Chp. 4 DEBT KEY Study Guide for Assessment
Be sure you know the CREDIT/DEBT vocabulary terms we learned in class!
Such as... pay yourself first, collateral, lease...
1. What's the difference between a credit card and a debit card? Credit card is borrowed money/Debit card is your money from your account
2. Do you need a credit card to rent a hotel room or a car? No, you can use a debit card
How do you make using it safer/more secure? Use it (swipe it) like a credit card, don’t put in your PIN. This gives you the protection from VISA or Mastercard.
3. Which is more painful psychologically, spending cash or using a credit card?
4. How much more do you typically spend on purchases if you use a credit card instead of cash? 12-18%
5. What is the problem with using credit cards even if you pay the balance off every month?
You tend to spend more $ when using credit cards (12-18% more). Spending cash is physically more painful.
6. Why should you pay more than the minimum balance on credit card debt? So you can pay the debt off quicker, pay less interest. What happens if you don't? You will pay more interest, stay in debt longer.
7. What percent of Americans don't pay off their credit card balances each month? 78%
8. Why do credit card companies market so heavily to teenagers? Because they don't have credit cards yet; they tend to be loyal to their first credit cards; most adults already have credit cards.
9. Should you loan money to a friend or relative? No, give it to them as a gift so it doesn't ruin the relationship; They aren’t likely to pay you back anyway.
10. What is the danger of co-signing a loan? If the 1st borrower doesn't pay, then you have to pay the loan off; could damage your credit report.
11. How old do you have to be to get your own credit card? (not be a joint card holder or authorized signer) 21
12. Why is financing a car (buying it with a loan) a more expensive than buying it with cash that you’ve saved in a sinking fund? It increases the final cost of the car by a lot! (Interest is added) What other expenses do you have to pay if you take out a loan on a car besides just paying the loan payment? You have to fully insure a car if it has a loan on it because it is the collateral required to pay the loan off.
13. What's the difference between "secured" and "unsecured" loans? Give an example of each: Secured means there is collateral that the bank can repossess if the borrower doesn't pay the loan back. Example: car loan
Unsecured doesn't involve collateral. Example: student loan
What's the difference between "secured" and "unsecured" credit cards? A secured credit card is secured by a deposit you put down that the credit card company holds in case you don’t pay your bill. An unsecured credit card doesn’t have any collateral.
Unsecured loans/credit cards have higher interest rates compared to secured loan...
14. Is leasing a car economical? NO! Dave calls it "fleecing" or being swindled. Leasing a car is similar to renting it long term. The are mileage limits, you have to return the car at the end of the lease (no equity).
15. What does Dave Ramsey recommend if you want to "Drive Free?" Be able to explain the process.
Save enough for an inexpensive car, while driving it, keep saving for next car (10 months or so), sell 1st car, purchase nicer car, keep saving, repeat...
16. What are the FIVE Steps Out of Debt?
1. Quit borrowing money 2. Save money 3. Sell something
4. Get a part-time job or work overtime 5. Use debt snowball
17. How does debt affect your future and your ability to build weath? less lifetime savings & investing, less ability to build wealth
18. What is the KEY to Wealth Building? Staying debt free
19. Do you begin the debt snowball with the highest debt or the lowest debt?How does the Debt Snowball work?
List debts from smallest to largest, pay smallest off first; pay minimum payments on the rest. When smallest debt is paid, attack the 2nd smallest debt with the $ from the paid off debt plus anything else you can afford to pay toward it...continue with the rest of the debts.
20. What does it mean if a person is "upside down" on a loan? They owe more on the loan than the collateral is worth.
21. What are you responsible for if your identity is stolen? It depends: You NEED to report ID theft issues immediately, the sooner the better (at least within 60 days - good reason to balance/reconcile your accounts monthly!) Otherwise, your responsibility varies depending on the type of ID theft.
22. What are the signs of identity theft? credit report errors, accounts on your credit report that you didn't open yourself, call from collectors for debt that isn't yours, bills & statements not arriving on time
23. How many credit bureaus are there? Three
24. What are the names of the three credit bureaus? Experian, TransUnion, Equifax
25. How long does account information stay on your credit report? 7 years
26. How long does a bankruptcy stay on your credit report? 10 years
27. How often should you AND how often can you obtain a free copy of your credit report? yearly/annually/once a year
28. What advice would you give to a young adult who wants to start building their credit reputation but doesn’t have any credit yet and doesn’t want to ask help from an adult?
Get a secured credit card, obtain it by putting down a deposit. Use it cautiously, pay off the balance every month (don’t carry over any debt from month to monty! If you do you'll have to pay interest on the remaining balance.)