Test Your Knowledge Lesson 3: A Fresh Start Click on the letter of your choice to test your understanding. A B C

A B C Question 1 Credit is an arrangement whereby You owe something, typically money, or something is due. A You receive goods, services, or money in exchange for a promise to repay at a later date. B You set money aside that you can access quickly for unexpected expenses. C

Try again! Debt is something, typically money, that is owed or due. Using credit can result in debt. Back

Correct! Credit allows you to make purchases in the present with the promise to repay in the future. Credit is also the assessment of your ability to fulfill financial obligations. Next

Try again! You set an emergency fund, not credit, aside that you can access quickly for unexpected expenses. However, having access to credit may be part of your financial preparedness plan. Back

A B C Question 2 The opportunity cost of using credit is the Purchasing power of future money for past purchases. A The previous earning power of money spent on interest and fees. B Current purchases, interest, and fees. C

Correct! By making purchases today you are forgoing the power of the future use of that money. The opportunity cost of credit is also the future earning power of money spent on interest and fees. Next

Try again! By using credit, you are giving up the future, rather than the past, earning power of money spent on interest and fees. Back

Try again! Making purchases with credit causes you to have an opportunity cost, but the purchases are not the actual opportunity cost. Back

Question 3 The type of credit that you get when a lender allows you to borrow an amount for a specific purpose for a specific amount of time at a given interest rate is called A Installment/term credit. B Noninstallment/service credit. C Revolving credit.

Correct! In installment, or term, credit arrangements, a lender allows you to borrow an amount for a specific purpose for a specific amount of time at a given interest rate. The lender calculates the total amount of interest you will pay up front and spreads payments out equally over the length of the loan. Car loans, mortgages, and student loans are examples of installment credit. Next

Try again! Noninstallment, or service, credit arrangements allow you to pay for a service that you have already used. You must make payment in full by a specified date. Although the lender does not charge interest, failure to pay within the specified timeframe may result in your paying service fees or the provider discontinuing services. Cell phone plans, cable TV, and utilities are examples of service credit. Back

Try again! With revolving credit, as you borrow against your credit limit, the amount available to borrow decreases. As you repay your debt, the difference between your credit limit and the amount that you owe continues to be available for you to borrow. You can pay back the loan in lump sums or over an extended period of time. If you choose to pay over time, you will pay interest on the full amount that you owe. A credit card is an example of revolving credit. Back

Question 4 The price that you pay for the use of money you borrow from a lender is called A Principal. B Interest. C Loan term.

Try again! The principal is the original amount of money that you borrowed or you still owe on which interest is charged. Back

Correct! Interest is the price you pay for the use of money you borrow from a lender. Interest is an expense to you, the borrower, and income to the lender. The interest rate is the price expressed as a percentage. Next

Try again! The loan term refers to the length of the loan. In general, the longer the term of the loan, the higher the cost of borrowing. Even if the interest rates are equal, when you take longer to pay, there are more payment periods on which interest is applied. Back

Question 5 The annual percentage rate (APR) is The total cost of credit to the lender. B Finance charge expressed as an monthly rate. C The interest rate for the whole year.

Try again! The APR is the total cost of credit to the consumer, not to the lender. Back

Try again! The APR is the finance charge expressed as an annual rate, not a monthly rate. Back

Correct! The APR is the interest rate for the whole year as applied on a loan, credit, mortgage, and so on. The two APR categories are: 1) nominal, which is the basic calculation of the interest rate applied to the principal amount as stated on the loan, and 2) effective, which is the calculation of the interest rate applied to the principal amount as stated on the loan PLUS additional fees that have been added to the loan. Next

Question 6 A credit card is A type of credit that requires full payment by a specified date. B A credit tool with a limited number of monthly transactions. C A high-interest, revolving, unsecured loan.

Try again! A charge card requires full payment by a specified date, but a credit card requires only a minimum payment by a specified date. Back

Try again! A credit card does not necessarily have limits on the number of transactions that you can make in a month, but it may limit the total amount that you can spend (that limit is the credit limit). Back

Correct! Compared to other credit tools, a credit card is a high-interest, revolving, unsecured loan. Revolving credit arrangements and unsecured arrangements generally have higher interest rates than other closed-end loans. Because the agreement is open ended, there is no set end date for paying off the debt. The longer it takes you to pay the loan balance, the more interest you incur. Credit cards are not meant to be long-term financing options. If you use a credit card that way, the cost of the credit for simple purchases can be staggering. Next

Question 7 A credit report is A summary of loan and bill payments kept by a credit bureau. B A profile of your nationality, educational attainment, and credit obligations. C An active data file kept by the credit bureau for 10 years.

Correct! A credit report is a profile of how you manage your credit obligations. The report, which is kept by a credit bureau, summarizes loan and bill payments for the past 7 years (bankruptcy within past 10 years). Next

Try again! While a credit report does include information about how you manage your credit obligations, it does not include information about your nationality or your educational attainment. Back

Try again! A credit report includes activity for the past 7 years as well as bankruptcies for the past 10 years. Back

Question 8 Also known as your “financial GPA,” a credit score is An annualized number that measures how you handle your financial obligations. B A snapshot of your level of risk to a lender at a specific point in time. C A single factor used to make lending decisions.

Try again! A credit score is a numerical measure of how you handle financial obligations, but it is not an annualized number. Back

Correct! A credit score is the numerical representation of how you handle your financial obligations. A credit score is a snapshot of your level of risk to a lender at a specific point in time. This score is only one of the components a lender uses in determining whether or not to approve a credit application. Next

Try again! A credit score is only one of the components a lender uses in determining whether or not to approve a credit application. Back

Question 9 The two components that make up the greatest percentage of the total credit score are A Length of credit history and overall credit. B New credit and types of credit used. C Payment history and amounts owed.

Try again! Length of credit history (15%) accounts for only a small percentage of the total credit score. Overall credit is not a component of the credit score. Back

Try again! New credit (10%) and types of credit used (10%) account for only a small percentage of the total credit score. Back

Correct! Payment history (35%) and amounts owed (30%) account for the greatest percentage of the total credit score. The other components include length of credit history (15%), new credit (10%), and types of credit used (10%). Next

Question 10 Having an accurate credit report is important because Positive information increases credit opportunities and decreases the cost of borrowing. B Negative information reduces credit opportunities, increases the cost of borrowing, can impact service credit, and can eliminate some job offers. C All of the above.

Try again! Yes, positive information increases credit opportunities and decreases the cost of borrowing. However, negative information also has an impact. Back

Try again! Yes, negative information reduces credit opportunities, increases the cost of borrowing, can impact service credit, and can eliminate some job offers. However, positive information also has an impact. Back

Correct! Positive and negative information can affect your credit report and, in turn, your credit score. Next

Thank you for participating in “Test Your Knowledge”