Credit Analysis & Debt Management Flashcards
6 cards from real CCC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Analysis & Debt Management flashcards as text
What is the primary purpose of credit analysis?
Answer: To assess a borrower's financial health and risk level
The primary purpose of credit analysis is to assess a borrower's financial health and risk level before extending credit. Lenders examine factors like income, existing debts, payment history, and credit score to determine the borrower's ability and willingness to repay a loan. This evaluation helps lenders make informed decisions and mitigate potential losses.
Which factor has the greatest impact on a credit score?
Answer: Payment history
Payment history has the greatest impact on a credit score, accounting for approximately 35% of the total score. Consistently making on-time payments demonstrates financial responsibility and reliability to lenders, which positively influences your score. Conversely, late or missed payments can severely damage your creditworthiness and signal higher risk.
Why is debt-to-income (DTI) ratio important in debt management?
Answer: To assess a borrower’s ability to repay debt
The debt-to-income (DTI) ratio is important in debt management because it assesses a borrower’s ability to repay debt by comparing their total monthly debt payments to their gross monthly income. Lenders use DTI to determine if an individual can comfortably take on additional debt. A lower DTI indicates a healthier financial position and a greater capacity to manage financial obligations.
What is the best strategy for reducing credit card debt efficiently?
Answer: Use the debt avalanche method
The debt avalanche method is the most efficient strategy for reducing credit card debt because it prioritizes paying off the debt with the highest interest rate first. This approach minimizes the total amount of interest paid over time, leading to faster overall debt elimination and significant savings. By tackling the most expensive debts first, consumers can accelerate their progress and reduce the financial burden more effectively.
Which debt management strategy involves negotiating lower interest rates or payments with creditors?
Answer: Debt settlement or negotiation
Debt settlement or negotiation is a strategy where an individual or a credit counselor works directly with creditors to reduce the total amount of debt owed or to establish more manageable payment terms. This can involve negotiating lower interest rates, waiving fees, or agreeing to a lump-sum payment that is less than the full balance. It's a proactive approach to debt management that aims to make debt repayment more feasible for the consumer.
Why is maintaining a good credit score important?
Answer: To qualify for better loan terms and lower interest rates
Maintaining a good credit score is crucial because it signals to lenders that an individual is a responsible borrower. A higher credit score allows consumers to qualify for more favorable loan terms, including lower interest rates on mortgages, car loans, and credit cards. This translates into significant savings over the life of a loan and broader access to financial products.