FFC Debt and Credit Management 2 — Questions and Answers
Question 1: A client has a $10,000 credit card balance at 22% APR and a $15,000 car loan at 6% APR. Which debt-payoff strategy recommends tackling the credit card first?
- Snowball method
- Avalanche method (Correct answer)
- Consolidation method
- Minimum payment method
Correct answer: Avalanche method
The avalanche method targets the highest-interest debt first to minimize total interest paid.
Question 2: What is the maximum debt-to-income (DTI) ratio most conventional mortgage lenders prefer borrowers not to exceed?
- 25%
- 36% (Correct answer)
- 50%
- 60%
Correct answer: 36%
Most conventional lenders prefer a back-end DTI of 36% or lower, though some allow up to 43-50%.
Question 3: Which action MOST directly improves a client's credit utilization ratio?
- Opening several new credit accounts
- Paying down revolving credit card balances (Correct answer)
- Closing old unused credit cards
- Applying for a personal loan
Correct answer: Paying down revolving credit card balances
Paying down revolving balances lowers the amount of available credit being used, directly reducing the utilization ratio.
Question 4: A 'hard inquiry' on a credit report typically results from which of the following?
- Checking your own credit score
- An employer reviewing your credit
- Applying for a new credit card (Correct answer)
- A utility company setting up service
Correct answer: Applying for a new credit card
Applying for new credit triggers a hard inquiry, which can temporarily lower a credit score by a few points.
Question 5: Which of the following debts is generally considered 'secured'?
- Medical bills
- Credit card balances
- Student loans
- Auto loans (Correct answer)
Correct answer: Auto loans
Auto loans are secured debt because the vehicle serves as collateral that the lender can repossess upon default.
Question 6: Under the Fair Debt Collection Practices Act (FDCPA), a debt collector is prohibited from calling a consumer:
- More than three times per week
- Before 8 a.m. or after 9 p.m. local time (Correct answer)
- On weekends or federal holidays
- Without first sending a written notice
Correct answer: Before 8 a.m. or after 9 p.m. local time
The FDCPA prohibits debt collectors from calling before 8 a.m. or after 9 p.m. in the consumer's local time zone.
Question 7: What does a 'charge-off' on a credit report mean?
- The debt has been fully paid and forgiven
- The lender has written the debt off as a loss and may sell it to a collector (Correct answer)
- The consumer has successfully disputed the debt
- The account is in good standing with no balance
Correct answer: The lender has written the debt off as a loss and may sell it to a collector
A charge-off means the original creditor has written the debt off as a loss, but the consumer still legally owes the balance.
FFC Debt and Credit Management 2
A client has a $10,000 credit card balance at 22% APR and a $15,000 car loan at 6% APR.
Which debt-payoff strategy recommends tackling the credit card first?