AFC - Accredited Financial Counselor Credit and Debt Management Questions and Answers 1 — Questions and Answers
Question 1: A client, Sarah, is working to improve her FICO credit score. Which of the following factors carries the most weight in the FICO score calculation?
- Amounts owed
- Length of credit history
- Payment history (Correct answer)
- New credit
Correct answer: Payment history
Payment history is the most significant factor in calculating a FICO score, accounting for approximately 35% of the total score. Making timely payments on all credit obligations is crucial for building and maintaining a good credit score.
Question 2: An AFC is counseling a client who is overwhelmed with various debts. The client has a stable income and wants to pay off their debt systematically. The counselor suggests the 'debt snowball' method. Which of the following best describes this strategy?
- Paying off the loan with the highest interest rate first, while making minimum payments on others.
- Consolidating all debts into a single loan with a lower interest rate.
- Making extra payments on the largest debt balance first to feel a significant impact.
- Paying off the smallest debt balance first for a quick psychological win, then rolling that payment into the next smallest debt. (Correct answer)
Correct answer: Paying off the smallest debt balance first for a quick psychological win, then rolling that payment into the next smallest debt.
The debt snowball method focuses on building momentum and motivation. The client pays off the smallest debts first, regardless of interest rates. This provides a quick sense of accomplishment, which can encourage them to continue with the debt repayment plan by applying the freed-up payment amount to the next-largest debt.
Question 3: Under the Fair Debt Collection Practices Act (FDCPA), which of the following actions by a third-party debt collector is permissible?
- Calling the debtor's employer and disclosing the nature of the debt.
- Contacting the debtor at 10:00 PM local time.
- Calling the debtor's neighbor to ask for the debtor's address. (Correct answer)
- Threatening to have the debtor arrested for non-payment of a civil debt.
Correct answer: Calling the debtor's neighbor to ask for the debtor's address.
The FDCPA allows a debt collector to contact third parties, like a neighbor, for the limited purpose of acquiring location information about the debtor. They cannot, however, state that the consumer owes any debt. Calling after 9 PM, disclosing the debt to an employer, or making false threats are all prohibited practices under the FDCPA.
Question 4: A client pulls their credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) and notices an error on the Experian report. What is the first step the client should take to dispute this inaccuracy?
- File a lawsuit against the creditor that reported the inaccurate information.
- Contact the Federal Trade Commission (FTC) to file a formal complaint.
- Send a dispute letter via certified mail to the creditor that provided the information.
- File a dispute directly with the credit bureau (Experian) that is showing the error. (Correct answer)
Correct answer: File a dispute directly with the credit bureau (Experian) that is showing the error.
The Fair Credit Reporting Act (FCRA) outlines the process for disputing errors. The first and most direct step is to file a dispute with the specific credit reporting agency that is reporting the incorrect information. The bureau must then investigate the claim, typically within 30 days.
Question 5: A financial counselor is calculating a client's back-end debt-to-income (DTI) ratio. The client has a gross monthly income of $5,000. Their monthly obligations include a $1,200 mortgage payment, a $400 car loan payment, a $150 student loan payment, and a $100 minimum credit card payment. What is the client's back-end DTI ratio?
- 30%
- 37% (Correct answer)
- 24%
- 42%
Correct answer: 37%
The back-end DTI ratio includes all monthly debt payments, including housing. The calculation is (Total Monthly Debt Payments / Gross Monthly Income) * 100. In this case, ($1,200 + $400 + $150 + $100) / $5,000 = $1,850 / $5,000 = 0.37, or 37%.
Question 6: Which type of bankruptcy, also known as a 'wage earner's plan,' involves creating a repayment plan over three to five years to pay back all or a portion of the debts?
- Chapter 11
- Chapter 7
- Chapter 13 (Correct answer)
- Chapter 12
Correct answer: Chapter 13
Chapter 13 bankruptcy allows individuals with a regular income to develop a plan to repay all or part of their debts. Debtors propose a repayment plan to make installments to creditors over three to five years. This is different from Chapter 7, which involves liquidating assets to pay off debts.
