AFC Budgeting & Debt Management 4

Question 1

A client has a $12,000 credit card balance at 22% APR and a $5,000 medical bill with 0% interest. Which debt should they prioritize paying down first using the avalanche method?

Accepted Answer

The credit card because it has the highest interest rate

Answer

The avalanche method targets the highest-interest debt first to minimize total interest paid over time.

Question 2

Which ratio is most commonly used to assess a client's ability to manage monthly debt obligations relative to their gross income?

Accepted Answer

Debt-to-income (DTI) ratio

Answer

The debt-to-income ratio compares total monthly debt payments to gross monthly income and is a key indicator of debt load.

Question 3

A client's take-home pay is $3,500/month. Under the 50/30/20 budgeting rule, how much should be allocated to savings and debt repayment?

Accepted Answer

$700

Answer

The 20% category covers savings and debt repayment: 20% of $3,500 = $700.

Question 4

What is the primary risk of using a home equity loan to consolidate unsecured credit card debt?

Accepted Answer

Converting unsecured debt into debt secured by your home

Answer

Using a home equity loan puts your home at risk of foreclosure if you default, whereas credit card debt is unsecured.

Question 5

A client wants to use the envelope budgeting system. Which scenario best describes this method?

Accepted Answer

Allocating physical or virtual cash into spending category envelopes each month

Answer

The envelope system pre-allocates cash into labeled envelopes for each budget category, preventing overspending.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Budgeting & Debt Management 4