Credit Cards – Test Your Knowledge
How much do you know about how your credit cards work? Seventy-eight percent of U.S. households have at least one credit card, and the average American carries a balance of $3,000 in credit card debt. In commemoration of Financial Literacy Month, the Associated Press has published this short quiz to test how much you know about the credit cards in your wallet.
Questions:
1. What affects your credit score most?
a) payment history
b) the number of credit cards you have
c) how long you’ve had your credit cards
2. True or False: Studies have shown that people spend more when they use credit cards than when they shop using cash.
3. If you pay 2 percent of your credit card balance each month, how long will it take you to pay off a $3,000 balance at 10% interest?
a) 2 years
b) 8 years
c) 18 years
4. Once you get a credit card with a certain interest rate, the bank may raise that rate because:
a) you miss a payment on that credit card
b) you miss a payment on another credit card
c) you lose your job
d) banks can change credit card rates at any time
5. True or False: Credit card issuers are required to always give you a “grace period” to pay your balance in full without applying finance charges.
6. After paying off a high-interest credit card, you should:
a) close the account
b) leave the account open but don’t use it again
c) keep it open and use it once in a while
7. True or False:
You can tell if banks think you’re creditworthy by how many credit card offers you get in the mail.
8. Reward credit cards are a good deal only if you:
a) get free airline tickets
b) get cash back
c) carry no balance
9. What will a credit card issuer look at when setting your credit limit:
a) your payment history
b) the limits on other credit cards you hold
c) the places you use your credit card
d) all of the above
10. How is the interest that you’re charged each month on credit cards calculated?
a) annual percentage rate (APR) multiplied by your balance
b) APR divided by 12 months, multiplied by your balance
c) APR multiplied by your new charges
Answers and Explanations:
1. a – While all of the choices factor into your credit score, the single most important element is whether or not you pay your bills on time, which accounts for about 35 percent of your score.
2. True – Several scientific studies have shown that people spend less when pulling cash out of their wallet than when they are using credit cards.
3. c – With an initial minimum payment of 2%, or $60 on a $3,000 balance, it will take just over 18 years to pay off the credit card debt.
4. d – Banks can change your credit card interest rate for any reason and at any time. Recent rules passed by the Federal Reserve will require the banks to give you 45 days notice before they make changes to your credit card account. But this is only a “notification” requirement. It doesn’t limit the bank’s ability to make the changes, and these new rules don’t take effect until July 1, 2010.
5. False – Credit card companies are legally allowed to give you up to a 25 day grace period before charging interest, but many banks are reducing or eliminating the grace period. Check your credit card statement or talk to your bank if you have questions about your grace period.
6. c – Paying off a balance and then using the credit card occasionally will provide the biggest boost to your credit score. If you close the account, particularly if it’s one you’ve had a long time, your credit score may actually go down.
7. False – The credit card offers that come in the mail are based on a wide range of factors, such as which magazines you subscribe to. But banks can’t check your credit score without your permission, and it’s your credit score that determines your credit worthiness to a bank.
8. c – Rewards credit cards typically charge higher interest rates, so if you carry a balance, you are generally better off to find a credit card with a low interest rate. You should also be mindful of the annual fees charged by rewards cards, because the annual fee could exceed the value of your rewards, depending on how many points you earn.
9. d – Banks will look not only at your payment history and your total credit limit, but will also look for changes in your spending habits for signs that you could be in financial trouble.
10. b – To figure your monthly interest charges, banks use a monthly interest rate, which is your annual percentage rate (APR) divided by 12 months. This rate is then multiplied by your balance.
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