Personal Financial Planning 13th Edition by Lawrence J. Gitman – Test Bank

Personal Financial Planning 13th Edition by Lawrence J. Gitman – Test Bank

Chapter 6—Using Credit

TRUE/FALSE

1. Using credit is the ideal way to provide for financial emergencies.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

2. Saving is the preferred way to provide for financial emergencies.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

3. Paying only the minimum payment each time on a credit card usually enables one to pay off the balance fairly quickly.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

4. One can be overusing credit even though he can afford to make minimum monthly payments on time.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

5. Credit should not consistently be used for non-durable goods.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

6. Credit cards with very low minimum balance requirements are in the consumer’s best interest.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

7. One should not use credit to purchase food, clothing, and other non-durables, even if it is only for convenience and the balance will be totally paid upon billing.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

8. Never adding up all one’s bills is one of the signs that one may be headed for serious credit problems.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

9. Using more than 20 percent of one’s take-home income to pay off consumer debt is one of the signs that one may be headed for serious credit problems.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-1

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

10. Having a checking account tells a creditor that you have some experience in managing your own funds.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

11. Always paying cash is helpful in establishing a high level of creditworthiness.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

12. Having arranged and fully repaid a small loan should help improve creditworthiness.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

13. The purpose of a credit report is to evaluate the kind of risk you pose to the lender.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

14. Credit report is routinely used to predict credit worthiness.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

15. Paying a loan off much quicker than scheduled is one way to build a good credit rating.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

16. A debt safety ratio of 25% might be a signal of financial trouble ahead.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

17. A debt safety ratio of 5% would generally be a signal of financial trouble ahead.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

18. It is safe, and often required, to give your Social Security number as a form of identification when using a credit card.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

19. The most common forms of open account credit are bank credit cards and retail charge cards.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

20. The most common forms of open account credit are travel and entertainment cards.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

21. Auto loans are an example of open-end credit since you can add to the debt when you purchase another vehicle.

ANS: F PTS: 1 DIF: East OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

22. A credit limit refers to the maximum amount the cardholder can owe the issuer at any point in time.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

23. The key to credit worthiness is to keep your debt safety ratio as high as possible.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-2

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

24. Individuals with better credit ratings usually can secure higher credit limits.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

25. Credit reports on individual borrowers are issued by credit unions reporting agencies.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

26. Credit reports on individual borrowers are issued by credit card issuers.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

27. Being late on credit payments only 2-3 times per year pay label you a “late payer” in your credit file.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

28. The required monthly payment on an open account will be the smaller of a minimum dollar amount or a specified percentage of the balance.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

29. Bank credit cards represent the most common kind of open account credit.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

30. Bank credit card cash advances will begin accruing interest charges immediately.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

31. Bank credit card purchases always begin accruing interest charges immediately.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

32. Advantages of balance transfers can include lower interest rates and the convenience of consolidation.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

33. Balance transfers can be expensive, including fees and eventually high interest rates.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

34. Bank credit cards often offer features such as buyer protection plans for a fee to all customers.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

35. Rebate credit cards work best for those who use the rebates, charge a lot, and do not carry high monthly balances.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

36. Generally speaking, the interest rates on credit cards are lower than any other form of credit.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

37. A revolving charge account requires the customers to pay off the debt 10 to 20 days after the billing date with no interest expense.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

38. Thirty-day or regular charge accounts require the customers to pay off the debt 10 to 20 days after the billing date with no interest expense.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

39. Interest rates on credit cards tend to be lower than most other forms of consumer credit.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

40. Most organizations that issue credit cards have basically the same qualifications for card applicants.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

41. Credit cards often have penalties for late payment and for exceeding credit limits.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

42. Open account credit is a form of credit extended to a consumer in advance of any transaction.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

43. The most common method used by lenders to apply finance charges to credit cards is the average daily balance including new purchases method.

ANS: T PTS: 1 DIF: Challenging OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

44. Nearly all credit cards have annual fees.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

45. Credit card users can often avoid finance charges entirely by paying their total balances by the stated due date.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

46. The grace period on a credit card starts on the billing date and ends on the date the lender should receive the payment.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

47. Secured credit cards require that the card holder puts up collateral in order to get the card.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

48. Student credit cards are structured much differently than regular credit cards.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

49. Debit cards are a form of credit that is very convenient to use.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

50. Debit cards look like credit cards, but they work like checks.

ANS: T PTS: 1 DIF: Easy OBJ: LO:6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

51. Prepaid cards are a form of credit that is very convenient to use and do not charge a service fee.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

52. Prepaid cards are used to pay for things, with the purchase amount electronically deducted from the card.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

53. Revolving credit lines are often accessed by writing checks.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

54. An overdraft protection line of credit allows one to routinely bounce checks with little or no adverse consequences.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

55. Unsecured lines of credit provide tax advantages if you itemize deductions.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

56. Unsecured lines of credit are easy to use and often use some form of collateral as default protection.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

57. The proceeds of a home equity loan can be used for just about any purpose, and the interest paid is usually tax deductible.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

58. One can lose his home if he does not repay his home equity line of credit.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

59. Home equity loans are one of the least expensive forms of consumer credit.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Comprehension

60. For someone with a good credit rating, lenders will typically lend up to 100% of equity in a home using a home equity credit line.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-3

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

61. A credit applicant will be granted credit only after establishing a complete file at the local credit bureau.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

62. For a fee, credit bureaus can provide credit scores for prospective borrowers.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

63. Credit bureaus provide information about prospective borrowers.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

64. One can and should check his credit bureau file regularly.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Application

65. Credit bureau files often include information such as political and religious affiliations in addition to financial information.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

66. Credit scoring systems are often used by lenders to determine your creditworthiness.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

67. Chapter 7 bankruptcies remain in your credit file for 7 years.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-6

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

68. Your credit limit is determined by a number of factors, such as financial position, earning power, etc.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Knowledge

69. A credit card user’s credit rating will be harmed if she pays only the minimum monthly payment on a credit card.

ANS: F PTS: 1 DIF: Challenging OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis

70. The more credit cards one has, the better one’s credit score.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 6-4

NAT: BUSPROG: Analytic skills STA: DISC: Capital Budgeting and Cost of Capital

KEY: Bloom’s: Analysis