Dollars & Sense

Bouncing back from the Great Recession.

Test Your Financial Literacy

by Joe Lindsey

We’re all trying to be smarter about our money. How does your financial IQ add up?

You can request a free credit report from the three independent credit reporting agencies (Equifax, Transunion, Experian):
• A) Once a year
• B) Once every three years
• C) Once every three years per agency (i.e., one per year, but not from the same agency)
• D) Never

You have loans to pay off. Assuming you are making the minimum payments on all of them, which do you try to pay off the fastest?
• A) $4,000 left on a car loan at 6 percent
• B) $150,000 mortgage at 5.5 percent
• C) $20,000 student loan at 4.5 percent
• D) $6,000 credit card balance at 12 percent

You have a fixed-rate mortgage and are looking to refinance. The time is right for a refi when:
• A) Interest rates drop two points from your current rate
• B) You can recoup your closing costs in 12 to 18 months
• C) You’ll save more than $100 on your monthly payment

You just bought a house and get a flyer in the mail offering to enroll you in a twice-monthly payment program, which purportedly saves you a good chunk of interest. You should enroll.
• True: Compound interest is what kills you on a mortgage loan, and biweekly payments cut that in half
• False: The way most of these plans are structured, you don’t see any interest savings

You have two credit cards, one with a $1,500 balance at 12 percent and one with a $3,000 balance at 14 percent. You get a solicitation for a balance transfer to a new card at a 4.99 percent introductory interest rate. Consolidating the balances on both cards to the new one is a good idea.
• True: The lower interest rate on the new card will save you hundreds in interest in a year
• False: The low rate is just a teaser and will reset higher than your existing cards
• It Depends: The issue isn’t the old rate or the new rate, but rather how quickly you can pay off the balance

In your auto insurance policy, which provision pays damages to your own car when you’re in an accident?
• A) Comprehensive
• B) Liability
• C) Term
• D) Collision

You should get a life insurance policy if:
• A) You own property
• B) You have family who rely on your income and cannot replace it
• C) You have a pet
• D) You don’t have a will

Your credit card was stolen and someone racked up a number of charges. How much are you liable for?
• A) $0
• B) $50
• C) $500
• D) As much as the thief charges
• E) It depends on when you report it

Your debit card was stolen and someone went on a shopping spree. How much are you liable for?
• A) $0
• B) $50
• C) $500
• D) As much as the thief charges
• E) It depends on when you report it

If you have negative information on your credit report, how long does it stay there?
• A) A year
• B) A minimum of three years
• C) A minimum of seven years
• D) Forever

ANSWER KEY

1. A—You have the right to a free credit report yearly from each agency.

2. D—Did you pick the loan with the lowest balance? Most people do. But higher interest rates cost you proportionately more no matter the balance. If you pay extra on the credit card balance versus, say, the car loan, the 6 percent difference is like getting a guaranteed 6 percent return on an investment.

3. B—Some part of any refi savings is resetting the loan term to 30 years. So focus on the fixed, nondeductible cost: closing. If the savings on the monthly payment over a 12- to 18-month time frame exceeds the closing costs, go for it. Why that time frame? It’s risky to plan major life decisions further out than that; a job loss or change in family size could force a move, and then you’ve lost money.

4. False—Most biweekly payment programs still make the loan payment to your lender monthly. Any interest savings for you comes in the two extra payments a year. And, most programs have sign-up fees. If you’re in a position to pay extra on your mortgage, pay more on the principal each month, which does affect interest savings.

5. It Depends—Always read the fine print: When does that teaser rate reset? What happens if you still have a balance then? Before switching, take a full accounting of any rate changes or fees on the new account versus the old ones, and be honest about your ability to pay off the balance before the rate resets.

6. D—Collision covers your car if you, say, back into a concrete column in a parking garage. On older cars, it doesn’t make sense because the payout covers only the value of the car, no matter the damage. So once the policy premiums per year exceed the maximum payout, drop collision coverage.

7. B—Life insurance is meant to provide funds for your spouse and dependents that your income normally would. If you have no immediate family, a small policy to cover funeral costs may be helpful, but the best thing you can do for your financial planning would be to have a will on file and durable powers of attorney.

8. B—By federal law, your liability on a lost or stolen card number is limited to $50.

9. E—Debit cards have different protections, and your liability depends on how quickly you report the loss or theft to your card’s issuer. If you report it before the card is used you’re liable for $50 or less; within two days, you’re liable for up to $500. After 60 days, you’re on the hook for the full balance.

10. C—Missed payments, so-called charge-offs (when a creditor lists a debt as uncollectable), and even foreclosures stay on your credit report for at least seven years, according to regulations under the Fair Credit Reporting Act. But some negative information stays longer: Bankruptcies are listed for 10 years and unpaid tax liens for seven or more years.