CAEC Financial Literacy and Personal Finance 2 — Questions and Answers
Question 1: What is a credit score primarily used for?
- To determine how much you owe in income taxes
- To assess how likely you are to repay borrowed money (Correct answer)
- To measure your total personal net worth
- To calculate your recommended monthly budget
Correct answer: To assess how likely you are to repay borrowed money
A credit score is a numerical rating that lenders use to evaluate the risk of lending money to a borrower based on their credit history and repayment behavior.
Question 2: What is the main purpose of a chequing account?
- To earn the highest possible interest on long-term savings
- To invest money in stocks and mutual funds
- For everyday transactions such as paying bills and making purchases (Correct answer)
- To store retirement savings tax-free
Correct answer: For everyday transactions such as paying bills and making purchases
Chequing accounts are designed for frequent everyday transactions including paying bills, making purchases, and withdrawing cash.
Question 3: What is interest on a loan?
- A penalty charged for paying a loan back too early
- The fee charged by a lender for borrowing money (Correct answer)
- The original principal amount that was borrowed
- A government tax applied to all financial transactions
Correct answer: The fee charged by a lender for borrowing money
Interest is the cost of borrowing money, expressed as a percentage of the principal, paid to the lender over the duration of the loan.
Question 4: Why is it important to pay more than the minimum payment on a credit card balance?
- It automatically improves your chequing account balance
- It reduces the total amount of interest paid over time (Correct answer)
- It immediately increases your available credit limit
- It lowers your annual income tax obligation
Correct answer: It reduces the total amount of interest paid over time
Paying only the minimum payment means more interest accumulates on the remaining balance, making the total repayment cost much higher over time.
Question 5: What does APR stand for in the context of loans and credit cards?
- Annual Payment Requirement
- Applied Percentage Rate
- Annual Percentage Rate (Correct answer)
- Authorized Payment Record
Correct answer: Annual Percentage Rate
APR stands for Annual Percentage Rate, which represents the yearly cost of borrowing money including interest and fees expressed as a percentage.
Question 6: What is overdraft protection on a bank account?
- Insurance that reimburses funds stolen by fraud
- A feature allowing transactions to proceed even when the account balance is insufficient, up to a set limit (Correct answer)
- A savings account automatically linked to stock market investments
- A service that blocks all transactions when the balance is low
Correct answer: A feature allowing transactions to proceed even when the account balance is insufficient, up to a set limit
Overdraft protection allows transactions to go through even when your account balance is insufficient, typically resulting in a fee from the bank.
Question 7: What is the key difference between a secured and an unsecured loan?
- A secured loan requires collateral; an unsecured loan does not and typically has a higher interest rate (Correct answer)
- A secured loan is only available to businesses; an unsecured loan is for individuals only
- A secured loan comes from a bank; an unsecured loan comes from the government
- A secured loan has flexible repayment terms; an unsecured loan has only fixed terms
Correct answer: A secured loan requires collateral; an unsecured loan does not and typically has a higher interest rate
Secured loans require collateral such as a house or car that the lender can claim if you default, while unsecured loans have no collateral but typically carry higher interest rates.
CAEC Financial Literacy and Personal Finance 2
What is a credit score primarily used for?