W!SE - Credit

Which of the following is considered to be open-end credit?

• A mortgage

• A car loan

• Department store charge cards

• Installment loans

Answer explanation

Open-end credit is a revolving live of credit that is offered by banks and other lenders to consumers. There is a limit set on the line of credit and the funds, products or services are accessed using a credit or debit card, check, store charge card or cash advance. Consumers pay interest on the outstanding balance. A car loan is made for a specified amount and a specific length of time and is therefore considered closed-end credit. A mortgage loan is also considered a form of closed-end credit since the house serves as collateral for the loan which is made at a specified interest rate for a specified time period.

A person has three credit cards with very large outstanding balances and is unable to make payments on any of them. Which action should the person take?

• Notify a credit reporting agency in order to avoid a late fee.

• File for bankruptcy in order to maintain ones current credit score.

• Notify the credit card companies in order to negotiate a new payment plan.

• Contact the Internal Revenue Service in order to avoid paying income tax this year.

Answer explanation

When experiencing financial difficulties, the first action to take is to notify \ncreditors, in this case the three credit card companies. Quite often the company will assist in negotiating new terms.

What is meant by an uncollateralized loan?

• A loan not backed by a co-signer who agrees to cover the amount of the loan.

• A personal loan without assets to cover the loan amount.

• A home equity loan.

• A loan taken on a life insurance policy.

Answer explanation

Collateral is a tangible asset that is used to secure a loan. In the case of a mortgage, the actual house or apartment serves as the collateral for that loan. The same is true of a car loan. If the person who takes the loan, defaults on that loan, the bank or other lending agency has the right to keep the collateral. Therefore, an uncollateralized loan is one that does not have an asset to support the loan.

When a person brings an item to a pawnshop to obtain cash, the transaction is considered--

• a collateralized loan

• a custodial payment

• an unsecured loan

• a sales agreement

Answer explanation

Since pawnshops make loans based on determining the value of collateral (a tangible object such as jewelry, cameras, musical instruments) they receive, the loan is considered a collateralized loan.

When a person declares bankruptcy that fact will appear on the person's credit report--

• for a 3 year period

• for a 10 year period

• until the person repays all debts owed

• until the person is able to receive a new credit card

Answer explanation

Most of the adverse information on a credit report appears for 7 years. After a declared bankruptcy, the limit is 10 years.

To qualify for a Federal Housing Administration (FHA) loan, a person must generally--

• have at least a high school diploma.

• have one-quarter of the cost of the home for a down-payment.

• fulfill income guidelines.

• provide two individuals to co-sign the loan.

Answer explanation

The Federal Housing Administration (FHA)

insures lenders who make mortgage loans that are riskier than regular bank loans because FHA loans are made to individuals who usually would not qualify for regular low-cost mortgages from banks (usually first-time home buyers with lower income and a weaker credit score). The objective of this federal agency is to encourage home ownership while helping to protect the lenders at the same time.

Which factor would most likely lead to an increase the interest rate on a person?s credit card?

• Number of purchases

• Late payments

• Total amount charged

• Number of cash advances

Answer explanation

Before setting interest rates, credit card companies look at the individual's capacity to repay outstanding obligations. If the capacity is limited then the person is likely to make late payments.

What is a credit score?

• A number used to determine how much credit to extend to a person.

• A measure used to indicate a person's gross wealth.

• A reward system that is based on the number of credit cards a person has.

• A formula based solely on a person's earnings.

Answer explanation

A credit score is a method used by credit grantors to determine the amount of credit to grant an applicant. A higher, good, score is achieved by paying bills on time, paying total balances on charge or credit cards, making loan payments on time, and, not having outstanding debt beyond one?s ability to pay.

You used your credit card to buy flowers at the florist. The dollar amount of the purchase was:

• Deducted immediately from your checking account

• Added to your credit card account as a finance charge

• Added to your credit card bill and you pay for it at a later date

• Put on your credit card bill as a cash advance

Answer explanation

The purchase amount is immediately added to the credit card account balance by the credit card company. Your credit card statement is generated once a month on the billing cycle date.

Collateral is...

• Something of value that secures a loan to protect the lender

• Something that explains your net worth

• A form of credit

• Required for all loans

Answer explanation

Collateral is required for a secured loan to protect the lender. If the debtor defaults on a loan, the creditor (lender) can seize and sell the collateral to pay off the secured loan. Collateral may be the item purchased with the loan, such as a vehicle, or in a cash loan, it may be some item that can be sold to pay off the loan.