AFC Credit and Debt Management 5 — Questions and Answers
Question 1: A client's credit card balance is $8,000 at 22% APR. If they pay only the minimum payment of $160/month, approximately how long will it take to pay off the balance?
- About 3 years
- About 5 years
- About 8 years
- Over 10 years (Correct answer)
Correct answer: Over 10 years
At high interest rates with minimum payments, payoff timelines extend dramatically — a $8,000 balance at 22% APR with minimum payments typically takes well over 10 years.
Question 2: Which debt repayment strategy prioritizes paying off the highest interest rate debt first, regardless of balance size?
- Debt snowball
- Debt avalanche (Correct answer)
- Debt consolidation
- Debt settlement
Correct answer: Debt avalanche
The debt avalanche method targets the highest-interest debt first, minimizing total interest paid over time.
Question 3: Under the Fair Debt Collection Practices Act (FDCPA), which action is a debt collector PROHIBITED from taking?
- Sending written notice of the debt within 5 days
- Contacting a consumer's employer to verify employment
- Calling before 8 a.m. or after 9 p.m. in the consumer's time zone (Correct answer)
- Reporting the debt to credit bureaus
Correct answer: Calling before 8 a.m. or after 9 p.m. in the consumer's time zone
The FDCPA prohibits debt collectors from contacting consumers before 8 a.m. or after 9 p.m. local time.
Question 4: A client has a 'charge-off' listed on their credit report. What does this mean?
- The debt has been legally forgiven and the client owes nothing
- The creditor has written the debt off as a loss but the client still owes the balance (Correct answer)
- The account was transferred to a new creditor and the balance is now zero
- The client successfully disputed the debt and it was removed
Correct answer: The creditor has written the debt off as a loss but the client still owes the balance
A charge-off means the original creditor wrote the debt off as a loss for accounting purposes, but the consumer still legally owes the balance.
Question 5: What is the statute of limitations on debt most directly relevant to?
- How long a debt can appear on a credit report
- The time period during which a creditor can sue to collect a debt (Correct answer)
- The maximum interest rate a creditor may charge
- The number of times a creditor can contact a debtor per day
Correct answer: The time period during which a creditor can sue to collect a debt
The statute of limitations governs the window of time during which a creditor or collector can file a lawsuit to collect a debt.
Question 6: A client receives a 1099-C form from a creditor. What does this indicate?
- The creditor has filed a lawsuit against the client
- The client successfully disputed and removed a debt
- Cancellation of debt income that may be taxable (Correct answer)
- A credit inquiry was made on the client's report
Correct answer: Cancellation of debt income that may be taxable
A 1099-C is issued when a creditor cancels $600 or more of debt, which the IRS may treat as taxable income for the debtor.
Question 7: Which factor most accurately describes the difference between a secured and an unsecured debt?
- Secured debts have lower interest rates and no collateral requirement
- Unsecured debts are backed by collateral that can be seized upon default
- Secured debts are backed by collateral, while unsecured debts are not (Correct answer)
- Unsecured debts must be paid before secured debts in bankruptcy
Correct answer: Secured debts are backed by collateral, while unsecured debts are not
Secured debts are tied to a specific asset (collateral) the lender can repossess if the borrower defaults; unsecured debts have no such backing.
AFC Credit and Debt Management 5
A client's credit card balance is $8,000 at 22% APR.
If they pay only the minimum payment of $160/month, approximately how long will it take to pay off the balance?