PFIN5 5th Edition Billingsley Test Bank

Full download at link:

Test Bank: https://testbankpack.com/p/test-bank-for-pfin5-5th-

edition-billingsley-gitman-joehnk-1305661702-9781305661707/

Solution Manual: https://testbankpack.com/p/solution-manual-for-

pfin5-5th-edition-billingsley-gitman-joehnk-1305661702-
9781305661707/

Chapter 06 Using Credit

TRUEFALSE

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

(A) True

(B) False

Answer : (B)

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

(A) True

(B) False

Answer : (A)

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

(A) True (B)

False

Answer : (A)

4. Credit should not consistently be used for nondurable goods.

(A) True

(B) False

Answer : (A)
5. Credit cards with very low minimum payment requirements are in the consumers' best interest.

(A) True

(B) False

Answer : (B)

6. 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 completely paid upon billing.
(A) True

(B) False

Answer : (A)

7. When one uses more than 20 percent of one's take-home income to pay off consumer debt, it is
one of the signs that one may be headed towards serious credit problems.

(A) True (B)

False

Answer : (A)

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

(A) True

(B) False

Answer : (B)

9. Having arranged and fully repaid a small loan helps improve creditworthiness.

(A) True

(B) False

Answer : (A)

10. Paying a loan ahead of schedule is one way to build a good credit rating.

(A) True

(B) False

Answer : (A)

11. The key to creditworthiness is to keep your debt safety ratio as high as possible.

(A) True

(B) False

Answer : (B)

12. Debit cards are a form of credit that is very convenient to use.
(A) True

(B) False

Answer : (A)

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

(A) True

(B) False

Answer : (A)

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

(A) True

(B) False

Answer : (A)

15. A retail charge card can be accessed by writing checks against demand deposit.

(A) True

(B) False

Answer : (B)

16. Retail charge cards are cheaper than credit cards provided by financial institutions.

(A) True

(B) False

Answer : (B)

17. Most families have only one type of source for consumer credit.

(A) True

(B) False

Answer : (B)

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

(A) True
(B) False

Answer : (B)

19. A credit report is routinely used to predict creditworthiness.

(A) True

(B) False

Answer : (A)

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

(A) True

(B) False

Answer : (B)

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

(A) True (B)

False

Answer : (A)

22. A credit applicant is granted credit only after establishing a complete file at the local credit
bureau.

(A) True (B)

False

Answer : (B)

23. For a fee, credit bureaus can provide credit scores of prospective borrowers.

(A) True

(B) False

Answer : (A)

24. One can and should check his or her credit bureau file regularly.
(A) True (B)

False

Answer : (A)

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

(A) True (B)

False

Answer : (B)

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

(A) True

(B) False

Answer : (A)

27. A credit card user's credit rating will be hampered if he or she pays only the minimum monthly
payment on a credit card.

(A) True (B)

False

Answer : (B)

28. Finance charges are computed only on the unpaid balance from previous months' purchases.

(A) True

(B) False

Answer : (B)

29. The most common method of computing finance charges on a credit card is the average daily
balance method including new purchases.

(A) True (B)

False

Answer : (A)
30. The amount of finance charges one pays on a credit card depends only on the annual percentage
rate (APR) and the amount one charges

(A) True (B)

False

Answer : (B)

31. Nearly all credit cards have annual fees.

(A) True

(B) False

Answer : (B)

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

(A) True (B)

False

Answer : (B)

33. The intent of the Wage Earner Plan is to eliminate most of a debtor's obligations.

(A) True

(B) False

Answer : (B)

34. A Chapter 13 bankruptcy filing would result in the discharge of most of your debts.

(A) True

(B) False

Answer : (B)

35. Families that have a steady source of income and a reasonable chance to repay debts would
choose Chapter 13 rather than Chapter 7 of the U.S. Bankruptcy Code.

(A) True

(B) False
Answer : (A)

36. The majority of persons filing for bankruptcy choose Chapter 7 of the U.S.Bankruptcy Code.

(A) True

(B) False

Answer : (A)

37. It is recommended that you never give your credit card account number over the phone to
people or organizations who call you.

(A) True (B)

False

Answer : (A)

38. If you initiated the telephone call, it is okay to give your credit card account number when
ordering/purchasing from major catalog houses, airlines, hotels, and so on.

(A) True (B)

False

Answer : (A)

39. Overspending will help you manage your budget effectively.

(A) True

(B) False

Answer : (B)

40. People who let their credit balances build up are mortgaging their future.

(A) True

(B) False

Answer : (A)

MULTICHOICE

41. Which of the following is an appropriate reason for using a credit card?
(A) Purchase of food

(B) Payment of utility bills

(C) Payment of small cash outlays

(D) Impulse purchases

(E) Shopping convenience

Answer : (E)

42. It is good to use credit for:

(A) buying groceries

(B) purchasing an expensive perfume

(C) buying a car

(D) visiting a tourist destination

(E) buying a dress

Answer : (C)

43. Which of the following is an improper use of credit?

(A) Buying a home

(B) Buying a short-lived service

(C) Spreading payments within a budget

(D) Purchasing a big-ticket item

(E) Meeting a financial emergency

Answer : (B)

44. is a benefit of using credit cards.

(A) Being able to buy inexpensive goods while spreading the payments over time

(B) Providing payments for living beyond one's means

(C) Making impulse purchases

(D) Being able to meet everyday living expenses

(E) Being able to meet a financial emergency

Answer : (E)

45. To establish creditworthiness and to have a good credit score, one should probably first:

(A) open savings and checking accounts.

(B) use credit extensively. (C)

arrange for a small loan. (D)

pay cash for all purchases.

(E) arrange for a large loan from close relatives.

Answer : (A)

46. Which of the following would be an indication of wise usage of credit?

(A) Your checks are bouncing.

(B) Collection agencies are calling you frequently.

(C) There are no pending charges on your credit cards.

(D) You have no cash reserves and must borrow for incidentals.

(E) You have missed few loan payments.

Answer : (C)

47. Which of the following will lead to poor credit rating?

(A) Opening checking and savings accounts

(B) Opening and using a charge account

(C) Applying for a long-term loan and occasionally being late with a payment

(D) Making payments ahead of scheduled time

(E) Discussing with the lender if you foresee difficulty in making a payment

Answer : (C)

48. As a percent of take-home pay, monthly consumer credit payments should not exceed .

(A) 25%

(B) 20%

(C) 15%
(D) 10% (E)

5% Answer :

(B)

49. If your monthly before-tax income is $2,000 and your monthly take-home pay is $1,500, your
maximum monthly consumer credit payments should not exceed:

(A) $600.

(B) $450.

(C) $400.

(D) $300.

(E) $200.

Answer : (D)

50. Clare's annual gross salary is $36,000 and her after-tax income is $28,800. What is Clare's
maximum recommended monthly consumer credit payment?

(A) $600

(B) $480

(C) $450

(D) $360

(E) $200

Answer : (B)

51. With a bank credit card, one can often avoid interest charges if:

(A) the account balance is paid in full every month.

(B) at least half the account balance is paid every month.

(C) the minimum payment is made every month.

(D) the account is a revolving credit account.

(E) the account balance is below the credit limit.

Answer : (A)

52. Mike has a MasterCard with an annual fee of $25, an 18% interest, and a $1,000 credit limit. He
always pays the total outstanding balance monthly. His most recent monthly statement lists last
month's payment, new charges this month totaling $1,500, and a $30 fee. The fee is most likely the
result of:

(A) interest charges.

(B) his annual fee.

(C) an over-the-limit fee.

(D) a late payment.

(E) transaction fees on purchases.

Answer : (C)

53. Which of the following cards provide direct access to your checking account?

(A) Retail charge cards

(B) Affinity cards

(C) Student credit cards

(D) Reward cards

(E) Bank debit cards

Answer : (E)

54. Interest will usually begin to accrue immediately when you use a bank credit card to:

(A) make purchases.

(B) send payments.

(C) compute finance charges.

(D) get cash advances.

(E) meet a financial emergency.

Answer : (D)

55. Which of the following forms of consumer credit is the cheapest and offers tax shelters?

(A) Overdraft protection lines

(B) Home equity lines of credit

(C) Credit cards

(D) Unsecured personal credit

(E) The Wage Earner Plan

Answer : (B)

56. cards offer the cardholder a way to contribute to a worthy cause and are sometimes
described as "credit cards with a cause."

(A) Student

(B) Debit

(C) Credit

(D) Affinity

(E) Rebate

Answer : (D)

57. Persons with very poor credit ratings can still get credit cards.

(A) secured

(B) reward

(C) prestige

(D) affinity

(E) retail

Answer : (A)

58. A payment made by is equivalent to paying by cash

(A) a retail credit card

(B) a debit card

(C) an affinity card

(D) a reward card

(E) a student credit card

Answer : (B)

59. Sheldon has a home valued at $108,000 with an outstanding mortgage of $70,000. If his lender
is willing to provide a home equity loan of up to 80% of the market value, how much can Sheldon
borrow using a home equity loan?

(A) $86,400

(B) $80,000

(C) $38,000

(D) $30,400

(E) $16,400

Answer : (E)

60. Russ and Lois have a home valued at $96,000 with an outstanding mortgage of $60,000. If their
lender is willing to provide a home equity loan of up to 75% of the market value of the home, how
much could they borrow using a home equity loan?

(A) $0

(B) $12,000

(C) $27,000

(D) $28,000

(E) $36,000

Answer : (B)

61. Any credit card purchase will effectively be an interest-free loan if you:

(A) pay for the purchase within six months.

(B) pay the minimum payment.

(C) pay the entire balance on or before the due date.

(D) pay the previous balance by the due date.

(E) receive a cash advance.

Answer : (C)

62. Which of the following cards is issued as a form of credit by department stores and oil
companies?

(A) Debit card

(B) Student credit card

(C) Retail charge card

(D) Credit card

(E) Gift card

Answer : (C)

63. Retail charge cards are advantageous to merchants because:

(A) they help the merchants get loans.

(B) they help build consumer loyalty.

(C) they help the merchants file for bankruptcy.

(D) they help the merchants in saving taxes.

(E) they help the merchants in giving loans to their suppliers.

Answer : (B)

64. James finds it difficult to manage credit but likes the convenience of using a card. He wants to
buy a card that will directly access his checking account. James should get a .

(A) retail charge card

(B) gift card

(C) student credit card

(D) debit card

(E) membership card

Answer : (D)

65. Why has consumer credit become such a popular way of making routine purchases?

(A) Individuals can have a restriction on their spending.

(B) Taking more credit will increase the credit scores.

(C) Availability of different types of credit is abundant.

(D) Consumer credit cannot be used for emergencies.

(E) No interest is charged when credit is used for large outlays.

Answer : (C)

66. A(n) is an agency that provides credit information about individual borrowers to lenders.
(A) credit bureau

(B) consumer bureau

(C) insurance company

(D) bank

(E) credit scoring house

Answer : (A)

67. If the information on your credit report is in dispute, you are entitled to:

(A) correct it.

(B) sue.

(C) erase it.

(D) provide your own explanation about the dispute.

(E) withdraw from the credit bureau.

Answer : (D)

68. Which of the following is true about credit scoring systems?

(A) Lower scores are better than higher scores.

(B) Scoring systems are based on statistical studies.

(C) Credit unions calculate and sell credit scores to lenders.

(D) Females receive higher scores than males.

(E) Stronger the personal traits of a person, lower will be his credit score.

Answer : (B)

69. Which of the following information is redundant when the lender when analyzes the
creditworthiness of a borrower?

(A) Personal/family matters

(B) Housing

(C) Employment

(D) Income

(E) Lifestyle
Answer : (E)

70. What does a lender look at before granting credit?

(A) Political interests of the borrower

(B) Friend circle of the borrower

(C) Age of the borrower

(D) Religious affiliations of the borrower

(E) Lifestyle of the borrower

Answer : (D)

71. Finance charges on two credit cards with the same stated annual percentage rate (APR):

(A) will always be the same.

(B) will be the same as the rate calculated in the federal law.

(C) will be determined by the type of credit card used.

(D) will be determined by the method used to calculate balances.

(E) will be decided by the credit bureau.

Answer : (D)

72. For a person who uses his or her credit card very frequently, which calculation method would produce
more interest income?

(A) Average daily balance including new purchases

(B) Effective daily balance excluding new purchases

(C) Two-cycle average daily balance including new purchases

(D) Double declining average daily balance excluding new purchases

(E) Annual percentage rate method including new purchases

Answer : (A)

73. Which of the following information can be excluded from a monthly credit card statement?

(A) Size of the payment

(B) Payment due date

(C) Type of goods purchased

(D) Annual percentage rate

(E) Finance charge, if any.

Answer : (C)

74. William uses his bank credit card frequently; however, he always pays off the total balance on
the card each month. What should William look for in a credit card given the way he uses one?

(A) Low annual fee and short grace period

(B) Low annual fee and low interest rate

(C) No annual fee and short grace period

(D) No annual fee and long grace period

(E) High annual fee and low interest rate

Answer : (D)

75. Ann Marie accumulated a large balance on her credit card while in college. She is trying to get it
paid off as quickly as possible and wants to roll the balance onto a new credit card. She now uses a
credit card only for emergencies. What should Ann Marie look for in a credit card given the large
balance and the way she plans to use the card?

(A) Low annual fee

(B) Low annual percentage rate

(C) Long grace period

(D) Average daily balance method excluding purchases

(E) Two-cycle average daily balance method

Answer : (B)

76. When comparing credit cards, a person who pays his total outstanding balance off monthly
would want a card with:

(A) a low required minimum payment percentage.

(B) a high interest rate.

(C) high over-the-limit fees.

(D) no grace period.

(E) no annual fee

Answer : (E)

77. Anna uses her credit card regularly, but she pays off the total balance monthly. Anna should look
for a credit account with:

(A) no reward points.

(B) low interest rates.

(C) no grace period.

(D) no rebate programs.

(E) no annual fees.

Answer : (E)

78. Joe and Jane have a tendency to build up large balances on their credit cards. Which of the
following would be least important to them?

(A) No annual fee

(B) Low interest rates on balances

(C) Long grace period

(D) Method of calculating balances

(E) High reward points

Answer : (C)

79. When canceling a credit card, you should cut up the card and that you are canceling your
account.

(A) inform the issuer in writing

(B) call the issuer and tell them

(C) inform the credit bureau in writing

(D) call the credit bureau and tell them

(E) inform the future lender in writing

Answer : (A)

80. Personal insolvency can be legally satisfied by:

(A) not taking any credit in the future.

(B) relinquishing all credit cards.

(C) canceling loans availed so far.

(D) Chapter 4 bankruptcy.

(E) Chapter 13 bankruptcy

Answer : (E)

81. Chapter 7 bankruptcy will:

(A) restore all the losses incurred by the borrower.

(B) result in the loss of all of one's assets.

(C) require the debtor to pay back the debt in the future.

(D) sell only the home of the borrower.

(E) eliminate most of the financial obligations of the borrower.

Answer : (E)

82. Which of the following is true about phishing?

(A) Using bills in the trash to obtain personal information

(B) Rerouting bills to a different address

(C) Using false pretense to get information from financial institutions

(D) Stealing wallets

(E) Pretending to be an employee of a financial institution

Answer : (E)

83. Which of the following modes of identity theft involves thieves obtaining your personal
information from financial institutions and other sources under false pretenses?

(A) Dumpster diving

(B) Skimming

(C) Phishing

(D) Pretexting

(E) Old-fashioned stealing

Answer : (D)

84. Which of the following credit problems is a consequence of a wallet full of credit cards?

(A) Wise spending of credit

(B) FICO score reduced

(C) Easy loan approval

(D) Safety from identity theft

(E) Safety from bankruptcy

Answer : (B)

SHORTANSWER

85. Using to handle financial emergencies is recommended.A. credit

B. savings
C. a bank loan
D. a checking account
Answer : savings

86. An improper use of extended credit would be to buy .A. an expensive car
B. an expensive house
C. an expensive dinner
D. a piece of land
Answer : an expensive dinner

87. A proper use of open account credit would be to buy .A. food
B. a washing machine
C. expensive wine
D. a designer purse
Answer : a washing machine

88. The first step to take in establishing a credit history is to .A. get a credit card
B. open checking and savings accounts
C. borrow from neighbors
D. pay cash for all purchases
Answer : open checking and savings accounts

89. Most creditors if you are having difficulty meeting your payments.A. will double your
interest rate
B. will file a legal case
C. will work out a solution
D. will never give you a loan in the future
Answer : will work out a solution
90. You are likely to have financial difficulty if your personal credit obligations exceed of
your take-home pay.A. 15%
B. 20%
C. 10%
D. 3%
Answer : 20%

91. Nancy's take-home income is $3,000 per month, and she currently has a $700 monthly consumer
debt. According to the general rules of thumb, A. Nancy cannot take on additional
consumer debt as her debt safety ratio is higher than the general criteria.
B. Nancy can take on additional consumer debt as her debt safety ratio is higher than the general
criteria.
C. Nancy can take on additional consumer debt as her debt safety ratio is lower than the general
criteria.
D. Nancy cannot take on additional consumer debt as her debt safety ratio is lower than the general
criteria.
Answer : Nancy cannot take on additional consumer debt as her debt safety ratio is higher than the
general criteria.

92. The decision whether or not to grant you credit will be made by .A. individual creditors
B. the credit bureau
C. the credit card holder
D. the Federal Trade Commission
Answer : individual creditors

93. If a borrower has a higher credit score, then there is .A. a minimal chance of his or her loan
getting approved
B. no chance of his or her loan getting approved
C a higher chance of his or her loan getting approved
D. a higher chance of more collateral requirements for his or her loan
Answer : a higher chance of his or her loan getting approved

94. The most expensive method of determining finance charges on revolving credit would be the
.A. average daily balance (ADB) method including new purchases
B. average daily balance (ADB) method excluding new purchases C
annual percentage rate (APR) method including new purchases D.
annual percentage rate (APR) method excluding new purchases
Answer : average daily balance (ADB) method including new purchases

95. A credit scoring system might assign points according to your annual income and .A. gender
B. age
C religious affiliations
D. habits
Answer : age

96. A person who pays his credit balance off every month should look for a credit card with a
.A. long grace period
B. high annual fee
C. high interest rate
D. method of calculating balance
Answer : long grace period
97. involves some type of debt restructuring by establishing a debt repayment schedule.A.
The Wage Earner Plan
B. Straight bankruptcy
C. Pretexting
D. Phishing
Answer : The Wage Earner Plan

98. Most of your debts would be totally discharged under Chapter of the federal
bankruptcy law.A. 7
B. 13
C. 12
D. 9
Answer : 7

99. If you are expecting credit difficulties in making your payments, it is recommended that you
.A. talk to creditors
B. consult a credit counselor
C. file a legal complaint
D. obtain more credit
Answer : talk to creditors

ESSAY

100. Lindsey has a job with a monthly take-home pay of $3,500. Using the suggested maximum debt
safety ratio, what maximum debt burden per month can she assume? (Show all work.)

Graders Info :

The debt safety ratio of 20 percent is the maximum debt burden recommended for an individual.
Lindsey's maximum debt burden = 0.20 × $3,500 = $700 per month. REJ: Please see the section
"The Basic Concepts of Credit" for more information.

101. Ted and Karen have a combined take-home income of $4,500. Their total monthly payments on
consumer debt is $875. What is their debt safety ratio? Are they exhibiting any sign of approaching
credit problems?

Graders Info :

Ted and Karen's debt safety ratio is 19.44 percent, which is calculated by dividing $875 by $4,500.
They are approaching the maximum recommended level of consumer debt and hence are exhibiting
signs of potential credit problems. Ted and Karen should avoid taking on additional consumer debt.
REJ: Please see the section "The Basic Concepts of Credit" for more information.

102. The market value of your house is $175,000, and you have a first mortgage balance of
$100,000. If a lender requires an 80% loan-to-market value ratio, how large could your home equity
loan be?
Graders Info :

Home equity loan = ($175,000 × 0.80) - $100,000 = $40,000. REJ: Please see the section "Credit
Cards and Other Types of Open Account Credit" for more information.

103. Denise (a single taxpayer) contributes $6,000 annually to her church. In addition, she owns a
home in which she has $20,000 equity, and she itemizes deductions. If she pays $1,000 interest on
credit cards, $6,000 interest on her home equity loan, and is in the 25% marginal tax bracket,
calculate Denise's tax savings from these interest payments.

Graders Info :

The interest paid on the home equity loan is tax deductible. However, the interest paid on the credit
cards is not tax deductible. Therefore, the tax savings is calculated as 25 percent of $6,000, which is
equal to $1,500. REJ: Please see the section "Credit Cards and Other Types of Open Account Credit"
for more information.

104. You have a $926 balance on your credit card account. The minimum payment on your account is 2
percent of the latest balance or $20, whichever is greater. What will be the minimum payment this month?

Graders Info :

The minimum payment for the month is 2 percent of the new balance of $926, which is $18.52. As 2
percent of the latest balance is less than $20, the minimum payment is $20. REJ: Please see the
section "Obtaining and Managing Open Forms of Credit" for more information.