AFC Credit and Debt Management 2 — Questions and Answers
Question 1: A client's credit report shows a collection account for $1,200 that is four years old. What should the counselor advise regarding the statute of limitations?
- Pay the collection immediately to improve the credit score
- Verify the statute of limitations in the client's state before taking any action (Correct answer)
- Dispute the account as too old to be valid
- Ignore the collection since it will fall off in three years
Correct answer: Verify the statute of limitations in the client's state before taking any action
The statute of limitations varies by state and debt type, and making a payment can restart the clock, so verification is essential before advising action.
The statute of limitations on debt collection varies from 3-10 years depending on the state and type of debt. Making a payment on time-barred debt can restart the statute of limitations in many states. A financial counselor must first determine the type of debt, applicable state law, when the last payment was made, and whether the debt is within the 7-year credit reporting period under FCRA.
Question 2: Which credit scoring factor has the greatest weight in the FICO scoring model?
- Credit utilization ratio
- Payment history (Correct answer)
- Length of credit history
- Credit mix
Correct answer: Payment history
Payment history accounts for approximately 35% of a FICO score, making it the single most influential factor.
The FICO scoring model weighs five factors: payment history (35%), amounts owed/credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%). Payment history has the greatest impact because it directly measures the borrower's track record. A single 30-day late payment can drop a score by 60-110 points. Financial counselors should emphasize that consistent on-time payments are the foundation of credit building.
Question 3: A client wants to dispute an inaccurate item on their credit report. Under the Fair Credit Reporting Act, the credit bureau must investigate within how many days?
- 15 days
- 30 days (Correct answer)
- 45 days
- 60 days
Correct answer: 30 days
The FCRA requires credit reporting agencies to investigate disputes within 30 days of receiving the consumer's complaint.
Under Section 611 of the Fair Credit Reporting Act, credit reporting agencies must complete their investigation within 30 days. The CRA must forward information to the furnisher, who must investigate and report back. If the consumer provides additional information, the period may be extended by 15 days. Financial counselors should help clients file disputes in writing via certified mail.
Question 4: What is the recommended credit utilization ratio to maximize a client's credit score?
- Below 10% (Correct answer)
- Below 30%
- Below 50%
- Below 75%
Correct answer: Below 10%
While keeping utilization below 30% is the widely known guideline, consumers with the highest credit scores typically maintain utilization below 10%.
Credit utilization is the second most influential FICO factor at 30%. While conventional advice cites 30% as the threshold, data shows consumers with scores above 800 typically maintain utilization below 10%. Both per-card and overall utilization matter. Counselors should note that 0% utilization is not ideal either, as some scoring models reward small active balances.
Question 5: A client is considering enrolling in a debt management plan through a credit counseling agency. Which of the following is a typical feature of these plans?
- Debts are forgiven after completing the plan
- Creditors may agree to reduced interest rates and waived fees (Correct answer)
- The client's credit score immediately improves upon enrollment
- All types of debt including student loans and mortgages are eligible
Correct answer: Creditors may agree to reduced interest rates and waived fees
Debt management plans typically involve creditors agreeing to reduced interest rates, waived late fees, and possibly re-aging accounts, but require full repayment of principal.
A DMP administered through a nonprofit credit counseling agency consolidates unsecured debt payments into a single monthly payment. Creditors may reduce interest rates (often to 0-9%), waive late fees, and re-age delinquent accounts. However, the client must repay 100% of the principal, typically over 3-5 years. DMPs generally cover only unsecured debts like credit cards and medical bills.
Question 6: Which federal law protects consumers from abusive debt collection practices, including limits on when and how collectors can contact them?
- Truth in Lending Act
- Fair Debt Collection Practices Act (Correct answer)
- Equal Credit Opportunity Act
- Consumer Credit Protection Act
Correct answer: Fair Debt Collection Practices Act
The FDCPA protects consumers from abusive, deceptive, and unfair debt collection practices by third-party collectors.
The Fair Debt Collection Practices Act regulates third-party debt collectors. Key protections include: no calls before 8 AM or after 9 PM, no workplace contact if told not to, must cease contact upon written request, cannot use threats or obscene language, must provide written debt validation within 5 days, and cannot discuss debt with third parties. Financial counselors should help clients understand these rights and document any violations.
AFC Credit and Debt Management 2
A client's credit report shows a collection account for $1,200 that is four years old.
What should the counselor advise regarding the statute of limitations?