CFC Debt Management and Credit Planning 1 — Questions and Answers
Question 1: Which debt repayment strategy focuses on paying off the smallest balance first to build psychological momentum?
- Avalanche method
- Snowball method (Correct answer)
- Consolidation method
- Ladder method
Correct answer: Snowball method
The snowball method prioritizes smallest balances first to create quick wins and motivation, regardless of interest rates.
Question 2: A client has a $350,000 mortgage at 6.5% with 20 years remaining. Making one extra principal payment per year will most likely result in which outcome?
- Lower monthly payments
- Reduced loan term and total interest paid (Correct answer)
- Elimination of PMI only
- Increased equity without affecting loan term
Correct answer: Reduced loan term and total interest paid
Extra principal payments reduce the outstanding balance, which shortens the loan term and decreases total interest paid over the life of the loan.
Question 3: What is the debt-to-income (DTI) ratio threshold that most conventional mortgage lenders prefer borrowers not to exceed?
- 28%
- 36%
- 43% (Correct answer)
- 50%
Correct answer: 43%
Most conventional lenders use 43% as the maximum back-end DTI ratio, though 36% is preferred; above 43% typically disqualifies borrowers from qualified mortgages.
Question 4: Which credit score range is generally considered 'excellent' by FICO scoring models?
- 620–659
- 660–699
- 700–749
- 800–850 (Correct answer)
Correct answer: 800–850
FICO scores of 800–850 are considered exceptional/excellent, giving borrowers access to the most favorable interest rates and terms.
Question 5: A client has multiple high-interest credit card balances. Which strategy minimizes total interest paid over time?
- Snowball method
- Avalanche method (Correct answer)
- Balance cycling
- Minimum payment strategy
Correct answer: Avalanche method
The avalanche method targets the highest-interest debt first, mathematically minimizing total interest paid across all accounts.
Question 6: What effect does closing an old credit card account typically have on a borrower's FICO credit score?
- Increases score by improving payment history
- Decreases score by reducing available credit and average account age (Correct answer)
- Has no effect because closed accounts are removed immediately
- Increases score by reducing total number of accounts
Correct answer: Decreases score by reducing available credit and average account age
Closing an old account reduces available credit (increasing utilization ratio) and may lower average credit age, both of which can decrease the FICO score.
Question 7: Which type of bankruptcy allows individuals to restructure and repay debts over a 3–5 year plan while keeping most assets?
- Chapter 7
- Chapter 11
- Chapter 13 (Correct answer)
- Chapter 15
Correct answer: Chapter 13
Chapter 13 bankruptcy is a reorganization plan that lets individuals repay all or part of their debts over 3–5 years while retaining assets like a home.
CFC Debt Management and Credit Planning 1
Which debt repayment strategy focuses on paying off the smallest balance first to build psychological momentum?