Solutions to FP/120 Version 6 Questions

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Week Two:

Objective 2.1 Secured and unsecured debt

Which of the following is considered unsecured debt?

  1. a.   A mortgage b.   A car loan
  2. A 401k loan
  3. d.   Credit-card debt

If you have applied for your first credit card and been denied, what is the best thing to do?

  1. a.   Call up the card company and ask if you can be approved if you agree to a higher interest rate.
  2. b.   Apply for a secured credit card
  3. Add money from a cash loan to your checking account so it appears you have more funds available.
  4. d.   Have someone cosign for a credit card for you.

Objective 2.2 Paying off and avoiding credit card debt

When you have serious credit card debt, where is the best place to seek help?

  1. a.   From a debt consolidation company
  2. b.   From an independent consumer credit counseling agency, such as AICCCA or the

National Foundation for Credit Counseling c.   From a credit deferral service

  1. d.   From a private loan organization, such as a bank or credit union.

When you keep getting calls from a credit-card company about a bill you do not remember charging, what is the first thing you should do?

  1. a.   Pay it off in full. b.   Verify the debt.
  2. Refuse to pay the debt since you do not have a personal record of it. d.   Change your phone number.

What is the rule of thumb about using money in a savings account to pay off a credit card balance?

  1. a.   Use savings when your credit card balance is over $5,000 b.   Use savings when your savings balance is over $5,000
  2. Use savings when your credit card interest rate is more than 4% higher than your savings account interest
  3. d.   Use savings when your savings account interest rate is 1% higher than your credit card interest rate

Objective 2.3 (A) Credit reports and scores

Which of the following is considered a very good credit score?

  1. a.   500-559 b.   600-659
  1. 700-759 d.   760-859

Which of the following is NOT a credit reporting agency?

  1. a.   Equifax b. Experian
  2. Fair Isaac Corporation (FICO)
  3. d.   TransUnion

Which site provides a free credit report from each of the three national credit reporting agencies?

  1. a.   www.freecreditreport.com
  2. b.   www.annualcreditreport.com www.creditreports.com
  3. d.   www.freecreditscore.com

Objective 2.3 (B) Improving credit scores

Which of the following is the most effective way to improve your credit score?

  1. a.   Pay your bills on time
  2. b.   Never exceed your credit limit.
  3. Reduce your credit utilization rate.
  4. d.   Close your credit-card accounts as soon as you pay them off.

What is a credit utilization rate?

  1. a.   How many open credit accounts you have
  2. b.   The percentage of all your reported credit accounts that are open accounts Your total outstanding balance as a percentage of total credit limit
  3. d.   How often you use credit to make purchases

Why might voluntarily closing a credit card account lower your credit score?

  1. a.   It can lower your total available credit, making your credit utilization rate appear higher. b.   It can lower your total available credit, making your credit utilization rate appear lower. It can look like the creditor closed the account for non-payment.
  2. d.   It can look like an inquiry on your credit file.

Objective 2.4 (A) Debit cards and cash

What is the main disadvantage of using only a debit card?

  1. a.   Debit card purchases are not reported to credit reporting agencies and therefore will not help you build your credit score.
  2. b.   Not all stores accept debit cards.
  3. You may earn better rewards with a credit card.
  4. d.   Credit cards offer fewer protections if your card is lost or stolen.

When selecting and using a debit card, you should avoid a.   monitoring your account every other day

  1. b.   prepay cards that allow you to load more money onto them debit cards tied to your checking account
  2. d.   overdraft protection that allows you to spend more than you have

Which of the following is not an effective way to think about money?

  1. a.   Live below your means but within your need
  2. Only purchase needs, not wants.
  3. c.   Financial freedom requires making a lot of money.
  4. Pay yourself first.

Objective 2.4 (B) Saving money

The smartest way to build an emergency fund is to

  1. a.   set aside small amounts monthly through an automatic savings plan
  2. b.   open a home equity line of credit (HELOC) that you can tap into in case of emergency
  3. take out multiple credit cards with high credit limits that you can tap into in emergencies d.   go on a strict budget and save as much as possible until you have an emergency fund

How much money should you have in your emergency savings account?

  1. a.   An amount that will safely cover your bills for 3 to 6 months b.   An amount equal to 8 months of your living expenses
  2. An amount between $2,500 and $5,000 to cover sudden, unexpected expenses d.   3 months of your wages

The best place for your emergency savings fund is

  1. a.   in a liquid account at a bank or credit union that offers you the highest interest rate possible
  2. b.   in a fireproof safe within your home; you want to be able to get to your money quickly in an emergency
  3. in your checking account or your debit-card account so you can get it right away—keep a mental note of what part of your balance is to be spent only on emergencies
  4. d. in a Roth IRA—you can always withdraw your contributions without a penalty or tax

How do you make sure the money you deposit at a bank or credit union is 100% safe—that you are guaranteed to get every penny back no matter what?

  1. a.   Keep the money in a checking or savings account, not a money-market fund.
  2. b.   Keep cash in a safe-deposit box at a bank that you have access to 7 days a wee
  3. Just make sure your balance is never more than $50,000 at a single bank or credit union, because that is the limit that financial institutions can guarantee.
  4. d.   Confirm that a bank is a member of the Federal Deposit Insurance Corp. (FDIC) or a credit union is a member of the National Credit Union Share Insurance Fund (NCUSIF), and never have more in your account than the maximum insured amount.

Objective 2.5 Reducing expenses

If the money you have coming in each month (your take-home pay) is less than the money going out each month to pay the bills, you should

  1. a.   make up the difference by using a credit card with a very low interest rate
  2. b.   stop paying your credit card in full; paying just the minimum due gives you more money each month
  3. look through your spending for the single biggest expense you can eliminate completely to make your income equal what you spend
  4. d.   find ways to trim spending from multiple spending categories till you have made up the shortfall

To intelligently reduce your spending over the long term

  1. a.   mark all the needs in your spending categories and get rid of them completely b.   never carry cash or credit cards on your person
  2. consider scaling back on the frequency of certain expenses, such as how many times a month you eat out or go to the movies
  3. d.   limit your trips to stores or malls to just once a month
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