AFC - Accredited Financial Counselor Accredited Financial Counselor Credit and Debt Management 1 — Questions and Answers
Question 1: A client has a credit score of 580 and is being denied credit. Which of the following actions would most directly improve their credit utilization ratio?
- Closing unused credit card accounts to simplify their finances
- Paying down outstanding revolving balances below 30% of credit limits (Correct answer)
- Applying for a new installment loan to diversify credit mix
- Disputing all negative items on the credit report regardless of accuracy
Correct answer: Paying down outstanding revolving balances below 30% of credit limits
Credit utilization — the ratio of revolving balances to credit limits — accounts for roughly 30% of a FICO score. Reducing balances below 30% of available credit (ideally below 10%) directly lowers utilization and can produce rapid score improvements. Closing accounts actually reduces available credit and can worsen utilization.
Question 2: Under the Fair Debt Collection Practices Act (FDCPA), which of the following is a debt collector PROHIBITED from doing?
- Contacting a debtor by mail to request payment
- Calling a debtor at their workplace if the employer permits it
- Reporting an accurate delinquent debt to a credit bureau
- Calling a debtor repeatedly with the intent to annoy or harass (Correct answer)
Correct answer: Calling a debtor repeatedly with the intent to annoy or harass
The FDCPA explicitly prohibits debt collectors from engaging in harassing, oppressive, or abusive conduct, including causing a phone to ring repeatedly or engaging any person in continuous telephone conversations with intent to annoy, abuse, or harass. The other options represent lawful collector activities under the Act.
Question 3: A client wants to use the debt avalanche method to eliminate four debts. Which debt should they prioritize paying off first?
- The debt with the smallest outstanding balance
- The debt with the largest outstanding balance
- The debt with the highest interest rate (Correct answer)
- The debt with the most recent delinquency date
Correct answer: The debt with the highest interest rate
The debt avalanche method directs extra payments toward the debt carrying the highest interest rate first, while maintaining minimums on all others. This approach minimizes total interest paid over time and is mathematically optimal, distinguishing it from the debt snowball method which targets the smallest balance first for psychological momentum.
Question 4: A counselor is reviewing a client's credit report and finds a collection account that is six years old. The client lives in a state with a four-year statute of limitations on open accounts. Which statement is most accurate?
- The collector can still sue the client because the credit report entry has not yet expired
- The debt is time-barred from legal collection but may still appear on the credit report for up to seven years (Correct answer)
- The client should immediately pay the debt in full to restart the statute of limitations clock
- The credit bureau is legally required to remove the collection account because the statute of limitations has passed
Correct answer: The debt is time-barred from legal collection but may still appear on the credit report for up to seven years
The statute of limitations governs how long a creditor can sue to collect a debt, while the credit reporting period (generally seven years from the date of first delinquency) is governed by the FCRA. A time-barred debt cannot result in a successful lawsuit, but it may still legally appear on the credit report until the FCRA reporting window expires.
Question 5: Which of the following best describes a secured credit card and its primary benefit for a client rebuilding credit?
- A card with a zero-interest introductory period backed by a creditworthy co-signer
- A card where the credit limit is collateralized by the cardholder's own cash deposit (Correct answer)
- A card issued exclusively to consumers with credit scores above 700
- A card that automatically converts to a rewards card after six on-time payments
Correct answer: A card where the credit limit is collateralized by the cardholder's own cash deposit
A secured credit card requires the applicant to place a refundable cash deposit that typically equals the credit limit. Because the issuer bears minimal default risk, these cards are accessible to consumers with damaged or no credit history. Responsible use — keeping utilization low and paying on time — generates positive payment history that helps rebuild a credit profile.
Question 6: A client with $30,000 in unsecured debt is considering a debt management plan (DMP) through a nonprofit credit counseling agency. Which outcome should the counselor explain is a likely benefit of a DMP?
- All negative credit report entries will be removed upon enrollment
- Creditors may agree to reduce interest rates and waive certain fees (Correct answer)
- The client will no longer be required to make monthly payments during the plan
- The debt will be legally discharged at the conclusion of the plan
Correct answer: Creditors may agree to reduce interest rates and waive certain fees
Under a DMP, the nonprofit credit counseling agency negotiates with creditors on the client's behalf; creditors often agree to reduce interest rates and waive late or over-limit fees as a concession for receiving consistent payments through the plan. DMPs do not discharge debt, eliminate negative entries, or suspend payments — the client makes a single monthly payment to the agency, which distributes funds to creditors.
AFC - Accredited Financial Counselor Accredited Financial Counselor Credit and Debt Management 1
A client has a credit score of 580 and is being denied credit.
Which of the following actions would most directly improve their credit utilization ratio?