Week 4 (Tutorial Exercises)

Chapter 6 Using Credit Cards: The Role of Open Credit

1) The use of credit involves receiving cash, goods, or services with an obligation to pay later.
Which statement is not an opening line to the use of credit in a shopper's language?
A) "Charge it."
B) "Put it on my account."
C) "Put it on my debit."
D) "I'll pay for it with plastic."

2) The main factor that determines the cost of a line of credit is the ________, which is also
considered the true simple interest rate paid over the life of the loan.
A) annual merchant rate (AMR)
B) teaser rate
C) annual percentage rate (APR)
D) penalty rate

3) Most credit cards have a ________ grace period from the date of the bill to make payments.
A) 1- to 15-day
B) 5- to 20-day
C) 21 to 25-day
D) 31- to 35-day

4) Typically, an annual fee charge ranges from $10 to $100, but the American Express Centurion
Card charges a ________ annual fee–and there's also a ________ initiation fee for the first year.
A) $0; $0
B) $25; $75
C) $250; $750
D) $2,500; $7,500

5) The ________ is the percentage of the credit card sale that the retailer owes to the credit card
company.
A) retailer credit acceptance fee
B) card usage allowance
C) merchant's discount fee
D) franchise fee

6) According to the Bankcard Holders Association of America, about 95 percent of all bank card
issuers use the
A) adjusted balance method.
B) previous balance method.
C) average daily balance method.
D) daily double balance method.

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7) Typically, the credit card issuer allows you a grace period, which means
A) you do not have to make a payment during the current month.
B) you are not charged any interest during this grace period.
C) you must pay your balance off in full to benefit from the grace period.
D) interest charges are reduced during this time.
E) both B and C apply.

8) Which of the following apply to getting a cash advance with a credit card?
A) Cash advances are available at ATM machines.
B) You begin paying interest immediately.
C) There may be a cash advance fee.
D) The interest rate may be higher than on regular purchases.
E) All of the above

9) Which method sums the outstanding balances owed each day during the billing period and
divides by the number of days in the period?
A) Average daily balance
B) Previous balance
C) Adjusted balance
D) Balance calculation method
E) Simple interest

10) On October 1st Joe charged $900 to his credit card, on October 10th he charged another
$1,300 to his credit card, and on October 15th he charged an additional $100. His credit card
charges him an Annual Percentage Rate (APR) of 18% compounded monthly. Using the Average
Daily Balance Method calculate Joe's finance charge for the month of October.
A) $7.12
B) $28.16
C) $212.36
D) $523.14
E) None of the above are correct answers.

11) Credit cards are a form of ________ credit.

A) close ended
B) revolving
C) installment
D) service

12) Assume a 31-day month to calculate your average daily balance for your credit card bill.
Your daily balance for the first 10 days was $1,400, for the next 10 days was $1900, and for the
last 10 days was $2700. What will your average daily balance be at the end of the month?
A) $1935.48
B) $19.35
C) $193.58
D) $1.94

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13) Assuming the APR on your credit card is 18% and your average daily balance this month
was $10,000, what will your interest or finance charges for the month be?
A) $180
B) $60
C) $150
D) $1.50

14) More than ________ of the 25 biggest credit card issuers do not charge annual fees.
A) 30 percent
B) 50 percent
C) 70 percent
D) 90 percent

15) One of the unpleasant secrets about using your credit card for a cash advance is that
A) there is usually a 6 to 8 percent upfront fee on the amount.
B) the APR on the cash advance is typically lower than the APR for normal purchases.
C) payments do not apply to cash advance balances unless the balance for regular credit
purchases is zero.
D) All but B apply to cash advances.

16) The ________ is the interest rate you pay on your balance if you don't make your minimum
payments on time.
A) penalty rate
B) late rate
C) cash advance rate
D) over-the-limit rate

17) In an emergency, you used your credit card for a $500 cash advance. You just received your
statement and your total balance due is $1,859, and the cash advance was the most recent charge.
You want to be sure to pay for the cash advance so you send in a payment of $700. Your credit
card has an APR of 12 percent. How much of your payment will apply to the cash-advance
balance?
A) Because it was the most recent charge, $500 of the payment will apply to the cash-advance
balance.
B) It doesn't make any difference because the $1,859 balance includes the cash advance, the
$700 payment will lower your total balance regardless, so the amount applied to the cash-
advance balance is irrelevant.
C) There isn't enough information to answer the question, because the answer depends on the
cash advance's interest rate.
D) None of the above

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18) When you withdraw cash from an ATM using your credit card
A) you begin paying interest immediately.
B) you are not charged any interest until after the date the payment is due.
C) the interest fee is lower than that for purchases.
D) you're using a relatively inexpensive way to borrow money.

19) Which of the following is an advantage of credit cards?

A) They make it easy to lose control of spending.
B) In general they are an expensive way to borrow money.
C) They allow the consumer the ability to rent cars and make online reservations.
D) Using them means you will have less spendable money in the future.

20) Your credit card company cannot increase your rate for the first 12 months after you open an
account unless
A) your card has a fixed interest rate tied to an index and the index goes down.
B) your card's introductory rate expires and your rate reverts to the "go-to" rate the company
disclosed when you got the card.
C) you are more than 15 days late in paying your bill.
D) all of the above.

21) Which of the following is a disadvantage of credit cards?

A) Allows for consumption before the purchase is fully paid for
B) Emergency use
C) Allows for online shopping
D) The finance charge that accrues on the account if not paid off in full each month

22) Research has determined that undergraduate college students tend to behave in similar
manners with regards to their credit card usage. As noted in Chapter 6, which of the following
behaviors are indicative of undergraduate students' credit card behaviors?
A) Their parents do not frequently pay their credit card balances for them.
B) They make more than their minimum payment each month but still tend to carry a balance on
their cards.
C) They pay off all of their cards in full each month.
D) They make more than the required minimum payment on 90% of all other cards each month.

23) The choice of a credit card is a matter of personal credit card philosophy. If you are a credit
user, the most important decision factor is the card's
A) length of grace period.
B) annual fee.
C) APR on the unpaid balance.
D) minimum payment.
E) late payment fee.

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24) Credit cards issued in conjunction with particular charities or organizations, like the Sierra
Club or the Humane Society, that send a portion of their annual fee or percentage of their
purchases back to the sponsoring organization are known as
A) premium cards.
B) prestige cards.
C) affinity cards.
D) secured credit cards.

25) ________ is not information generally found in your credit report.

A) Employment information
B) Personal credit history
C) College attended, grades, etc.
D) Your public financial history
E) Past inquiries regarding your credit report

26) Your credit score affects

A) the rate you pay on your credit cards.
B) the size of your credit line.
C) your mortgage rate.
D) the amount of junk mail offering additional credit cards that you receive.
E) All of the above are correct answers.

27) Credit scoring is

A) quite expensive for the lender.
B) not a flawless method of determining creditworthiness.
C) an inefficient but necessary process.
D) all of the above.

28) Consider the "Five Cs of Credit." The category that considers the size of your investment
holding or portfolio is
A) collateral.
B) capital.
C) capacity.
D) character.
E) none of the above.

29) Consider the "Five Cs of Credit." The category that considers your current income level and
current borrowing level is
A) collateral.
B) capital.
C) capacity.
D) character.
E) none of the above.
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30) Which of the following is the best strategy for controlling and managing your credit cards
and open debt?
A) Reduce your balance.
B) Resolve billing errors.
C) Protect against fraud.
D) Look for trouble signs in credit card spending.
E) All are good strategies.

31) When you find you cannot pay your credit card bills you must take action! Which option is
advisable?
A) Adjust your budget to allow for more money to pay for the cards.
B) Change to a less expensive credit card or cards.
C) Use a secured loan or home equity loan to get a lower interest rate to pay the cards off.
D) Use savings to pay off some or all of current credit card debt.
E) All of the above