#1
What is a common reason for building an emergency fund?
To cover unexpected expenses
ExplanationEmergency funds provide financial security by covering unexpected expenses.
#2
What does APR stand for in the context of loans and credit cards?
Annual Percentage Rate
ExplanationAPR represents the annual cost of borrowing, including interest and fees.
#3
What is the purpose of a budget in personal finance?
To track income and expenses
ExplanationBudgets help manage finances by monitoring income and expenditure.
#4
What is the 'snowball method' in debt repayment?
Paying off the smallest debt first and then rolling the payments into larger debts
ExplanationIt involves tackling debts sequentially, starting with the smallest balances.
#5
What is the concept of compound interest?
Interest calculated on the initial principal plus the accumulated interest
ExplanationIt involves interest calculation on both the initial amount and accrued interest.
#6
Which of the following is NOT a component of a credit report?
Income history
ExplanationCredit reports primarily cover credit accounts, not income history.
#7
Which of the following factors can positively affect your credit score?
Having a long history of timely payments
ExplanationTimely payments over an extended period demonstrate creditworthiness.
#8
What does the debt-to-income ratio measure?
The amount of debt you have compared to your income
ExplanationIt assesses your ability to manage debt relative to your income level.
#9
Which of the following is NOT a type of credit score used by lenders?
TransUnion Score
ExplanationLenders typically use FICO or VantageScore, not TransUnion Score, for credit assessment.
#10
What is a 401(k) plan?
A retirement savings plan sponsored by an employer
Explanation401(k) plans enable employees to save for retirement with employer contributions.
#11
What is a collateralized loan?
A loan secured by an asset
ExplanationIt's a loan backed by collateral, reducing the lender's risk.
#12
What is the grace period on a credit card?
The period during which you can pay your credit card bill without incurring interest
ExplanationIt allows cardholders to settle balances without accruing interest.
#13
Which of the following is a characteristic of a fixed-rate mortgage?
The interest rate stays the same for the life of the loan
ExplanationFixed-rate mortgages offer stable interest rates, ensuring consistent payments.
#14
What is the purpose of diversification in investment?
To reduce risk by spreading investments across different assets
ExplanationDiversification lowers risk exposure by investing in various asset classes.
#15
What is the difference between a traditional IRA and a Roth IRA?
Traditional IRA contributions are tax-deductible, while Roth IRA contributions are not
ExplanationTraditional IRA contributions offer tax deductions, unlike Roth IRA contributions.
#16
What is the purpose of an HSA (Health Savings Account)?
To pay for medical expenses not covered by insurance
ExplanationHSAs enable tax-advantaged savings for medical costs not covered by insurance.
#17
What is a credit utilization ratio?
The ratio of your credit card balance to your credit limit
ExplanationIt measures the percentage of available credit being used.