Personal Finance Test Chapter 4
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Questions and Answers

Predatory lenders get their negative reputation from?

Charging high fees for loans and targeting desperate people

Credit cards that offer flashy rewards like airline miles often?

Charge a high annual fee

Car lease agreements come with a stipulation that you must pay a penalty if you___________.

Go over the pre-established mileage cap

When looking over your credit report, it's important to make sure?

<p>No lines of credit have been opened under your name without your knowledge</p> Signup and view all the answers

Your greatest tool to building wealth is _____________.

<p>Your income</p> Signup and view all the answers

A credit score is an indicator of how well someone pays off their debt, not how well they handle money.

<p>True</p> Signup and view all the answers

The smartest way to buy a car is to ________________.

<p>Pay for it in cash</p> Signup and view all the answers

Credit card companies charge stores a 2-3% fee for every purchase made with credit cards. This is called a(n)...

<p>Merchant fee</p> Signup and view all the answers

The debt snowball method involves...

<p>Paying off debts from smallest to largest</p> Signup and view all the answers

_____________ require the borrower to put up collateral for the loan.

<p>Secured loans</p> Signup and view all the answers

Which is an example of an appreciating asset?

<p>A home</p> Signup and view all the answers

Credit card companies make the most profit from _______________.

<p>Charging interest to customers who only pay part of their monthly debt</p> Signup and view all the answers

When you finance a new car, you will end up paying more than the sticker price.

<p>True</p> Signup and view all the answers

Leasing a car is a method of financing where someone __________________.

<p>Makes monthly payments on but does not own the vehicle</p> Signup and view all the answers

What is The Second Foundation?

<p>Get out and stay out of debt</p> Signup and view all the answers

When you buy with credit, you typically spend more than you would with cash or a debit card.

<p>True</p> Signup and view all the answers

When a homeowner takes out a home equity line of credit (HELOC), that loan can only be used for home repairs and renovations.

<p>False</p> Signup and view all the answers

Banks and lenders use credit scores to determine...

<p>The likelihood that someone is able to repay debt</p> Signup and view all the answers

How you spend and give your money...

<p>Is a reflection of your personal values</p> Signup and view all the answers

A car is a depreciating asset.

<p>True</p> Signup and view all the answers

The _______________ is the total amount of the car loan, plus taxes and fees.

<p>Principal</p> Signup and view all the answers

There are certain things, like renting a car or booking a hotel room, that you cannot do without having a credit card.

<p>False</p> Signup and view all the answers

Once you turn 18, you should regularly check your credit report...

<p>For errors or signs of identity fraud</p> Signup and view all the answers

Something that credit card commercials don't show you is...

<p>People making payments for months or years on those credit card purchases</p> Signup and view all the answers

Which of the following is part of the formula that determines a person's FICO score?

<p>Their history of payments made to lenders</p> Signup and view all the answers

Loans that directly help you advance in life, such as student loans, are acceptable debts.

<p>False</p> Signup and view all the answers

What is the best way to avoid falling into debt?

<p>Only buy things that you can purchase with cash</p> Signup and view all the answers

Credit isn't a wealth-building tool, it's a business that makes money for...

<p>Credit card companies, banks, and lenders</p> Signup and view all the answers

Making purchases with a credit card means that you're borrowing money with interest, and ______ pay much higher interest rates.

<p>Young people</p> Signup and view all the answers

While it may not always appear so, the majority of Americans live paycheck to paycheck.

<p>True</p> Signup and view all the answers

Explain why debt and credit are a bad idea. How could they negatively affect your life?

<p>Keeps in a cycle of paying off past instead of focusing on future, keeps you from focusing and achieving your goals</p> Signup and view all the answers

What is the danger of putting up collateral for a loan?

<p>You can lose the loan collateral if you fail to make the payment</p> Signup and view all the answers

Explain why the importance of a good credit score is a myth.

<p>FICO score does not measure how wealthy someone is or how well you manage your money. It only shows how good you are at making payments on your debt.</p> Signup and view all the answers

List three ways the credit card industry makes money off of customers.

<p>Through interest charges, late fees payments, cash advance fees, merchant fees</p> Signup and view all the answers

What is the difference between an appreciating asset and a depreciating asset? Give examples of both.

<p>An appreciating asset's equity goes up like a house. A depreciating asset is where the value goes down like a car.</p> Signup and view all the answers

Describe marketing tactics that the credit industry uses to trick people into getting into debt.

<p>essay question 1</p> Signup and view all the answers

Explain the debt snowball method. How can it help you get out of debt?

<p>essay question 2</p> Signup and view all the answers

Study Notes

Predatory Lending and Fees

  • Predatory lenders target desperate individuals, charging exorbitant fees for loans.
  • Credit cards with rewards, like airline miles, often come with high annual fees.

Car Financing and Lease Agreements

  • Exceeding the pre-established mileage cap in car leases incurs penalties.
  • The best strategy for buying a car is to pay in cash to avoid high-interest payments.

Credit Reports and Credit Scores

  • It’s crucial to check credit reports to ensure no unauthorized accounts exist.
  • A credit score assesses debt repayment behavior rather than overall money management.

Debt Management Strategies

  • The debt snowball method prioritizes paying off debts from smallest to largest.
  • Acceptable debt, such as student loans, is often a misconception; they can still lead to financial strain.

Assets and Wealth Building

  • An appreciating asset, like a home, increases in value over time, while a car is a depreciating asset that loses value.
  • Your income is your most powerful tool for building wealth.

Importance of Financial Awareness

  • Regularly checking your credit report after turning 18 helps monitor for identity fraud.
  • Spending habits reflect personal values; being aware can guide better financial choices.

The Credit System and Personal Finance

  • Credit card companies profit primarily through interest charged to customers who carry balances.
  • Merchant fees are typically charged to stores for credit card transactions.

The Reality of Debt and Spending

  • Most Americans live paycheck to paycheck, often struggling with debt cycles.
  • Credit is a business that benefits institutions like banks and credit card companies, not consumers.

Risks of Credit and Loans

  • Collateral loans pose risks; failure to repay leads to losing the collateral.
  • Credit card marketing often obscures the long-term costs of debt, emphasizing immediate benefits.

Understanding Financial Terms

  • Principal refers to the total amount of a car loan after including taxes and fees.
  • Knowing the difference between appreciating and depreciating assets is crucial for making informed investments.

Financial Misconceptions

  • The perceived necessity of a good credit score can be misleading; it does not equate to financial stability.
  • High-interest credit purchases expose young consumers to financial difficulties.

Strategies to Avoid Debt

  • The best approach to avoid debt is to make purchases only with available cash.
  • Understanding how credit cards make money through various fees can inform smarter financial decisions.

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Description

Test your knowledge on important concepts from Chapter 4 of personal finance. This quiz covers key terms related to loans, credit cards, and leasing agreements, helping you understand the nuances of borrowing and financial management. Perfect for students or anyone looking to brush up on their personal finance skills!

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