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Chapter 10-Credit

Indicate whether the sentence or statement is true or false.

____ 1. Few people can pay for a home without borrowing.
____ 2. ATM machines enable you to receive a cash advance and add it to your credit card bill.
____ 3. On a revolving charge account, the more slowly you reduce the balance, the less interest you will pay overall.
____ 4. Interest rates charged for unsecured loans are generally lower than on secured loans.
____ 5. The Fair Credit Reporting Act of 1971 gave consumers a way to check their credit reports.
____ 6. The Fair Credit Billing Act helps consumers correct credit card billing mistakes.
____ 7. Consumers should take every credit card that is offered to them so they will have a variety of choices.
____ 8. Married couples should have credit in only one of their names.
____ 9. Credit cards are usually one of the most expensive forms of borrowing.
____ 10. The Equal Credit Opportunity Act makes it illegal to refuse to grant credit on the basis of race, color, religion,
national origin, sex, marital status, or age.

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 11. A company that collects information about consumers' credit history and sells it to lenders is a ____.
a. bank
b. credit board
c. credit bureau
d. credit union
____ 12. A measure of your creditworthiness is your ____.
a. credit rating
b. credit debt
c. credit listing
d. credit limit
____ 13. A loan that is backed by something of value pledged to insure payment is a ____.
a. nonsecured loan
b. secured loan
c. signature loan
d. cosigned loan
____ 14. If you want to get cash for personal property such as jewelry or a TV, then you need to see a ____.
a. banker
b. loan officer
c. pawnbroker
d. credit bureau
____ 15. Suppose you are renting a living room chair for $9.95 per week. After you rent it for 40 weeks, the rent-to-
own company says you will own the chair. If you make all 40 payments, how much will the chair cost you?
a. $350
b. $300
c. $398
d. $412
____ 16. Which of the following are sources of credit cards?
b. MasterCard
c. American Express
d. all of the above
____ 17. The time between the billing date and the payment due date, when no interest is charged, is the ____.
a. credit period
b. interest period
c. grace period
d. free period
____ 18. The maximum amount you are allowed to charge on your account is the ____.
a. quota
b. credit limit
c. account ceiling
d. term
____ 19. The total cost a borrower must pay for a loan, including all interest and fees, is the ____.
a. finance charge
b. interest
c. over charge
d. principle
____ 20. A legal process in which people who cannot pay their debts surrender most of their property is called ____.
a. an acceleration clause
b. nullification
c. bankruptcy
d. foreclosure
____ 21. Troy was recently denied credit at a local furniture store. A week later he received a letter from the furniture
store identifying the credit bureau that supplied the information used in making its lending decision. At this
point, Troy has 30 days to request a free copy of his credit report from that credit bureau. What law created
this process giving Troy and other consumers a way to check their credit reports when they are denied credit?
a. Fair Credit Billing Act
b. Truth-in-Lending Act
c. Fair Credit Reporting Act
d. Consumer Credit Reporting Reform Act
____ 22. James and Vanessa both work and own their home. They want to borrow $15,000 to buy a car to give their
daughter as a college graduation present. What factors will lenders consider in computing James and Vanes-
sa's credit rating when assessing their car loan application?
a. current debt
b. payment history
c. number of credit cards
d. all of the above
____ 23. I-chen Lee has a charge account at a department store. The account allows her to make charges throughout the
month. She will not pay any interest because she must pay the balance in full by the 15th day of the next
month. What type of account does I-chen Lee have?
a. regular charge account
b. revolving charge account
c. installment loan
d. debit card account
____ 24. Orestes was hospitalized for two weeks. During this time he was unable to work. In addition to his lost in-
come, he owes over $12,000 as his part of his medical expenses that were not covered by his health insurance.
As a result, he was not able to pay many of his credit cards and other loans on time. Debt collection agencies
begin calling him regularly. One debt collector even followed him to a grocery store and embarrassed him in
front of other people. What law is intended to prevent debt collection agencies from using such abusive prac-
a. Truth in Lending Act
b. Fair Debt Collections Practices Act
c. Consumer Credit Reporting Reform Act
d. Equal Credit Opportunity Act
____ 25. When Calvin and Gloria financed a new car loan at their credit union, they were given extensive printed in-
formation about the specifics of the loan. This information included the total cost of the loan, including all in-
terest and fees. This total cost they will pay for the loan is known as ____.
a. principal
b. interest rate
c. finance charge
d. credit cost
____ 26. Recently Felix purchased a home entertainment system. A finance company granted Felix the credit necessary
to make the purchase. Felix signed the loan contract and had the system delivered to his home. For eight
months, Felix made the regularly scheduled payments on the loan. In the ninth month, however, he went out
of town and forgot to make his loan payment on time. When he returned from the trip, Felix received a letter
from the finance company demanding payment in full or the return of the entire system. What did Felix's
credit contract include?
a. acceleration clause
b. balloon payment
c. debtor's clause
d. deceleration clause
____ 27. Last year Gretchen signed up to receive several credit cards. After she received them, she immediately began
using them to purchase books, clothes, jewelry, a sound system, DVD player, and a television set. After four
months she lost her job. Gretchen was far in debt and had no income. She completed a legal process through
which she surrendered her property to the court. In exchange, the court ordered that she was no longer re-
sponsible for her debts. This process is known as ____.
a. debt consolidation
b. refinancing
c. credit counseling
d. bankruptcy
____ 28. While attending college, Caleb had a full-time job. During those years, he lived at the same address and al-
ways paid his rent and utilities on time. Lenders would look at his lifestyle and find him to be responsible.
They would grant him credit based on Caleb's ____.
a. capital
b. character
c. capacity
d. collateral
____ 29. Mazher has an account that allows him to charge up to $5,000. Under the credit agreement, he is not required
to pay the balance in full. Mazher often chooses to make the minimum payment, carrying the remaining bal-
ance forward to the next month. What type of account does Mazher have?
a. installment loan
b. revolving charge account
c. secured account
d. regular charge account
____ 30. Madison's credit card payment is due on the 25th of every month. Because the 25th falls between two pay
periods, she is often unable to make the regular payment on time. The credit card company charges her $25
each time her payment is late. This charge is known as ____.
a. interest
b. a monthly fee
c. a penalty
d. a finance charge

Complete each sentence or statement.

31. Borrowing money in return for a promise of future repayment is called ____________________.
32. The difference between the amount owed on a home and the home's value is the ____________________.
33. A record of your past borrowing and repayments is your credit ____________________.
34. Omar has several loans with low balances but high interest rates. He has decided to obtain a larger loan at a
low interest rate in order to pay off the other loans. This loan is known as a(n) _________________________
35. Asking another person, usually a parent, to agree to pay a debt for you if you become unable to pay is asking
them to ____________________ the loan.
36. Angelina has saved enough money to make a down payment on her first car. After selecting her car, the deal-
ership will work with her to make financing arrangements for a car loan. The car itself will be used to back up
or secure the car loan. It will serve as ____________________ for her loan.
37. Louis was surprised when he was denied credit. He has always used credit responsibly so he could not under-
stand the denial. He obtained a copy of his credit report and was shocked to learn there were many credit ac-
counts in his name that he had never opened. He found that someone had stolen his identity and taken out
credit cards using his good credit to purchase goods and services. Louis has experienced
____________________ fraud.
38. In order for Hugh to avoid paying high interest on his credit card, he could pay the entire balance between the
billing date and the payment due date. During this period of time, Hugh will not be charged any interest. This
period of time is known as the _________________________.
39. In their native country, Alfonse and Nuccia found it difficult to obtain credit because banks had different lend-
ing policies for different customers. Because of their race and national origin, they expected to have similar
difficulties in the United States after their immigration. However, the ______________________________
prohibits lenders from refusing credit based on race, color, religion, national origin, sex, marital status, or age.
40. Each month Sabrina can charge up to $400 on her department store account. This $400 is known as her
41. Parris carries five credit cards in his wallet. The banks that issued these cards charge him between $30 and
$50 each year to have and use their cards. These charges are known as _________________________.
42. While shopping at a local store, Corinne saw a piano that she knew her mother would love to have. Corinne
decided it would make a great Mother's Day gift so she made arrangements to finance the piano for two years
with an 18 percent interest rate. Corinne obtained a(n) ______________________________.
43. Russ needed money quickly in order to travel home to visit his ill mother. Because he has a poor credit rating,
his options for a loan were limited. In order to get a loan, Russ can take his big screen television to a(n)
_________________________ to borrow the money he needs.
44. Beth compared her credit card statement with her charge receipts and found a charge for $251.67 for jewelry
that she never bought. She contacted her credit card company disputing the charge. The company must reply
within 30 days and resolve the dispute within 90 days. The ______________________________ Act allows
consumers to correct such credit card billing mistakes.

Short Answer

45. Cameron realized that he has overused his credit cards, so he went to the bank and arranged to get a debt con-
solidation loan. Now that he has a lower payment each month, Cameron decides that he can now charge some
new furniture on one of his credit cards. Why is this an unwise decision for Cameron?
46. After graduating from community college, Monica received several credit card applications in the mail. Be-
cause she had a job paying her $2,400 a month Monica felt she had a right to have credit cards and loans. She
submitted all the applications for credit she received. As her roommate, what advice would you give Monica
regarding her credit responsibilities? What mistakes should Monica avoid in her use of credit?
Chapter 10-Credit
Answer Section


1. ANS: T
2. ANS: T
3. ANS: F
4. ANS: F
5. ANS: T
6. ANS: T
7. ANS: F
8. ANS: F
9. ANS: T
10. ANS: T


11. ANS: C
12. ANS: A
13. ANS: B
14. ANS: C
15. ANS: C
16. ANS: D
17. ANS: C
18. ANS: B
19. ANS: A
20. ANS: C
21. ANS: C
22. ANS: D
23. ANS: A
24. ANS: B
25. ANS: C
26. ANS: A
27. ANS: D
28. ANS: B
29. ANS: B
30. ANS: C


31. ANS: credit
32. ANS: equity
33. ANS: history
34. ANS: debt consolidation
35. ANS: cosign
36. ANS: collateral
37. ANS: true name
38. ANS: grace period
39. ANS: Equal Credit Opportunity Act
40. ANS: credit limit
41. ANS: annual fees
42. ANS:
installment loan
closed-end credit
43. ANS: pawn broker
44. ANS: Fair Credit Billing


45. ANS:
Answers may vary. Overspending is exactly what got Cameron in his financial mess in the beginning. If he
continues to charge large items such as furniture, he will be in worse shape than he was before he got the debt
consolidation. The consolidation did not erase his previous debt; it simply combined it and required a lower
monthly payment.
46. ANS:
Answers may vary. Monica should be keenly aware of her debt capacity. That is, Monica should consider her
monthly income and her existing fixed expenses (such as rent, utilities, car payment, insurance, etc.) before
adding additional debt. She should also consider such expenses as food, clothes, gas, and entertainment. Once
she acquires a credit card, Monica should make more than the minimum payment. It would be better to pay
off the balance of a credit card each month. When possible, Monica should pay with cash and avoid getting
numerous credit cards. It is also wise to keep accurate records and compare her credit card statement with her
receipts to make sure that no mistakes were made. Monica should not miss payments and remember to contin-
ue to save regularly for emergencies that could arise.