Understanding Credit and Debt Concepts
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Questions and Answers

What is something that credit card commercials don't show you?

People making payments for months or years on those purchases.

A home equity line of credit (HELOC) can only be used for home repairs and renovations.

False

What do banks and lenders use credit scores to determine?

The likelihood that someone will repay debt.

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

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

The majority of Americans live paycheck to paycheck.

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

Your greatest tool to building wealth is __________.

<p>income</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

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

<p>The history of payments used to lenders.</p> Signup and view all the answers

You cannot rent a car or book a hotel room without a credit card.

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

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

<p>makes monthly payments but doesn't 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

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

Which is an example of an appreciating asset?

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

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

<p>errors or identity fraud.</p> Signup and view all the answers

Credit cards that offer flashy rewards like airline miles often...

<p>charge a high annual fee.</p> Signup and view all the answers

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

<p>go over the mileage cap.</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

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

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

Predatory lenders get their negative reputation from...

<p>charging high fees for loans and targeting desperate people.</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

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

The smartest way to buy a car is to ______________.

<p>pay cash.</p> Signup and view all the answers

What is the best way to avoid falling into debt?

<p>Only purchase things you can buy 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

A car is a depreciating asset.

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

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

<p>no lines of credit have been opened without your knowledge.</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 _______________ is the total amount of the car loan, plus taxes and fees.

<p>principal.</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

What are marketing tactics used by the credit industry to trick people into debt?

<p>Offering a low or zero interest introductory rate, requiring only the minimum payment, and offering cash back and other rewards.</p> Signup and view all the answers

What is the debt snowball method?

<ol> <li>List your debts in order from smallest to largest balance and focus on paying off the smallest debt first. 2. Attack your debt with intensity. 3. Every time you pay off a debt, you add its old minimum payment to your next debt payment.</li> </ol> Signup and view all the answers

What is the danger of putting collateral up?

<p>The biggest risk of a collateral loan is you could lose the asset if you fail to repay the loan.</p> Signup and view all the answers

Study Notes

Credit and Debt Concepts

  • Credit card payments can extend for months or years, leading to long-term debt.
  • Home equity line of credit (HELOC) provides flexibility beyond home repairs.
  • Credit scores assess the likelihood of debt repayment, influencing loans and credit offered.
  • Young individuals often face higher interest rates when using credit cards.
  • Financing a car generally results in paying more than its initial sticker price.

Financial Realities

  • A significant number of Americans live paycheck to paycheck, indicating financial instability.
  • Income is a fundamental asset in building wealth; it is more critical than credit.
  • Secured loans involve collateral, minimizing lender risk and requiring borrowers to risk their assets.

Understanding Credit Scores

  • FICO scores are determined by payment history, which impacts loan availability and conditions.
  • Regular credit report checks are essential for detecting errors or fraudulent activity.

Consumer Behavior and Debt Management

  • Leasing a car entails monthly payments without ownership, differing from buying.
  • The Second Foundation encourages a debt-free lifestyle.
  • Credit cards offering rewards often come with high annual fees that can negate benefits.
  • Exceeding the mileage limit in a car lease incurs penalties.

Debt Strategies

  • The debt snowball method advocates paying off debts starting from the smallest to the largest.
  • Acceptable debts may include student loans, but they should still be managed carefully.
  • Predatory lending practices include targeting vulnerable individuals and imposing exorbitant fees.

Financial Literacy and Spending Habits

  • A credit score reflects debt repayment behavior, not overall financial management skills.
  • Consumers often spend more when using credit compared to cash or debit cards.
  • Cash purchases offer a more responsible financial approach, helping to avoid debt.

Credit Industry Practices

  • Credit card companies generate profits by charging interest, particularly from individuals who carry balances.
  • Knowing personal values is crucial as they influence spending and financial decisions.
  • Marketing tactics in the credit industry often deceive consumers into accruing debt through low introductory rates and enticing rewards.

Risks and Responsibilities in Borrowing

  • Collateral loans pose a risk of losing the pledged asset if repayment fails.
  • Understanding principal amounts includes loan totals plus associated taxes and fees.

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Description

This quiz covers essential concepts of credit and debt, including credit scores, financing options, and the financial realities faced by consumers. It aims to enhance your understanding of how credit impacts financial stability and decision-making. Prepare to explore various financial instruments and their implications.

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