Debt Management and Credit Planning Flashcards
7 cards from real CFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Debt Management and Credit Planning flashcards as text
Which of the following best describes the 'debt avalanche' method compared to the 'debt snowball' method?
Answer: Avalanche targets the highest interest rate first; snowball targets the smallest balance first
The avalanche method targets the highest-interest-rate debt first to minimize total interest, while the snowball method targets the smallest balance for psychological wins.
A client is considering debt settlement with a creditor for less than the full amount owed. Which is a key tax consequence they should be aware of?
Answer: Cancelled or forgiven debt is generally treated as taxable income by the IRS
Under IRS rules, cancelled or forgiven debt is generally considered taxable income reported on Form 1099-C, unless specific exclusions (insolvency, bankruptcy) apply.
What is the maximum credit utilization ratio generally recommended by financial advisors to maintain a healthy credit score?
Answer: 30%
Financial advisors generally recommend keeping credit utilization at or below 30% to maintain a healthy credit score, as this ratio accounts for 30% of FICO scoring.
A 30-year fixed mortgage at 7% on a $400,000 loan will generate approximately how much total interest over the life of the loan?
Answer: $558,000
A $400,000 loan at 7% for 30 years results in roughly $558,000 in total interest paid, illustrating the substantial long-term cost of mortgage debt.
Which credit bureau report scoring model is most widely used by mortgage lenders in the United States?
Answer: FICO Score 2/4/5 (classic models)
Mortgage lenders typically pull FICO Score 2 (Experian), FICO Score 4 (TransUnion), and FICO Score 5 (Equifax) — the classic bureau-specific FICO models — per GSE requirements.
Which of the following is the best description of a 'reverse mortgage' as a debt planning tool for retirees?
Answer: A loan allowing homeowners 62+ to convert home equity into cash with no monthly mortgage payments required
A reverse mortgage (HECM) lets homeowners aged 62+ borrow against home equity with no required monthly mortgage payments; the loan is repaid when the home is sold or the borrower leaves.
When advising a client on whether to pay off a low-interest mortgage early versus investing the extra funds, which financial principle is most relevant?
Answer: Opportunity cost and expected after-tax investment returns versus mortgage rate
The decision hinges on opportunity cost: if after-tax investment returns are expected to exceed the mortgage rate, investing is generally more advantageous; if not, paying off the mortgage may be preferred.