5. Manage Credit and Debt (15%) Flashcards

1
Q

What is the main purpose of a credit report?

A. To list a client’s assets and liabilities
B. To assess a client’s debt-to-income ratio
C. To provide a detailed record of a client’s credit history
D. To calculate a client’s net worth

A

C. To provide a detailed record of a client’s credit history

A credit report includes details about a client’s borrowing and repayment history.

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2
Q

Which of the following factors most impacts a credit score?

A. Employment history
B. Payment history
C. Educational background
D. Marital status

A

B. Payment history

Payment history is the most heavily weighted factor in determining a credit score.

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3
Q

What is the main difference between secured and unsecured debt?

A. Secured debt requires collateral, while unsecured debt does not
B. Unsecured debt has a lower interest rate
C. Secured debt does not appear on a credit report
D. Unsecured debt has a fixed interest rate

A

A. Secured debt requires collateral, while unsecured debt does not

Secured debt is backed by collateral, whereas unsecured debt is not.

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4
Q

What does APR stand for in relation to credit products?

A. Annual Payment Rate
B. Average Payback Rate
C. Annual Percentage Rate
D. Actual Principal Rate

A

C. Annual Percentage Rate

APR is the annual cost of borrowing expressed as a percentage, including interest and fees.

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5
Q

Which of the following is a counterproductive use of credit?

A. Financing a business expansion
B. Consolidating high-interest debt
C. Purchasing luxury items without the means to pay it off
D. Obtaining a mortgage for a home

A

C. Purchasing luxury items without the means to pay it off

Using credit to purchase items that cannot be paid off can lead to financial strain.

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6
Q

What is the recommended maximum debt-to-income (DTI) ratio for a client looking to qualify for a mortgage?

A. 10%
B. 25%
C. 36%
D. 50%

A

C. 36%

A DTI ratio of 36% or lower is generally recommended for mortgage qualification.

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7
Q

Which organization provides free annual credit reports to consumers?

A. Federal Reserve
B. IRS
C. AnnualCreditReport.com
D. Consumer Financial Protection Bureau (CFPB)

A

C. AnnualCreditReport.com

Consumers can obtain one free credit report per year from each credit bureau through AnnualCreditReport.com.

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8
Q

What is the primary purpose of the Fair Credit Reporting Act (FCRA)?

A. To regulate interest rates on loans
B. To provide free credit scores to consumers
C. To promote the accuracy and privacy of information in credit reports
D. To protect consumers from identity theft

A

C. To promote the accuracy and privacy of information in credit reports

The FCRA ensures consumer rights regarding credit report information.

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9
Q

Which of the following is considered an installment loan?

A. Credit card debt
B. Auto loan
C. Revolving line of credit
D. Personal loan with no set term

A

B. Auto loan

An auto loan has a set term and fixed payments, making it an installment loan.

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10
Q

Which factor does NOT impact a credit score?

A. Credit history length
B. Recent credit inquiries
C. Number of children
D. Types of credit used

A

C. Number of children

Personal factors like the number of children are not considered in credit score calculations.

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11
Q

A client’s credit score drops after closing an old credit card account with a high limit. What is the likely reason for this?

A. Decreased credit utilization ratio
B. Increased length of credit history
C. Decreased credit history length and utilization ratio
D. Improved credit mix

A

C. Decreased credit history length and utilization ratio

Closing a longstanding account reduces the average age of credit and increases credit utilization if balances remain unchanged.

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12
Q

A client is considering debt consolidation. Which of the following should they consider first?

A. Interest rates of new loan vs. existing debts
B. The client’s savings account balance
C. The client’s retirement contributions
D. The client’s employment status

A

A. Interest rates of new loan vs. existing debts

The interest rate is crucial in determining whether consolidating debt will lower overall costs.

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13
Q

A client has multiple credit card debts. What strategy would you suggest to minimize interest payments?

A. Pay off the smallest balance first
B. Pay off the card with the highest interest rate first
C. Stop making minimum payments on low-interest cards
D. Pay only the minimum on all cards

A

B. Pay off the card with the highest interest rate first

Paying high-interest debt first reduces the total interest paid over time.

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14
Q

Which type of credit is most suitable for ongoing, variable expenses?

A. Mortgage
B. Auto loan
C. Home equity loan
D. Credit card

A

D) Credit card

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15
Q

If a client wants to improve their credit score quickly, what action should they take?

A. Close all older accounts
B.Pay down outstanding balances to reduce credit utilization
C. Increase spending on all credit accounts
D. Open new credit accounts

A

B. Pay down outstanding balances to reduce credit utilization

Reducing credit utilization can positively impact credit scores in a short period.

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16
Q

A client has recently faced a financial setback and missed several credit card payments. What should they do to prevent further damage to their credit score?

A. Avoid contacting creditors.
B. Settle for bankruptcy.
C. Contact creditors to negotiate a temporary payment plan.
D. Continue missing payments.

A

C. Contact creditors to negotiate a temporary payment plan

Proactively contacting creditors can help establish a manageable payment plan and prevent further credit damage.

17
Q

A client is comparing two credit card offers. Which feature should they focus on if they plan to carry a balance?

A. Annual fees
B. Introductory rewards
C. Annual Percentage Rate (APR)
D. Foreign transaction fees

A

C. Annual Percentage Rate (APR)

If a balance is carried, the APR will directly affect the amount of interest accrued.

18
Q

Which of the following would you recommend to a client seeking to build credit?

A. Apply for a payday loan.
B. Open a secured credit card account.
C. Close existing credit accounts.
D. Avoid any credit activity.

A

B. Open a secured credit card account

Secured cards are often recommended for individuals building or rebuilding credit.

19
Q

A client is struggling with debt payments. What is the first step they should take?

A. Ignore the debt and focus on savings.
B. Analyze their budget and determine discretionary income.
C. File for bankruptcy.
D. Apply for more credit to cover the shortfall.

A

B. Analyze their budget and determine discretionary income

Understanding their cash flow can help the client find opportunities to pay down debt.

20
Q

What is an appropriate action to take if a client identifies an error on their credit report?

A. Ignore the error as it won’t affect their credit score.
B. Contact the creditor to report the error.
C. Dispute the error directly with the credit bureau.
D. Pay off the error to clear the report.

A

C. Dispute the error directly with the credit bureau

Errors should be disputed with the credit bureau for correction.

21
Q

A client’s debt-to-income (DTI) ratio is 45%, and they are considering taking out an additional loan. What should you advise?

A. Proceed with the loan since the DTI is not relevant.
B. Avoid the loan as a high DTI ratio may hinder future financial stability.
C. Open a new credit card for better interest rates.
D. Consolidate existing debt first before considering additional credit.

A

B. Avoid the loan as a high DTI ratio may hinder future financial stability

A high DTI indicates a large portion of income going toward debt, which can affect creditworthiness and financial stability.

22
Q

If a client’s credit score has dropped due to multiple recent inquiries, what might be a possible cause?

A. They have not used their credit accounts.
B. They have applied for several new credit accounts in a short period.
C. They have a low debt-to-income ratio.
D. They have closed their credit card accounts.

A

B. They have applied for several new credit accounts in a short period

Multiple inquiries indicate a client may be seeking additional credit, which can lower credit scores.

23
Q

A client’s credit report shows a delinquency. How should they address this to improve their credit score?

A. Ignore the delinquency as it will eventually disappear.
B. Set up a payment plan to pay off the delinquent amount.
C. Open a new account to offset the negative information.
D. Close the account associated with the delinquency.

A

B. Set up a payment plan to pay off the delinquent amount

Addressing delinquencies directly by paying them off is the most effective way to rebuild credit.

24
Q

A client has a debt settlement offer from a creditor for less than the amount owed. What factors should the client consider before accepting the settlement?

A. Impact on credit score and future creditworthiness.
B. Whether the settlement will remove all negative entries from the credit report.
C. If accepting the offer will immediately improve their credit score.
D. If the settlement will make the debt disappear from the credit report.

A

A. Impact on credit score and future creditworthiness

Debt settlement can negatively impact credit scores and remain on the credit report, affecting future creditworthiness.

25
Q

A client’s financial statements show that 70% of their income goes to debt payments, leaving little for other expenses. What strategy would you recommend to alleviate this situation?

A. Take out additional loans to cover living expenses.
B. Stop making debt payments temporarily.
C. Consider debt restructuring or refinancing options.
D. Close all existing credit accounts.

A

C. Consider debt restructuring or refinancing options

Restructuring or refinancing can reduce monthly debt payments, freeing up income for other expenses.

26
Q

A client has a credit utilization ratio of 90%. What does this indicate and how should the client proceed?

A. The client has a strong credit profile and should apply for more credit.
B. The client is over-leveraged and should focus on paying down balances.
C. The client should close existing accounts to improve their credit score.
D. The client should continue making minimum payments only.

A

B. The client is over-leveraged and should focus on paying down balances

A high credit utilization ratio indicates excessive debt relative to available credit, which can lower credit scores.

27
Q

If a client has several high-interest debts and only a small amount of discretionary income each month, what repayment strategy would you recommend?

A. Use discretionary income to pay the minimum on all debts.
B. Focus on paying off the highest interest debt first (debt avalanche method).
C. Pay off the smallest balance first (debt snowball method).
D. Ignore high-interest debts and pay only low-interest debts.

A

B. Focus on paying off the highest interest debt first (debt avalanche method)

The debt avalanche method helps minimize interest costs over time, which is beneficial when dealing with high-interest debts.

28
Q

A client is deciding between a debt consolidation loan and a balance transfer credit card to manage their credit card debt. What factors should they consider?

A. The length of the introductory 0% APR period and the interest rate after it ends.
B. The size of their emergency fund.
C. The number of years until retirement.
D. The need for a mortgage in the next year.

A

A. The length of the introductory 0% APR period and the interest rate after it ends

For a balance transfer card, it’s essential to consider how long the 0% APR lasts and what the interest rate will be afterward to avoid accruing additional interest costs.

29
Q

A client’s credit report indicates multiple late payments on various credit accounts over the past year. What might this suggest about the client’s financial behavior?

A. The client has no emergency fund.
B. The client is likely experiencing cash flow issues or has difficulty managing payments.
C. The client is applying for too much new credit.
D. The client has excellent credit utilization.

A

B. The client is likely experiencing cash flow issues or has difficulty managing payments

Multiple late payments typically indicate cash flow problems or challenges in managing debt obligations.

30
Q

A client has a negative cash flow due to high debt payments. What approach should they take to improve their financial situation?

A. Apply for more credit cards to spread the debt load.
B. Increase discretionary spending to maintain a good quality of life.
C. Explore debt restructuring, reduce discretionary spending, or increase income.
D. File for bankruptcy immediately.

A

C. Explore debt restructuring, reduce discretionary spending, or increase income

A multifaceted approach addressing the debt load, spending habits, and income is the most effective strategy for improving cash flow.