Chapter 7 Choosing a Source of Credit: The Costs of Credit Alternatives
True/False Questions
T F 1. By evaluating your credit options, you can reduce your finance charges.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 2. After you have selected a product, you should buy it immediately before the store runs
out of it.
Answer: False Difficulty: Easy LO: 1 Page: 200
T F 3. Buying on credit is almost always cheaper than paying cash.
Answer: False Difficulty: Med LO: 1 Page: 200
T F 4. Parents or family members are often the source of least expensive loans.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 5. You can often obtain medium-priced loans from commercial banks and credit unions.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 6. The least expensive loans are available from finance companies and retailers.
Answer: False Difficulty: Med LO: 1 Page: 200
T F 7. Credit unions rarely offer the same range of consumer loans that banks and other
financial institutions do.
Answer: False Difficulty: Easy LO: 1 Page: 201
T F 8. The most expensive loans are available from finance companies, retailers, and credit
cards.
Answer: True Difficulty: Easy LO: 1 Page: 201
,T F 9. Borrowing from car dealers, appliance stores, department stores, and other retailers is
relatively inexpensive.
Answer: False Difficulty: Easy LO: 1 Page: 201
T F 10. Credit card cobranding has become popular with banks and industries.
Answer: True Difficulty: Easy LO: 1 Page: 202
T F 11. Today borrowing and credit are more complex than ever.
Answer: True Difficulty: Easy LO: 1 Page: 202
T F 12. Shopping for credit is not as important as shopping for an automobile, furniture, or
major appliances.
Answer: False Difficulty: Med LO: 1 Page: 202
T F 13. Two key concepts that you should keep in mind when borrowing are the finance charge
and the annual percentage rate.
Answer: True Difficulty: Easy LO: 2 Page: 202
T F 14. Credit costs usually do not vary.
Answer: False Difficulty: Med LO: 2 Page: 202
T F 15. The finance charge is the total dollar amount you pay to use credit.
Answer: True Difficulty: Easy LO: 2 Page: 203
T F 16. Borrowing $100 costs you $8 in interest. If there is a service charge of $1, the finance
charge will be $10.
Answer: False Difficulty: Hard LO: 2 Page: 203
,T F 17. The Annual Percentage Rate is the percentage cost of credit on a yearly basis.
Answer: True Difficulty: Med LO: 2 Page: 203
T F 18. If you want to reduce your borrowing costs, you may need to accept conditions that
lower the risk for your lender.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 19. A variable interest rate is based on fluctuating rates in the banking system, such as the
prime rate.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 20. With a collateral, you'll probably pay a higher interest rate on your loan.
Answer: False Difficulty: Med LO: 2 Page: 207
T F 21. You may be able to borrow at a lower interest rate if you accept a shorter-term loan.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 22. The two most common methods of calculating interest are compound and simple
interest formulas.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 23. The most basic method of calculating interest is the compound interest calculation.
Answer: False Difficulty: Med LO: 2 Page: 207
T F 24. Simple interest is the dollar cost of borrowing money.
Answer: True Difficulty: Med LO: 2 Page: 207
, T F 25. Simple interest formula is: Interest = Principal ´ Rate of interest ´ Time
Answer: True Difficulty: Med LO: 2 Page: 208
T F 26. When more than one payment is made on a simple interest loan, the method of
computing interest is known as the declining balance method.
Answer: True Difficulty: Hard LO: 2 Page: 208
T F 27. With the add-on interest method, interest is calculated on the full amount of the original
principal.
Answer: True Difficulty: Hard LO: 2 Page: 209
T F 28. The Federal Trade Commission Act requires that open-end creditors let you know how
the finance charge and the APR will affect your costs.
Answer: False Difficulty: Med LO: 2 Page: 209
T F 29. Creditors use the same system to calculate the balance on which they assess finance
charges.
Answer: False Difficulty: Med LO: 2 Page: 209
T F 30. The fairest method of calculating the interest is the adjusted balance method.
Answer: False Difficulty: Hard LO: 2 Page: 209
T F 31. The fairest method of calculating interest is the previous balance method.
Answer: False Difficulty: Hard LO: 2 Page: 209
T F 32. The fairest method of calculating interest is the average daily balance method.
Answer: True Difficulty: Med LO: 2 Page: 209
True/False Questions
T F 1. By evaluating your credit options, you can reduce your finance charges.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 2. After you have selected a product, you should buy it immediately before the store runs
out of it.
Answer: False Difficulty: Easy LO: 1 Page: 200
T F 3. Buying on credit is almost always cheaper than paying cash.
Answer: False Difficulty: Med LO: 1 Page: 200
T F 4. Parents or family members are often the source of least expensive loans.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 5. You can often obtain medium-priced loans from commercial banks and credit unions.
Answer: True Difficulty: Easy LO: 1 Page: 200
T F 6. The least expensive loans are available from finance companies and retailers.
Answer: False Difficulty: Med LO: 1 Page: 200
T F 7. Credit unions rarely offer the same range of consumer loans that banks and other
financial institutions do.
Answer: False Difficulty: Easy LO: 1 Page: 201
T F 8. The most expensive loans are available from finance companies, retailers, and credit
cards.
Answer: True Difficulty: Easy LO: 1 Page: 201
,T F 9. Borrowing from car dealers, appliance stores, department stores, and other retailers is
relatively inexpensive.
Answer: False Difficulty: Easy LO: 1 Page: 201
T F 10. Credit card cobranding has become popular with banks and industries.
Answer: True Difficulty: Easy LO: 1 Page: 202
T F 11. Today borrowing and credit are more complex than ever.
Answer: True Difficulty: Easy LO: 1 Page: 202
T F 12. Shopping for credit is not as important as shopping for an automobile, furniture, or
major appliances.
Answer: False Difficulty: Med LO: 1 Page: 202
T F 13. Two key concepts that you should keep in mind when borrowing are the finance charge
and the annual percentage rate.
Answer: True Difficulty: Easy LO: 2 Page: 202
T F 14. Credit costs usually do not vary.
Answer: False Difficulty: Med LO: 2 Page: 202
T F 15. The finance charge is the total dollar amount you pay to use credit.
Answer: True Difficulty: Easy LO: 2 Page: 203
T F 16. Borrowing $100 costs you $8 in interest. If there is a service charge of $1, the finance
charge will be $10.
Answer: False Difficulty: Hard LO: 2 Page: 203
,T F 17. The Annual Percentage Rate is the percentage cost of credit on a yearly basis.
Answer: True Difficulty: Med LO: 2 Page: 203
T F 18. If you want to reduce your borrowing costs, you may need to accept conditions that
lower the risk for your lender.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 19. A variable interest rate is based on fluctuating rates in the banking system, such as the
prime rate.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 20. With a collateral, you'll probably pay a higher interest rate on your loan.
Answer: False Difficulty: Med LO: 2 Page: 207
T F 21. You may be able to borrow at a lower interest rate if you accept a shorter-term loan.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 22. The two most common methods of calculating interest are compound and simple
interest formulas.
Answer: True Difficulty: Med LO: 2 Page: 207
T F 23. The most basic method of calculating interest is the compound interest calculation.
Answer: False Difficulty: Med LO: 2 Page: 207
T F 24. Simple interest is the dollar cost of borrowing money.
Answer: True Difficulty: Med LO: 2 Page: 207
, T F 25. Simple interest formula is: Interest = Principal ´ Rate of interest ´ Time
Answer: True Difficulty: Med LO: 2 Page: 208
T F 26. When more than one payment is made on a simple interest loan, the method of
computing interest is known as the declining balance method.
Answer: True Difficulty: Hard LO: 2 Page: 208
T F 27. With the add-on interest method, interest is calculated on the full amount of the original
principal.
Answer: True Difficulty: Hard LO: 2 Page: 209
T F 28. The Federal Trade Commission Act requires that open-end creditors let you know how
the finance charge and the APR will affect your costs.
Answer: False Difficulty: Med LO: 2 Page: 209
T F 29. Creditors use the same system to calculate the balance on which they assess finance
charges.
Answer: False Difficulty: Med LO: 2 Page: 209
T F 30. The fairest method of calculating the interest is the adjusted balance method.
Answer: False Difficulty: Hard LO: 2 Page: 209
T F 31. The fairest method of calculating interest is the previous balance method.
Answer: False Difficulty: Hard LO: 2 Page: 209
T F 32. The fairest method of calculating interest is the average daily balance method.
Answer: True Difficulty: Med LO: 2 Page: 209
