Foundations in Personal Finance - Chapter 4 Quiz

FICO Score and Factors

• FICO score is influenced by multiple factors including payment history, credit utilization, and length of credit history.
• Paying cash for purchases does not contribute to building a FICO score.

Debt Management Strategies

• Effective strategies for getting out of debt include quitting borrowing, seeking additional income, and selling personal items.
• Borrowing money from family to pay off debt is not a recommended practice.

Debit Cards vs. Credit Cards

• Credit cards allow users to incur debt, whereas debit cards do not.
• Renting a car or purchasing items typically requires a credit card rather than a debit card.

Credit Score Factors

• Credit scores are impacted by types of debt, new debt, and the duration of debt.
• All mentioned factors collectively influence the overall credit score.

Fair Credit Reporting Act (FCRA)

• Prior to the FCRA, consumers faced challenges contesting credit report errors.
• The FCRA allows consumers one free credit report annually, contrary to the misconception of every five years.

Car Purchase Strategies

• The Drive Free method advocates for planning car purchases in advance and starting with an affordable car.
• Exploring new car dealerships is not part of the recommended strategies.

Home Financing Options

• The most cost-effective way to purchase a home is through a 15-year fixed-rate mortgage with at least a 10% down payment.
• Options involving a 30-year mortgage generally lead to higher costs.

Debt Snowball Method

• The debt snowball method encourages paying off the smallest debts first and applying those payments to larger debts.
• Prioritizing the largest debt first is not a part of this method.

Paycheck Garnishment

• Paycheck garnishment is a legal mechanism where lenders can collect owed amounts directly from a borrower’s wages.

Spending Behavior with Credit Cards

• Research indicates that consumers tend to spend more when using credit cards instead of cash due to perceived ease and rewards.

Common Credit Myths

• Myths include the idea that gaining a credit card signifies financial success or that debt can be a tool for prosperity.
• Recognizing the serious consequences of borrowing is vital for wealth building.

Alternatives for Mortgage Qualification

• Without a FICO score, mortgage eligibility may rely on rental and utility payment history and the size of the down payment.

Signs of Identity Theft

• Indicators of potential identity theft include receiving debt collection calls for unfamiliar debts and unexpected changes in credit reports.

Reporting Timelines

• Most account information falls off a credit report after seven years, whereas Chapter 7 bankruptcy stays for ten years.

Credit Establishment Misconceptions

• Establishing credit is not mandatory for purchasing a home.

Identity Theft Accountability

• Victims of identity theft are typically responsible for the entirety of the incurred debt.

Existence of Credit Bureaus

• There are three major credit bureaus: Experian, TransUnion, and Equifax.

Annual Credit Report Access

• Consumers are entitled to one free credit report per year to monitor their credit health for potential issues.

Credit Requirements for Rentals and Hotels

• A credit card is not a necessary prerequisite for renting a car or booking a hotel.

Credit Usage

• Using a credit card responsibly can be acceptable if the balance is paid off each month.

Federal Regulation of Credit

• The Federal Trade Commission plays a crucial role in regulating consumer credit laws.

Credit Information Access

• Access to an individual's credit information is restricted to those with legitimate needs only.

Targeting of Teenagers by Credit Companies

• Teenagers represent a significant target market for credit card companies.

Co-signing Loans Risks

• Co-signing loans can have negative financial repercussions for the co-signer.

Definitions

• Debt Snowball: A repayment strategy prioritizing smaller debts first.
• Credit Report: A comprehensive document detailing an individual's credit history.
• Loan Term: The specified duration for a loan agreement.
• Annual Percentage Rate (APR): A combined measure of borrowing costs, including interest and fees.
• Depreciation: A reduction in the value of an asset over time.
• Annual Fee: A recurring charge by credit card companies for card usage.
• Introductory Rate: A temporarily low interest rate for new customers.
• Lease: A long-term agreement for renting an asset, such as a car.
• Upside Down on Loan: A situation where an individual owes more on an item than its current value.
• Credit Card: A financial tool permitting users to borrow money for purchases.