Understanding Credit Scores and Lending Practices
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Questions and Answers

What do banks and lenders use credit scores to determine?

The likelihood that someone is able to repay debt.

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

True

What gives predatory lenders their negative reputation?

Charging high fees for loans and targeting desperate people.

Your greatest tool to building wealth is?

<p>Your income.</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 card companies charge stores a 2-3% fee for every purchase made with credit cards. What is this called?

<p>Merchant fee.</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 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

What should you ensure when looking over your credit report?

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

What happens if you go over the pre-established mileage cap in a car lease agreement?

<p>You may pay a penalty.</p> Signup and view all the answers

Who do credit card companies and lenders primarily make money for?

<p>Credit card companies, banks, and lenders.</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

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

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

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

What do credit card commercials often not show you?

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

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

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

What is an example of an appreciating asset?

<p>A home.</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

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

<p>Rich people.</p> Signup and view all the answers

What does the debt snowball method involve?

<p>Paying off debts from smallest to largest.</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

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

<p>Secured loans.</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

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

A car is a depreciating asset.

<p>True</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

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

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

<p>Errors or signs of identity fraud.</p> Signup and view all the answers

How you spend and give your money is a reflection of?

<p>Your personal values.</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

Explain why debt and credit are a bad idea.

<p>Having debt prevents you from saving and investing, slowing wealth growth.</p> Signup and view all the answers

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

<p>If you're unable to pay the loan, you can lose the asset.</p> Signup and view all the answers

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

<p>A credit score doesn't accurately reflect financial success.</p> Signup and view all the answers

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

<p>Interest, annual fees, and late payment fees.</p> Signup and view all the answers

What is the difference between an appreciating asset and a depreciating asset?

<p>Appreciating assets increase in value; depreciating assets decrease in value.</p> Signup and view all the answers

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

<p>They promote benefits but often lead to higher costs in the long run.</p> Signup and view all the answers

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

<p>It helps eliminate smaller debts first, reducing overwhelm and building momentum.</p> Signup and view all the answers

Study Notes

Credit Scores and Lending

  • Credit scores assess the likelihood of debt repayment, crucial for banks and lenders.
  • A credit score reflects debt repayment history, not overall money management skills.

Predatory Lending and Debt Management

  • Predatory lenders gain a negative reputation due to high fees and targeting vulnerable individuals.
  • Building wealth primarily relies on income rather than credit.

Avoiding Debt and Responsible Credit Use

  • Avoid debt by making purchases only with cash.
  • Credit card companies charge merchants a 2-3% fee per transaction known as a merchant fee.

Profit Sources and Risks of Credit Cards

  • Credit card companies benefit most from interest charged to customers carrying balances.
  • Home Equity Lines of Credit (HELOCs) can be used for a variety of purposes, not just home repairs.

Credit Report Vigilance

  • It's essential to check your credit report for unauthorized lines of credit.

Car Leasing and Ownership

  • Car leases have penalties for exceeding mileage limits.
  • Credit is a profit-driven business model, benefiting credit card companies, banks, and lenders.

Misconceptions about Credit and Debts

  • Renting a car or booking a hotel can be done without a credit card.
  • Leasing involves monthly payments without ownership transferring to the lessee.

Financial Literacy and Purchasing

  • The total car loan amount includes principal, taxes, and fees.
  • Credit card commercials often omit the reality of long-term repayment burdens.

FICO Scores and Asset Devaluation

  • FICO scores are influenced significantly by your repayment history.
  • Appreciating assets, like homes, increase in value, while cars depreciate over time.

Debt Evaluation

  • Not all debts, even student loans, are considered acceptable; they can burden financial growth.
  • Using credit for purchases incurs higher costs than paying with cash or debit cards.

Personal Financial Management

  • Many Americans live paycheck to paycheck, indicating widespread financial fragility.
  • Financing a car typically results in total payments exceeding the sticker price.

Importance of Credit Management

  • Regularly check credit reports post-18 for errors and identity fraud signs.
  • Financial habits reflect personal values concerning spending and giving.

Debt Prevention Foundations

  • The Second Foundation emphasizes living debt-free.
  • Debt's negative impact includes hindering savings, investments, and overall wealth growth.

Collateral Risks

  • Offering collateral for loans risks losing valuable assets if unable to repay.

Credit Score Myths

  • Good credit scores do not necessarily equate to financial success; alternatives exist regardless of score.

Credit Card Revenue Streams

  • The credit card industry profits from interest, annual fees, and late payment charges.

Asset Value Dynamics

  • Distinguish between appreciating assets (e.g., homes) which gain value and depreciating assets (e.g., cars) which lose value.

Marketing Tactics in Credit Industry

  • Credit companies use enticing offers to lure customers, but long-term costs often surpass initial savings.

Debt Repayment Strategies

  • The debt snowball method encourages focusing on smaller debts first, preventing overwhelm and facilitating gradual debt clearance.

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Description

This quiz covers essential topics related to credit scores, lending, and responsible credit management. It explores the implications of credit scores on debt repayment, the role of predatory lending, and strategies for avoiding debt. Additionally, it delves into the benefits and risks of credit cards and the importance of monitoring credit reports.

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