Building a Bridge to Financial Success
A Quiz on Credit Basics for National Credit Education Week (NCEW)
Our credit system is a remarkable thing. It provides opportunities for people from all walks of life to accomplish things that previously were reserved for those of privilege. Owning a house, earning a college degree, starting a business—these dreams come true every day thanks to the idea of credit. But if credit is misused or consumers are unaware of their rights in a credit transaction, what had once been a dream come true can wind up feeling more like a burden. Knowing how credit works—and how to use it wisely— is essential to achieving personal financial goals. During National Credit Education Week, you can build a bridge to financial success by finding your greatest tool: knowledge. How much do you know about credit? Take the quiz to find out: 1. What is the single most important way to maintain a positive credit history? a.) Avoid cosigning loans for others. b.) Pay your bills on time. c.) Avoid exceeding your credit limit on revolving accounts. d.) Transfer credit balances often to take advantage of low introductory rates. Which of the following is an example of a revolving account? a.) Auto loan. b.) Mortgage. c.) Student loan. d.) Credit card. Your credit history can have an impact on which of the following? a.) Your application for a credit card. b.) The rates you pay for auto and home insurance. c.) Your job application with a prospective employer. d.) All of the above. e.) None of the above. Which of the following balance calculation methods used by credit card companies results in the most expensive credit terms (assuming the interest rates are equal), and is the one you should avoid when evaluating credit card offers? a.) Two-cycle average daily balance, including new purchases. b.) Average daily balance, excluding new purchases. c.) Two-cycle average daily balance, excluding new purchases. d.) Average daily balance, including new purchases. Aside from the annual percentage rate, what is the most important factor to consider when choosing between several credit card offers? a.) Length of the grace period. b.) The balance calculation method. c.) The annual fee. d.) The fee for late payments.
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Your credit card is stolen and the thief runs up a total of $1,000. You notify the issuer of the card as soon as you discover it is missing. What is the maximum amount that you can be obligated to pay according to federal law? a.) None. b.) $50. c.) $1,000. d.) $500. Which of the following debts can be discharged (wiped out) when you file for bankruptcy? a.) Child support. b.) Student loans. c.) Taxes owed to the IRS. d.) All of the above. e.) None of the above. Which of the following costs are expressed in a credit offer’s annual percentage rate? a.) Annual fees, acceptance fees and interest. b.) Annual fees, late fees, over-limit fees and interest. c.) Annual fees, credit-loss protection insurance and interest. d.) Interest. Saul must borrow $10,000 to complete his college education. Which of the following would NOT be likely to reduce the finance charge rate? a.) If the loan was insured by the federal government. b.) If his parents cosigned the loan. c.) If he went to a state college rather than a private college. d.) If his parents took out an additional mortgage on their house for the loan.
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10. Which of the following statements best describes your right to check your credit history for accuracy? a.) Your credit record can be checked at any time for free. b.) If you are turned down for credit based on information the creditor obtained in a consumer report, the report can be checked for free. c.) Most people will have to pay to receive a single copy of their credit record each year, but the fees are low and cannot exceed the maximum amount set by law. d.) Access to credit records is reserved for lenders and government agencies. Individuals cannot see their credit records. 11. Which of the following statements is true? a.) If you missed a payment more than five years ago, it cannot be considered in a loan decision. b.) People have so many loans it is very unlikely that one bank will know your history with another bank. c.) Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any loan payments you have missed. d.) Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan. 12. Which of the following is a way to establish credit history if you currently have none? a.) Open a savings account with a federally-insured financial institution. b.) Do business with a rent-to-own store. c.) Open an account in your name with a local utility company. d.) Apply for government assistance programs. e.) Borrow and repay a series of small, personal loans from a check-cashing or payday lender.
13. Debbie has agreed to cosign a loan with her son so he can be approved for an auto loan from the bank. Which of the following is a risk Debbie is taking as a cosigner? a.) Debbie will have to carry an additional auto insurance policy in her name on her son’s car. b.) If her son does not repay his loan, Debbie’s own car will be taken by the bank. c.) If her son does not repay his loan, Debbie will be responsible for making the payments on his car. d.) As the principal applicant on the loan, only her son is responsible for the payments, but Debbie may be contacted by the bank if her son does not repay the loan.
QUIZ ANSWERS 1. Answer: B. The formulas used to determine your “credit score” place the most weight on your bill paying habits. Paying your bills on time is the best way to build a positive credit history. It’s also the best way to improve a low credit score. Answer: D. Credit cards, as revolving accounts, have no set period of time in which they must be paid off. You can take as long as you like to repay, during which time you are free to borrow-up and pay-down the balance repeatedly. Most auto, mortgage and student loans are installment loans, requiring a predetermined number of equal monthly payments. Answer: D. Credit grantors check your credit history before deciding whether or not to lend to you. Many insurers also check your credit, because poor credit history is an indication that a person is more likely to result in financial loss to an insurer. Prospective employers can check the credit history of a job applicant, but not without the applicant’s permission. For employers, credit history can be an indication of your reliability and integrity. Answer: A. Credit cards usually use a combination of two factors: Average daily balance or two-cycle average daily balance; and “including new purchases” or “excluding new purchases.” A two-cycle card retroactively eliminates your grace period by going back to the previous billing cycle and charging you interest for any balances you carried, as well as on the current billing cycle. With an average daily balance card, balances paid off within the billing cycle incur no finance charges. “Including new purchases” means that new charges made during the current billing cycle will incur finance charges right away, while a card that uses “excluding new purchases” will not hit you with a finance charge for the added amounts until next billing period. Answer: B. Although each of these should be considered when choosing a credit card, the one that will most directly affect how much you pay in finance charges, other than the annual percentage rate, is the balance calculation method. Answer: B. The Fair Credit Billing Act limits your liability for unauthorized use of your credit card to $50. If you had reported the card stolen before the thief was able to make charges, or if the loss involves your credit card number but not the card itself, you have no liability for unauthorized charges. Answer: E. None of these debts can be discharged in a bankruptcy. They will remain as financial obligations even after bankruptcy is filed. Answer: A. The annual percentage rate (APR) includes the interest and all mandatory fees in order to give you the true cost you’ll pay each year to borrow the money. Many cards have no acceptance fees or annual fees. Penalty fees are not calculated in the APR. Credit-loss insurance is always an optional feature. Answer: C. The cost of credit increases with risk, so the lower the risk to the lender, the cheaper the loan. When a guarantor, such as the federal government, insures the loan, the lender’s risk is lessened. A cosigner reduces the lender’s risk by agreeing to pay the loan if the primary borrower defaults. Securing a loan with property or something of value gives the lender collateral to offset a loss to default.
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10. Answer: B. The Fair Credit Reporting Act makes available to consumer one free consumer report from each of the major consumer reporting agencies per year. But any time you apply for credit and are denied based on what your consumer report says, you have the right to check your report for errors at no cost.
11. Answer: C. Creditors report on their customers to a consumer reporting agency in order to share with each other information on a customer’s creditworthiness. Information in a consumer report is generally limited to seven years in order to give consumers a chance to recover from past mistakes and improve their credit. 12. Answer: C. Savings account information is not reported to a consumer reporting agency because it is not a consumer credit obligation. Government assistance programs, check cashing businesses, payday lenders and rent-to-own retailers usually do not report to consumer reporting agencies. Utility companies generally do report to consumer reporting agencies, so having household utility accounts in your name can be a simple way to start building positive credit history. 13. Answer: C. By cosigning a loan, you are agreeing to repay the loan if the primary applicant defaults. Debbie’s car is not the collateral for her son’s loan, so the bank cannot repossess Debbie’s car.