Test Bank For Personal Finance 5 e 5th Edition Jeff Madura

Test Bank for Personal Finance, 5/E 5th Edition Jeff Madura
Test Bank for Personal Finance, 5/E 5th Edition Jeff

Madura
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Personal Finance, 5e (Madura)
Chapter 7 Assessing and Securing Your Credit
7.1 Background on Credit
1) If you refrain from using any credit, it will assure you the lowest possible interest rate when
you decide to use it.
Answer: FALSE
Diff: 1
Question Status: Previous edition
2) The proper use and control of credit is the best way to build a good credit history.
Answer: TRUE
Diff: 1
3) Credit issued by department stores for relatively long periods of time is called non-installment
credit.
Answer: FALSE
Diff: 1
4) Funds provided by a borrower that will be repaid in the future, with interest, is credit.
Answer: FALSE
Diff: 1
5) Credit cards are an example of revolving open-end credit.

Answer: TRUE
Diff: 2
6) Revolving open-end credit typically does not specify a maximum amount that can be
borrowed.
Answer: FALSE
Diff: 2
7) In order to have credit in the future, you must have used it wisely in the past.
Answer: TRUE
Diff: 1
8) An advantage to credit is it eliminates the need for writing checks.

Answer: TRUE
Diff: 1
1
Copyright © 2014 Pearson Education, Inc.
9) It is always easier to pay back what you borrow than to obtain credit in the first place.
Answer: FALSE
Diff: 2
10) Students graduating from college today have an average debt of less than $1,000.
Answer: FALSE
Diff: 1
11) Excessive use of credit can impair your ability to save money.
Answer: TRUE
Diff: 1
12) Using more credit than can be repaid is a primary cause of individual bankruptcies.
Answer: TRUE
Diff: 1
13) You can begin to build a credit history by having telephone service.
Answer: TRUE
Diff: 1
14) All of the following are correct statements about credit except
A) creditor provides funds.
B) credit needs to be paid back in the future.
C) repayment will include interest.
D) the interest is the total amount to be repaid.
Answer: D
Diff: 2
15) Advantages of using credit are all of the following except

A) the ability to cover cash flow shortages.
B) increases the number of checks written.
C) the ability to buy large items earlier.
D) convenience in making day-to-day transactions.
Answer: B
Diff: 1
2
16) Of the following statements, which is not a disadvantage of using credit?
A) It can be costly to use.
B) It can be difficult to repay if overused.
C) It is more difficult to obtain than repay.
D) It may tempt you to make impulse purchases.
Answer: C
Diff: 2
17) Which of the following is not a disadvantage of using credit?

A) Makes it easier to save
B) The potential high cost
C) The difficulty in paying back loans
D) The potential for personal bankruptcy
Answer: A
Diff: 2
18) The ability to save funds is ________ when credit payments are ________.
A) increased; small
B) reduced; small
C) reduced; large
D) Both A and C are correct.
Answer: D
Diff: 2
19) The impact of credit ________ saving and ________ spending.

A) increases; decreases
B) decreases; increases
C) decreases; decreases
D) Credit has no relationship on saving and spending.
Answer: B
Diff: 2
20) Improper use of credit may

A) increase your ability to save money.
B) make it necessary to file for bankruptcy.
C) increase your personal wealth.
D) All of the above.
Answer: B
Diff: 2
3
21) The cost of using credit may result in ________ spending and ________ debt.
A) controlled; reduced
B) excessive; increased
C) excessive; reduced
D) controlled; increased
Answer: B
Diff: 2
22) All of the following situations are valid reasons to borrow funds except
A) a medical emergency.
B) a college education.
C) purchasing a car in order to return to the workforce.
D) borrowing for every day living expenses.
Answer: D
Diff: 2
23) Of the following statements, which is not an advantage using credit?

A) Credit creates stability and allows you to establish a favorable credit history.
B) Buying today and paying tomorrow seems ideal, but continual spending can lead to financial
problems.
C) Using credit is safe since charge accounts and credit cards let you shop and travel without
carrying large amounts of cash.
D) Credit cards permit the purchase of goods even when cash funds are low.
Answer: B
Diff: 2
24) Which of the following is a disadvantage of using credit?

A) Ease of returning merchandise
B) Shopping convenience
C) Slowing of progress toward financial goals
D) Capacity to access credit in the future
Answer: C
Diff: 2
25) The average credit card balance of undergraduate students is between

A) $3,000 and $7,000.
B) $1,000 and $3,000.
C) $7,000 and $10,000.
D) $12,000 and $15,000.
Answer: A
Diff: 2
4
26) Which of the following will not help you establish a good credit history?
A) Paying your phone bill on time
B) Financing a car and making payments on time
C) Making as many purchases as possible with cash
D) Never exceeding your credit limit on your credit card
Answer: C
Diff: 2
27) Which of the following is not true regarding revolving open-end credit?
A) Credit cards are an example of it.
B) A specific maximum amount of credit is established.
C) If the balance is not paid off over a period of months, a penalty is incurred.
D) Interest is charged on the remaining balance each month.
Answer: C
Diff: 2
28) Credit extended to consumers for short periods of time to make specific purchases is
A) installment credit.
B) non-installment credit.
C) revolving open-end credit.
D) minimum limit credit.
Answer: B
Diff: 2
29) Which of the following statements is true regarding non-installment credit?

A) The borrower has a longer time to repay
B) Monthly payments of principal and interest must be paid
C) The borrower has an unlimited amount of credit
D) Credit is usually issued for 30 days or less
Answer: D
Diff: 2
30) A commitment to cover credit repayments under adverse conditions such as accident or
illness is called
A) accident insurance.
B) credit insurance.
C) health insurance.
D) unemployment insurance.
Answer: B
Diff: 2
5
31) The law that prohibits denying credit due to gender, age, race, natural origin, religion, or
marital status is
A) Fair Labor Standards Act.
B) the Fair Isaac Act.
C) Equal Credit Opportunity Act.
D) Fair Treatment of Borrowers Act.
Answer: C
Diff: 2
32) ________ is short-term credit provided by some department stores to consumers to purchase
specific items.
Answer: Non-installment credit
33) Paying your phone bill and electric bill on time each month will help you to establish a(n)
________.
Answer: credit history
34) The federal law that prohibits the denying of credit based on gender, age, race, natural origin,
religion, or marital status is the ________.
Answer: Equal Credit Opportunity Act
Use the following two columns of items to answer the matching questions:
A) extends credit by providing a service and billing for the service at the end of the time period
B) a borrowing arrangement in which regular monthly payments of principal and interest must be
made
35) installment credit

36) telephone company

Answers: 35) B 36) A
37) If you are making a purchase that you know that you will not be able to pay off for a
relatively long period of time, you should seek which type of credit and why.
Answer: Installment credit. It is designed for a longer repayment period with structured monthly
payments of principal and interest.
6
38) Discuss at least three disadvantages of using credit.
Answer: A) high cost of using credit; B) difficulty in repayment; C) impulse purchases that you
cannot afford; D) reduces your ability to save; E) potential bankruptcy
7.2 Credit Bureaus
1) Historical credit problems normally remain on a credit bureau's report for seven years and ten
years for bankruptcy.
Answer: TRUE
Diff: 2
2) Your credit report can be requested on line and should be checked periodically for errors.
Answer: TRUE
Diff: 1
3) With a credit rating of over 500, you should have no problem getting approval for credit
purchases.
Answer: FALSE
Diff: 2
4) The Equal Credit Opportunity Act allows a creditor to deny credit based on a person's age.
Answer: FALSE
Diff: 2
5) Federal law requires creditors to explain the reasons for the denial of credit.
Answer: TRUE
Diff: 2
6) The Fair Credit Reporting Act requires credit bureaus to correct any erroneous information on
your credit report.
Answer: TRUE
Diff: 2
Question Status: New
7) TransUnion is not one of the three primary credit bureaus.

Answer: FALSE
Diff: 1
7
8) The Fair Reporting Act limits the sharing of credit information.
Answer: TRUE
Diff: 2
9) For creating credit scores, credit bureaus rely on a model created by the Fair Isaac
Corporation.
Answer: TRUE
Diff: 2
10) The most important element in FICO credit scoring is your payment history.
Answer: TRUE
Diff: 2
11) The longer you maintain relationships with creditors, the lower will be your credit score.
Answer: FALSE
Diff: 1
12) If you find that you will not be able to make credit payments on time, the best course of
action is to immediately notify the creditor.
Answer: TRUE
Diff: 2
13) Which of the following is not one of the three primary credit bureaus?
A) Equifax
B) Experian
C) TransUnion
D) Fair Isaac Corporation
Answer: D
Diff: 1
14) Which of the following will not be included on your credit report?
A) Social Security number
B) FICO score
C) Unpaid accounts
D) Companies that have recently accessed your report
Answer: B
Diff: 3
8
15) The item that receives the most weight in the FICO credit scoring system is
A) the amount of credit used each month.
B) credit payment history.
C) credit utilization.
D) credit inquiries.
Answer: B
Diff: 3
16) Creditors prefer a ________ level of cash inflows and ________ level of cash outflows.
A) low; low
B) high; low
C) high; high
D) medium; low
Answer: B
Diff: 2
17) Creditors prefer a ________ amount of capital and ________ collateral in the best of
circumstances.
A) low; low
B) high; low
C) high; high
D) medium; low
Answer: C
Diff: 2
18) Which of the following is not a factor in the FICO credit scoring?
A) Credit utilization
B) Length of relationship with creditors
C) Marital status
D) Number of inquiries
Answer: C
Diff: 2
19) The minimum credit score required by financial institutions

A) varies by institution.
B) is 500.
C) is 550.
D) is 600.
Answer: A
Diff: 2
9
20) Credit scores in the 500-600 range will result in
A) lower interest rates.
B) higher interest rates.
C) automatic acceptance of your credit application.
D) preferential treatment of your application.
Answer: B
Diff: 2
21) Historical credit problems remain on a credit bureau's report for ________ years while a
bankruptcy remains for ________ years.
A) ten; twenty
B) seven; ten
C) eight; fifteen
D) five; ten
Answer: B
Diff: 2
22) A credit rating (score) of ________ would normally allow you to have easy approval for
credit.
A) 500
B) 600
C) 700
D) 1,000
Answer: C
Diff: 3
23) Generally, the ________ the credit history, the ________ the credit limit.
A) better; lower
B) worse; higher
C) better; higher
D) None of the above.
Answer: C
Diff: 3
24) Which of the following can be used by a creditor in deciding whether or not to grant credit?
A) Credit history
B) Race
C) Gender
D) Both A and C
Answer: A
Diff: 1
10
25) Which of the following would not help improve your credit score?
A) Reducing unnecessary expenditures
B) Destroying some credit cards
C) Applying for more credit cards
D) Notifying creditors of late payments
Answer: C
Diff: 2
26) Which of the following statements is not true regarding reviewing your credit report?
A) You will be able to determine if any errors have been made so they can be corrected.
B) It will help determine if there are credit cards that you should apply for to improve your credit
standing.
C) It will reveal the kind of information that lenders will consider when making a decision to
extend credit.
D) Will reveal deficiencies that you can work to eliminate that will improve your credit rating.
Answer: B
Diff: 2
27) Free credit reports are accessible to all U.S. consumers at

A) www.creditreport.com.
B) www.freecreditreport.com.
C) www.annualcreditreport.com.
D) www.experian.com.
Answer: C
Diff: 2
28) ________, ________, and ________ are the three major credit bureaus.
Answer: Equifax, Experian, TransUnion
29) Very high credit scores are considered anything over ________.
Answer: 700
30) You should review your credit report at least ________.

Answer: twice a year
11
A) the most important factor used in the FICO credit scoring model
B) credit arrangement where the balance may be paid off monthly and interest is only charged on
the remaining unpaid amount
C) document showing information reporting your payment history and past use of credit
31) credit report

32) credit payment history

33) revolving open-end credit

Answers: 31) C 32) A 33) B
34) Discuss the factors that are used in determining credit scoring in the FICO model.
Answer: A) paying your bills on time over the past seven years; B) the amount of credit used
each month; C) length of relationship with creditors; D) number of recent credit inquiries
35) What steps can you take to improve your credit score?
Answer: A) catch up late payments; B) reduce unnecessary expenditures; C) destroy credit cards
to reduce temptation; D) notify creditors of late payment to work out arrangements
7.3 Identity Theft: A Threat to Your Credit
1) Obtaining money, goods, and services are the only reasons for identify theft.
Answer: FALSE
Diff: 2
2) Most identify theft victims discover the crime in a reactive as opposed to a proactive manner.
Answer: TRUE
Diff: 2
3) If you are a victim of identity theft, you may be turned down for employment as a result of
incorrect background information.
Answer: TRUE
Diff: 2
12
4) The personal cost of identity theft is difficult to measure, but calculating the financial cost is
an easier task.
Answer: TRUE
Diff: 2
5) Identity theft occurs when an individual obtains, without your permission, all of the following
information except
A) Social Security number.
B) date and place of birth.
C) drivers license number.
D) bank account number.
Answer: B
Diff: 2
6) Which of the following is the least common manner in which an identity theft victim
discovers the crime?
A) Routine examination of a credit report
B) Receiving a collection notice
C) Being denied credit
D) Reviewing a credit card statement
Answer: A
Diff: 2
7) The average individual loss as a result of identity theft has in recent years been
A) decreasing.
B) staying the same.
C) increasing.
D) No pattern is discernable.
Answer: C
Diff: 1
8) Discuss the reasons why someone would wish to steal your identity.
Answer: To obtain money, goods, and services and also to create a new identity unknown to
authorities to facilitate criminal activities.
Question Status: Revised
9) Using a shredder to destroy personal data will protect you from shoulder surfing.
Answer: FALSE
Diff: 1
13
10) Posing as an employee of a financial institution to obtain information for purposes of identity
theft is an example of pretexting.
Answer: TRUE
Diff: 2
11) Identity theft only occurs through individuals who do not have legitimate access to your
information.
Answer: FALSE
Diff: 2
12) You should be very selective in shredding documents and when in doubt, do not shred them.
Answer: FALSE
Diff: 1
13) Unless your identity is stolen by someone out of state, you should only report the crime to
local law enforcement.
Answer: FALSE
Diff: 2
14) If a person obtains your credit card number by standing close enough to you to either see
your credit card or hear you speak the number during a telephone call, they are
A) shoulder surfing.
B) dumpster diving.
C) pretexting.
D) skimming.
Answer: A
Diff: 2
15) Identity thieves that obtain your information from the magnetic strip on your credit card are
using a technique known as
B) dumpster diving.
C) pretexting.
D) skimming.
Answer: D
Diff: 2
14
16) Obtaining information in order to steal your identity from documents discarded by your bank
is an example of
B) dumpster diving.
C) pretexting.
D) skimming.
Answer: B
Diff: 2
17) Posing as an employee of a brokerage firm to obtain information to allegedly update your
account information is an example of
B) dumpster diving.
C) pretexting.
D) skimming.
Answer: C
Diff: 2
18) Using e-mail messages from a legitimate source to obtain account information for the
purpose of identity theft is referred to as
A) pharming.
B) phishing.
C) skimming.
D) trolling.
Answer: B
Diff: 2
19) Identity thieves that have systematically infiltrated corporations and financial institutions in
order to facilitate large-scale identity thefts are usually a part of
A) the Federal Trade Commission.
B) The Internal Revenue Service.
C) a well-organized crime ring.
D) a political party.
Answer: C
Diff: 2
15
20) Manipulating e-mail viruses and host files to redirect users from legitimate commercial Web
sites to bogus Web sites to obtain log-in names and passwords is referred to as
A) pharming.
B) phishing.
C) skimming.
D) trolling.
Answer: A
Diff: 2
21) Which of the following may result in much of your personal financial information becoming
part of the public record?
A) Marriage
B) Applying for financial aid at a college
C) Purchasing a house with a mortgage
D) Divorce
Answer: D
Diff: 2
22) Which of the following items should not be removed from your wallet?
A) Social Security card
B) Birth certificate
C) Infrequently used credit cards
D) Drivers license
Answer: D
Diff: 1
23) Which of the following is the best rule to follow in shredding information?
A) If you have any question, shred it
B) Anything with your name and address on it received through the mail
C) Only items received from your bank or brokerage firm
D) Any item received that is first class mail
Answer: A
Diff: 2
24) If you receive a phone call that seeks to verify or update personal information you should
A) ask several questions of the solicitor to verify their authenticity.
B) ask to speak to a supervisor.
C) obtain their name and address in case you need to contact them in the future.
D) obtain their name and phone number and call them back to verify their credentials.
Answer: D
Diff: 2
16
25) The safest way to order merchandise using a credit card is by
A) cell phone.
B) computer.
C) hand-held phone.
D) land line phone.
Answer: D
Diff: 3
26) The safest way to obtain new checks is to

A) have them mailed first class to your house.
B) have them mailed first class to your work.
C) have them sent via United Parcel Service.
D) pick them up at the bank.
Answer: D
Diff: 1
27) Which of the following will not protect you from identity theft while on vacation?
A) Carry all credit cards, passports, and birth certificates with you
B) Have your mail stopped
C) Do not leave credit slips in restaurants
D) Do not leave sensitive information in your hotel room when you are not there
Answer: A
Diff: 2
28) At your place of employment, which of the following is acceptable?

A) Use of your Social Security number as an employee number on your time card
B) Inclusion of your Social Security number on your employee identity badge
C) Inclusion of your Social Security number on your payroll registry in the accounting office
D) Inclusion of your Social Security number on your paycheck
Answer: C
Diff: 3
29) When making purchases on line, you can take all of the following steps to recognize and
avoid identity theft except
A) use your cell phone to place credit card orders.
B) use a secure browser.
C) read the privacy policies of the web sites you visit.
D) don't download files sent to you by strangers.
Answer: A
Diff: 3
17
30) The Identity Theft and Assumption Deterrence Act has designated which federal agency as
the central clearinghouse for all identity theft complaints?
A) FBI
B) CIA
C) FTC
D) WPA
Answer: C
Diff: 2
31) Which of the following would not be contacted in all cases of identity theft?
A) Local law enforcement
B) Federal Trade Commission
C) Postal Inspection Service
D) The three major credit bureaus
Answer: C
Diff: 2
32) Which of the following federal agencies should always be notified in the event of identity
theft?
A) Federal Bureau of Investigation
B) Secret Service
C) Federal Trade Commission
D) Postal Inspection Service
Answer: C
Diff: 2
33) If you think that your identity has been stolen, the FTC recommends you do all of the
following except
A) contact the credit bureaus.
B) file a police report.
C) destroy all of your credit cards.
D) call your creditors.
Answer: C
Diff: 2
18
A) the federal agency that acts as a clearinghouse for all identity theft complaints
B) something you should never carry in your wallet
C) copying credit information from the magnetic strip on a credit card
D) something you should install on your computer to protect you from hackers and worms
E) obtaining information on a person's identity from discarded items
34) dumpster diving

35) skimming
36) FTC
37) Social Security card

38) firewall and virus protection

Answers: 34) E 35) C 36) A 37) B 38) D
39) Discuss at least two ways that you can protect yourself from identity theft.
Answer: A) go through your wallet or billfold and remove anything that contains your Social
Security number as well as rarely used credit cards; B) maintain a list of all items in your wallet
and toll free numbers that can be used to make notification in the event of a loss; C) purchase a
shredder; D) install a lock mail box or rent a P.O. box; E) have your name removed from local
directories. (Note—students may include other recommendations, however these are the most
common.)
40) Name and briefly discuss three tactics that an identity thief may use.
Answer: A) Shoulder surfing—standing close enough to see or hear credit card numbers and
PINs; B) dumpster diving—going through discarded items to obtain credit card numbers and pre-
approved credit card solicitations; C) skimming—copying information from the magnetic strip of
credit or debit cards; D) pretexting—posing as a survey taker or employee of a firm to obtain
information allegedly to update existing account information
19
Test Bank for Personal Finance, 5/E 5th Edition Jeff Madura
7.4 How Credit Assessment and Security Fits Within Your Financial Plan
1) Making sure that you have an adequate credit standing should be an important part of your
overall financial plan.
Answer: TRUE
Diff: 2
2) If your credit report contains deficiencies, there is really nothing you can do to correct them.
Answer: FALSE
Diff: 2
20
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Test Bank for Personal Finance, 5/E 5th Edition Jeff Madura

Test Bank for Personal Finance, 5/E 5th Edition Jeff

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7.1 Background on Credit

5) Credit cards are an example of revolving open-end credit.

8) An advantage to credit is it eliminates the need for writing checks.

15) Advantages of using credit are all of the following except

17) Which of the following is not a disadvantage of using credit?

19) The impact of credit ________ saving and ________ spending.

20) Improper use of credit may

23) Of the following statements, which is not an advantage using credit?

24) Which of the following is a disadvantage of using credit?

25) The average credit card balance of undergraduate students is between

29) Which of the following statements is true regarding non-installment credit?

35) installment credit

36) telephone company

Answers: 35) B 36) A

7.2 Credit Bureaus

7) TransUnion is not one of the three primary credit bureaus.

19) The minimum credit score required by financial institutions

27) Free credit reports are accessible to all U.S. consumers at

30) You should review your credit report at least ________.

31) credit report

32) credit payment history

33) revolving open-end credit

Answers: 31) C 32) A 33) B

7.3 Identity Theft: A Threat to Your Credit

26) The safest way to obtain new checks is to

28) At your place of employment, which of the following is acceptable?

34) dumpster diving

37) Social Security card

38) firewall and virus protection

Answers: 34) E 35) C 36) A 37) B 38) D

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19) The impact of credit saving and spending.