5. Manage Credit and Debt (15%) Flashcards
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
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.
Which of the following factors most impacts a credit score?
A. Employment history
B. Payment history
C. Educational background
D. Marital status
B. Payment history
Payment history is the most heavily weighted factor in determining a credit score.
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. Secured debt requires collateral, while unsecured debt does not
Secured debt is backed by collateral, whereas unsecured debt is not.
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
C. Annual Percentage Rate
APR is the annual cost of borrowing expressed as a percentage, including interest and fees.
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
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.
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%
C. 36%
A DTI ratio of 36% or lower is generally recommended for mortgage qualification.
Which organization provides free annual credit reports to consumers?
A. Federal Reserve
B. IRS
C. AnnualCreditReport.com
D. Consumer Financial Protection Bureau (CFPB)
C. AnnualCreditReport.com
Consumers can obtain one free credit report per year from each credit bureau through AnnualCreditReport.com.
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
C. To promote the accuracy and privacy of information in credit reports
The FCRA ensures consumer rights regarding credit report information.
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
B. Auto loan
An auto loan has a set term and fixed payments, making it an installment loan.
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
C. Number of children
Personal factors like the number of children are not considered in credit score calculations.
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
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.
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. Interest rates of new loan vs. existing debts
The interest rate is crucial in determining whether consolidating debt will lower overall costs.
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
B. Pay off the card with the highest interest rate first
Paying high-interest debt first reduces the total interest paid over time.
Which type of credit is most suitable for ongoing, variable expenses?
A. Mortgage
B. Auto loan
C. Home equity loan
D. Credit card
D) Credit card
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
B. Pay down outstanding balances to reduce credit utilization
Reducing credit utilization can positively impact credit scores in a short period.