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16
chapter
account
cash advance
closed-end
collateral
collateral
credit
creditor
Credit in America
deferred billing
finance charge
finance companies
grace period
line of credit
Loan sharks
Open-ended credit
Name_____________________________________
pawnbroker
retail
sales finance company
service
usury
Fill in the missing word(s) in the space provided
1. The free period, also called ___________________, allows you to avoid a finance charge if you pay in full before the
due date.
2. One who lends money or the use of goods and services for payment at a later date is known as a(n)
____________________.
3. Paying at a future date for the present use of goods and services or money is called _______________.
4. A(n) ____________________ is a pre-established amount that can be borrowed on demand.
5. A loan on which the goods purchased with the loan serve as ___________________ is a type of secured loan.
6. ___________________ is credit whereby you can add purchases up to a set credit limit.
7. A loan for a specific amount that must be repaid in full, including finance charges, by a stated due date, is called
_________________________ credit.
8. A(n) ___________________________ is money borrowed against the credit card limit.
9. A manufacturer-related company, called a(n) _________________________, makes loans through authorized
representatives
10. ___________________________ are unlicensed lenders who charge illegal rates.
M/C
1. Credit cards such as VISA and MasterCard are examples of
(a) 30-day credit agreements, (b) revolving credit agreements, (c) APRs, (d) installment loans.
2. Which of the following is an example of service credit?
(a) telephone bill, (b) bank credit card, (c) gasoline purchase, (d) retail store agreement
3. Finance companies charge higher rates of interest on loans because
(a) they are small and have less money to lend, (b) they have lenient loan policies, (c) they take more risk, (d) they
compete with banks and savings and loans for business.
Activity 16.1 – Your Credit Card Means Freedom
Directions: Read the information below and then answer the questions that follow.
Some people believe that credit cards are evil—that they lead to overspending, to debt problems, and to moral decline.
But credit cards can also mean the difference between having a good vacation and staying at home. Consider the
following:
1. In order to rent a car, you will need a credit card. The card must have a limit high enough to allow for charges of
$150 or greater. Most rental companies will not accept cash or debit cards because they want assurance that there
is a source of payment if you incur other charges, such as by keeping the car longer or by damaging it.
2. Motels and hotels usually also require a credit card. Once you have checked out and are ready to leave, they may
allow you to use a debit card or cash, but in order to secure a reservation and in order to stay at the facility, you
will need a valid credit card with space in your credit limit for charging.
3. While on the road, you may also need that credit card to buy gasoline. Many stations do not accept cash after
dark. The only way to obtain self-service gasoline may be to use your credit card at the pump. If you have an
emergency, such as needing a tow truck, the credit card provides a way to pay for it on the spot. When you’re out
of town, most merchants will not accept checks, so the credit card allows you the instant ability to buy necessities.
4. A credit card is a safer way to carry money when you travel. If the card is lost or stolen, you can get it replaced
and can get cash advances from the card by calling the card issuer’s toll-free number. If your cash is stolen,
however, you cannot get it replaced.
5. If you are traveling in a foreign country, using your credit card will enable you to get the up-to-the-minute
exchange rate, thus preventing merchants from giving you less than your fair dollar’s worth.
Both debit and credit cards can be used to get foreign currency from ATM machines abroad as well, also giving you the
best exchange rate possible.
Credit cards are not evil. They’re tools that can be used wisely to make your travel plans flow much more smoothly.
1. Have you been in a situation where a credit card would have been very useful? Describe what happened.
2. Explain why cash is not always the best thing to have in order to pay for your vacation expenses.
17
chapter
Credit Records and Laws Name______________________
Fill in the missing word(s) in the space provided
Capacity
character
conditions
credit bureau
credit history
credit report
creditworthiness
debt collector
discrimination
excellent
fair
good
point system
poor
subscriber
Truth-in-Lending Law
1. A responsible attitude toward paying bills and meeting obligations on time is called _____________________.
2. Your __________________________ will answer questions about how you have paid your bills, how many bills you
have had and what type, how much total credit you have been given, and how much credit appears to be outstanding now.
3. A credit bureau issues a written statement called a(n) ______________________, which itemizes accumulated
information about a person through subscribers and public records.
4. ________________________ is the ability to repay a loan or make payments on a debt out of current income.
5. Existing debts, stability of employment, and personal factors that determine a person’s ability to meet financial
obligations are called _________________________________.
6. A(n) _________________ is a business that accumulates, stores, and distributes credit information to members.
7. A(n) _________________________ is a type of rating used by credit bureaus in determining a person’s general
creditworthiness.
8. A(n) _________________________ credit rating is earned when you pay your bills before the due date.
9. A(n) __________________________ credit rating is earned when you pay your bills on the due date or within a short
grace period.
10. A(n) ________________________ credit rating is likely to result in denial of new credit.
11. A(n) __________________________ credit rating is given to a person who pays during the grace period, but
occasionally takes longer.
12. A(n) ______________________________ is a person hired to collect the balance due.
M/C
1. Which of the following is an unlawful purpose for a credit report?
(a) mailing list information, (b) credit application, (c) employment application, (d) insurance
2. Which is not one of the five Cs of credit?
(a) character, (b) capacity, (c) challenge, (d) collateral.
3. Which of the following could become part of your credit record?
(a) a lawsuit, (b) a divorce, (c) bankruptcy, (d) all of these
18
chapter
Responsibilities and Costs of Credit
Name___________________
Fill in the missing word(s) in the space provided
adjusted balance
annual percentage rate
average daily balance
credit
down payment
interest
previous balance
prime
principal
rate
rebate
simple
time
unused
1. The total amount that is financed or borrowed, on which interest is computed, is called ____________.
2. The _____________ rate of interest is charged by banks to their best commercial (business) customers.
3. The true annual rate of interest being charged is called the _______________________.
4. The portion of purchase price refunded is called _________________________.
5. The amount above what you owe, but below your maximum credit limit, is called _________________ credit.
6. When computations to determine interest involve the formula I = P * R * T, this is said to be
__________________________interest.
7. Money paid for the use of someone else’s money is called _________________________.
8. The _________________________ is always expressed as a percentage in the simple interest equation.
9. The ________________________ in the simple interest equation is expressed as a fraction of a year.
10. A deposit, or __________________________, is often made when purchasing a large or expensive item to ensure that
you will continue to make payments.
M/C
1. Individuals pay _________ than the rate of interest that banks offer to business accounts.
(a) more, (b) less, (c) the same, (d) much less
2. As your income increases, you _________ increase your credit.
(a) should, (b) should not, (c) should in direct proportion, (d) should make at least twice as much money to
3. A good rule of thumb is that purchases under _________ should not be charged but should be paid in cash.
(a) $5, (b) $10, (c) $25, (d) $50
4. The formula I _ P _ R _ T is for computing
(a) annual percentage rate, (b) compounded interest, (c) simple interest, (d) costs of loans.
5. The method of payment on installment loans is usually
(a) daily, (b) weekly, (c) semi-quarterly, (d) monthly.
6. A trade-in is _________ the purchase price of merchandise to determine the principal of a loan.
(a) added to, (b) subtracted from, (c) not considered, (d) not used in
7. The amount of credit above what you owe is called
(a) principal, (b) interest, (c) deferred payment price, (d) unused credit.
Activity 18.1 – Simple Interest
Directions: Calculate the following simple interest problems. Write your answers in the space provided; show your work.
Use the formula I = P * R * T and round your answers to the nearest cent or the nearest tenth of a percent. Use four
decimal places for fractions of time.
1. (a) I = ? P = $500 R = 8% T = 3 months (3/12)
(b) I = ? P = $50 R = 12% T = 1 month (1/12)
(c) I = ? P = $1,000 R = 18% T = 24 months (24/12)
(d) I = ? P = $600 R = 15% T = 60 days (60/360)
2. (a) I = $6 P = ? R = 12% T = 3 months (3/12)
(b) I = $15 P = ? R = 15% T = 90 days (90/360)
(c) I = $300 P = ? R = 12% T = 6 months (6/12)
(d) I = 90¢ P = ? R = 6% T = 60 days (60/360)
3. (a) I = $12 P = $200 R = ? T = 6 months (6/12)
(b) I = $390 P = $2,000 R = ? T = 18 month (18/12)
(c) I = 50¢ P = $25 R = ? T = 6 weeks (42/360)
(d) I = $3 P = $50 R = ? T = 180 days (180/360)
Activity 18.2 – Compound Interest
Directions: Calculate the following compound interest problems. Write your answers in the space provided; show your
work. Round your answers to the nearest cent or the nearest tenth of a percent. Use four decimal places for fractions of
time.
1. $7,300 at 7% compounded semiannually for years
2.
$1,030 at 4% compounded semiannually for years
3.
$18,000 at 9% compounded semiannually for years
4.
$1,500 at 7% compounded annually for years
5.
$1,240 at 8% compounded annually for years
6.
$55,000 at 16% compounded semiannually for years
7.
$28,600 at 7.9% compounded semiannually for years
Chapter
19
20/10
attorney
bankrupt
Chapter 7 bankruptcy
Chapter 11 bankruptcy
Problems with Credit
Chapter 13 bankruptcy
Credit counseling
debt-adjustment
debtor
discharged
exempted property
Name_________________________________________
involuntary
reaffirmation
unsecured
voluntary
1. A person who owes money to creditors is called a(n) _________________________.
2. A commercial _________________________ firm will charge you a fee and require you to sign a contract, to help you
get out of trouble with credit.
3. _________________________ services will help you set up a voluntary credit plan and will give you good advice.
4. If a person agrees to pay back a debt after it has been discharged by bankruptcy, the agreement is called
_________________________.
5. _________________________ is often called the wage earner’s plan because creditors get some of their money back
and the debtor enters a plan to pay off a portion of the total debt.
6. _________________________ is often called a straight bankruptcy proceeding, and it allows exempted items of value
and certain possessions and incomes.
7. A value or possession, called _________________________, is something a debtor is allowed to keep after bankruptcy
because it is considered necessary for survival.
8. In _________________________ bankruptcy, the debtor files a petition with the court asking that the debtor be
declared bankrupt.
9. In _________________________ bankruptcy, the creditor files a petition with the court asking that a debtor be
declared bankrupt.
10. To be _________________________ is to be declared legally insolvent, or incapable of paying one’s bills
11. The _________________________ Rule suggests that consumers use no more than 20 percent of yearly take-home
pay, or 10 percent of monthly take-home pay, to pay credit debts.
M/C
1. Which of the following choices is commonly known as straight bankruptcy?
(a) involuntary bankruptcy, (b) voluntary bankruptcy, (c) Chapter 7 bankruptcy, (d) Chapter 13 bankruptcy
2. The 20/10 Rule does not apply to
(a) credit cards, (b) open-ended credit, (c) mortgage loans for housing, (d) closed-ended credit.
3. Once you have filed straight bankruptcy, you cannot file again for _____________ years.
(a) three, (b) six, (c) seven (d) ten
Activity 19.1 – The 20/10 Rule
Directions: Credit counselors often suggest the use of the 20/10 Rule to people beginning to use credit:
Your total borrowing should never exceed 20 percent of your yearly take-home pay, and you should never take on
monthly payments that total more than 10 percent of your monthly take-home pay.
Example:
Take-home pay is roughly 70% of gross pay. If your annual salary is $30,000, then your take-home pay (after taxes)
is $21,000 ($30,000 x .70). If your annual salary is paid in 12 equal monthly payments of $2,500, your monthly takehome pay is $1,750.
Using the 20 /10 Rule, your total borrowing should not exceed 20% of annual take-home pay:
$21,000 x .20 = $4,200 maximum borrowing
Your monthly credit payments should not exceed 10% of monthly take-home pay:
$1,750 x .10 = $175 maximum monthly credit payments
Now assume you have an annual salary of $42,000. Apply the 20/10 Rule to determine your maximum borrowing &
monthly credit payments:
$42,000 x .70 = $29,400; $29,400 x .20 = $5,880 maximum borrowing
$29,400 / 12 = $2,450;
$2,450 x .10 = $245 maximum monthly credit payments
1. If your yearly take-home pay is $27,000, your total borrowing should not exceed
2. If your monthly take-home pay is $2,250, your monthly credit payments should not be more than
3. If your yearly take-home pay is $18,000, your total borrowing should not exceed
4. If your monthly take-home pay is $1,500, your monthly credit payments should not be more than
5. If your yearly take-home pay is $36,000, your total borrowing should not exceed
6. If your monthly take-home pay is $3,000, your monthly credit payments should not be more than
Activity 19.2 – Bankruptcy Review
Directions: Answer the following questions in the space that is provided.
1. Contrast the following:
Chapter 7 Bankruptcy
Chapter 11 Bankruptcy
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy Chapter 11 Bankruptcy Chapter 13 Bankruptcy
2. List four advantages of bankruptcy:
3. List four disadvantages of bankruptcy:
4. List items exempted by bankruptcy (and their values):
5. List debts not discharged by bankruptcy: