Chapter 7.

1 Concept Check

1. What is open-ended credit and give three examples. Open-ended credit is a form of
credit extended in advance of any transactions. Three examples of open-ended credit are
service credit, travel and entertainment cards, and retail credit cards.
2. Explain the basic features of bank credit cards. The basic features of bank credit cards
are used for electronic commerce through the Internet and for banking transactions at
ATMs.
3. Distinguish between an unsecured line of credit and a home equity credit line. An
unsecured line of credit is a line of credit that is available on an as-needed basis. A home
equity credit line is a type of loan in which the borrower uses the equity of their home as
collateral.

Chapter 7.2 Concept Check

1. Distinguish between a statement date and a payment due date on a credit statement.
A statement due is the last day of the month for which any transactions are reported on
the statement. A payment due date on a credit statement is the specific date by which the
credit card company should receive payment from you.
2. Distinguish between transaction and posting dates on a credit statement. A
transaction date is a date on which a credit cardholder makes a purchase or receives a
credit. A posting date is the month, day, and year when a credit card issuer processes a
credit card transaction and adds it to the cardholder’s account balance.
3. How does a penalty rate work on a credit card?A penalty rate works on a credit card
when a cardholder is late on making monthly payments. If they are late on a payment, a
high interest rate is charged by the card issuer.
4. What is the liability for a lost or stolen credit card? The liability for a lost or stolen
credit card is under the Truth in Lending Act which limits a credit card liability for lost or
stolen credit cards. Under the act, if you notify the card issuer within two days of a loss or
theft, you are not legally responsible for any fraudulent usage of the card.
5. What are your action steps to dispute an error on a billing statement? Action steps to
dispute an error on a billing statement are to notify the merchant, write to the creditor,
send your letter, and withhold payment for disputed items.

Chapter 7.3 Concept Check

1. What is a sales finance company and how does it work? A sales finance company is a
finance company that buys at a discount the installment sales contracts of merchants or
that directly finances retail sales. Sales finance companies work by making loans to
 individuals by borrowing money from commercial banks and other institutions with low
interest rates.
2. Where would you go to obtain an installment loan to finance a vehicle, if you had a
good credit rating and wanted to pay a low interest rate? To obtain an installment
loan to finance a vehicle you could go to a sales financing company or credit union.

Chapter 7.4 Concept Check

1. Distinguish between a single-payment and an installment loan. A single-payment loan

is a loan that is paid back in a lump sum at a later date. An installment loan is a system of
credit that is repaid by the borrower in regular installments.
2. What is the difference between a secured and an unsecured loan? The difference
between a secured and an unsecured loan is that a secured loan is where a borrower has
pledged some assets as collateral to guarantee a loan, while an unsecured loan is a loan
issued and supported by the borrower’s creditworthiness, rather than by the type of
collateral.
3. What reasons do some people offer for not having a relative cosign a student loan?
Some people offer not having a relative cosign on a student loan because the cosigner is
still responsible for the money owed by the borrower, even if something happens to said
borrower.
4. What is an acceleration clause? An acceleration clause allows a lender to require a
borrower to repay all of an outstanding loan if certain requirements are not met.
5. Which alternative lender probably charges the highest interest rate? The alternative
lender that charges the highest interest rate is a payday lender.

Chapter 7.5 Concept Check

1. Explain how the interest is calculated on a consumer loan that uses the declining-
balance method. The interest rate on a consumer loan that uses the declining-balance
method is calculated based on the outstanding loan balance.
2. Summarize how interest is calculated on a consumer loan that uses the add-on
method. To calculate interest on a consumer loan that uses the add-on method you take
the interest rate to the amount borrowed times the number of years.
3. What is the effect of the rule of 78s when a borrower repays an add-on method loan
early? When a borrower repays an add-on method loan early the rule of 78s is affected
because a prepayment penalty is applied which is an additional fee imposed by many loan
agreements.
4. Explain how the interest is calculated on a consumer loan that uses the discount
method. Interest is calculated on a consumer loan that uses the discount method by
deducting the interest amount for an entire loan period from the principal at the time the
loan is distributed.