Money in Review - Chapter 4

Questions and Answers

What is the cost of borrowing money on an annual basis that takes into account the interest rate and other related fees on a loan?

annual percentage rate

What term describes a decrease or loss in value?

depreciation

What is a detailed report of an individual's credit history called?

credit report

What is the time frame that a loan agreement is in force called?

loan term Signup and view all the answers

What type of card issued by a bank allows a user to finance a purchase?

credit card Signup and view all the answers

What is a measure of an individual's credit risk calculated from a credit report?

credit score Signup and view all the answers

What is a yearly fee charged by the credit card company for the convenience of the card?

annual fee Signup and view all the answers

What method of debt repayment involves organizing debts from smallest to largest balance?

debt snowball Signup and view all the answers

You must establish credit in order to buy a house.

False Signup and view all the answers

If you are a victim of identity theft, you are only responsible for paying back half.

False Signup and view all the answers

Paying with cash for all purchases is a factor in determining a FICO score.

False Signup and view all the answers

Quitting borrowing money is a good way to get out of debt.

True Signup and view all the answers

You cannot rent a car with a debit card.

False Signup and view all the answers

Why is an adjustable rate mortgage a bad idea?

Because you're gambling on how much your bill is going to be. Signup and view all the answers

Explain why financing a car is a bad idea.

It's going to lose its value the minute you drive it off the lot, you're losing money this way, and it's more expensive. Signup and view all the answers

Describe the negative consequences of debt. What effect can debt have on your future?

You're living paycheck to paycheck, you're not able to build wealth, and you're always stressed about whether you're going to be able to pay your bills. Signup and view all the answers

What are some things you can do to protect your personal information?

Don't give out your social security card, shred your personal information before you throw it away, and have strong passwords. Signup and view all the answers

Explain how the debt snowball works.

Putting your debt into a smallest to largest chart and paying off the lowest debt to the highest until they are paid off. Signup and view all the answers

Study Notes

Banking and Finance Terms

Annual Percentage Rate (APR): Represents the cost of borrowing money annually, factoring in the interest rate and any additional fees associated with a loan.
Depreciation: Refers to a decrease or loss in the value of an asset over time.
Credit Report: A comprehensive report detailing an individual’s credit history, used to assess creditworthiness.
Loan Term: The specified duration for which a loan agreement is valid, during which the loan must be repaid or renegotiated.

Credit and Debt Management

Credit Card: A type of card issued by banks that enables users to finance purchases on credit.
Credit Score: A numerical representation of an individual's credit risk, determined by a standardized calculation from their credit report.
Annual Fee: A yearly charge imposed by credit card companies for the privilege of using their cards.
Debt Snowball: A debt repayment strategy that organizes debts from smallest to largest, focusing on paying off the smallest debt first while maintaining minimum payments on others.

Misconceptions on Credit and Debt

Establishing credit is not strictly necessary to purchase a home; this statement is false.
In cases of identity theft, individuals are fully responsible for the debt incurred; the idea of paying back only half is false.
Cash payments for purchases do not directly influence FICO scores, making this statement false.
Ceasing borrowing is a viable strategy for debt relief; this statement is true.
Renting a car with a debit card is possible; thus, the idea that it cannot be done is false.

Financial Risks and Poor Choices

Adjustable Rate Mortgage (ARM): Considered risky as monthly payments can fluctuate, making budgeting difficult and creating financial uncertainty.
Car Financing: Financing a vehicle is often not advisable because cars lose value significantly the moment they are driven off the lot, leading to potential financial loss.
Consequences of Debt: Carrying debt can result in living paycheck to paycheck, hindering wealth accumulation, causing stress about bill payments, and limiting financial freedom.

Personal Information Protection

To safeguard personal information, do not share your Social Security number, shred documents with sensitive data, and use strong passwords to prevent unauthorized access.

Debt Snowball Mechanism

The debt snowball method systematically ranks debts from smallest to largest and focuses on eliminating the smallest first, thereby building momentum in debt repayment.

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Test your knowledge with flashcards on banking and finance concepts from Chapter 4. From understanding annual percentage rates to comprehending depreciation and credit reports, this quiz helps reinforce key definitions. Perfect for students aiming to master financial terminology!