5. Manage Credit and Debt (15%)

Question 1

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

Answer 1

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.

Question 2

Which of the following factors most impacts a credit score?

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

Answer 2

B. Payment history

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

Question 3

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

Answer 3

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

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

Question 4

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

Answer 4

C. Annual Percentage Rate

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

Question 5

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

Answer 5

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.

Question 6

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%

Answer 6

C. 36%

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

Question 7

Which organization provides free annual credit reports to consumers?

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

Answer 7

C. AnnualCreditReport.com

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

Question 8

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

Answer 8

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

The FCRA ensures consumer rights regarding credit report information.

Question 9

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

Answer 9

B. Auto loan

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

Question 10

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

Answer 10

C. Number of children

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

Question 11

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

Answer 11

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.

Question 12

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

Answer 12

A. Interest rates of new loan vs. existing debts

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

Question 13

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

Answer 13

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

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

Question 14

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

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

Answer 14

D. Credit card

Question 15

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

Answer 15

B. Pay down outstanding balances to reduce credit utilization

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

Question 16

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

Answer 16

C. Contact creditors to negotiate a temporary payment plan

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

Question 17

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

Answer 17

C. Annual Percentage Rate

(APR)

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

Question 18

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

Answer 18

B. Open a secured credit card account

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

Question 19

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

Answer 19

B. Analyze their budget and determine discretionary income

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

Question 20

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

Answer 20

C. Dispute the error directly with the credit bureau

Errors should be disputed with the credit bureau for correction.

Question 21

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

Answer 21

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.

Question 22

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

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

A. Impact on credit score and future creditworthiness

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

Question 25

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

Answer 25

C. Consider debt restructuring or refinancing options ## Footnote Restructuring or refinancing can reduce monthly debt payments, freeing up income for other expenses.

Question 26

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

Answer 26

B. The client is over-leveraged and should focus on paying down balances ## Footnote A high credit utilization ratio indicates excessive debt relative to available credit, which can lower credit scores.

Question 27

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

Answer 27

B. Focus on paying off the highest interest debt first (debt avalanche method) ## Footnote The debt avalanche method helps minimize interest costs over time, which is beneficial when dealing with high-interest debts.

Question 28

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

Answer 28

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

Question 29

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

Answer 29

B. The client is likely experiencing cash flow issues or has difficulty managing payments ## Footnote Multiple late payments typically indicate cash flow problems or challenges in managing debt obligations.

Question 30

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

Answer 30

C. Explore debt restructuring, reduce discretionary spending, or increase income ## Footnote A multifaceted approach addressing the debt load, spending habits, and income is the most effective strategy for improving cash flow.