CFC Debt Management and Credit Planning 2 — Questions and Answers
Question 1: What is the primary purpose of a debt management plan (DMP) administered by a nonprofit credit counseling agency?
- To eliminate debt through bankruptcy discharge
- To negotiate reduced interest rates and consolidate payments to creditors (Correct answer)
- To purchase debt at a discount and resell it
- To increase the client's credit score immediately
Correct answer: To negotiate reduced interest rates and consolidate payments to creditors
A DMP allows a credit counseling agency to negotiate lower interest rates with creditors and consolidate the client's monthly payments into one manageable payment.
Question 2: Which factor carries the highest weight in calculating a FICO credit score?
- Credit utilization ratio
- Length of credit history
- Payment history (Correct answer)
- New credit inquiries
Correct answer: Payment history
Payment history accounts for 35% of a FICO score, making it the single most influential factor in the scoring model.
Question 3: A financial consultant is helping a client choose between a home equity loan and a home equity line of credit (HELOC). Which statement best describes the key difference?
- A HELOC provides a lump sum at a fixed rate; a home equity loan is revolving with variable rate
- A home equity loan provides a lump sum at a fixed rate; a HELOC is revolving with a variable rate (Correct answer)
- Both products are identical in structure but differ only in tax treatment
- A HELOC must be repaid within 5 years; a home equity loan has no term limit
Correct answer: A home equity loan provides a lump sum at a fixed rate; a HELOC is revolving with a variable rate
A home equity loan disburses a lump sum at a fixed interest rate, while a HELOC functions as a revolving line of credit with a variable rate during the draw period.
Question 4: Which of the following is considered a 'secured' form of debt?
- Credit card balance
- Medical bill
- Auto loan (Correct answer)
- Personal line of credit
Correct answer: Auto loan
An auto loan is secured debt because the vehicle serves as collateral that the lender can repossess if the borrower defaults.
Question 5: Under the Fair Debt Collection Practices Act (FDCPA), a debt collector is prohibited from doing which of the following?
- Contacting a debtor by mail
- Calling a debtor between 8 a.m. and 9 p.m. local time
- Calling a debtor before 8 a.m. or after 9 p.m. without consent (Correct answer)
- Reporting a delinquency to a credit bureau
Correct answer: Calling a debtor before 8 a.m. or after 9 p.m. without consent
The FDCPA prohibits debt collectors from calling consumers before 8 a.m. or after 9 p.m. in the consumer's local time zone without prior consent.
Question 6: What is debt consolidation primarily designed to accomplish for a client with multiple consumer debts?
- Eliminate the principal balance owed on all accounts
- Combine multiple debts into a single loan, ideally at a lower overall interest rate (Correct answer)
- Remove negative items from the client's credit report
- Convert unsecured debt into secured debt automatically
Correct answer: Combine multiple debts into a single loan, ideally at a lower overall interest rate
Debt consolidation merges multiple debts into one loan, simplifying payments and potentially reducing the average interest rate the borrower pays.
Question 7: A client's credit utilization ratio is currently 65%. What is the most effective immediate action to improve their credit score?
- Apply for a new credit card to increase available credit
- Pay down existing revolving balances to reduce utilization below 30% (Correct answer)
- Dispute all negative items on the credit report
- Close unused credit card accounts
Correct answer: Pay down existing revolving balances to reduce utilization below 30%
Reducing credit utilization below 30% (ideally below 10%) is one of the fastest ways to improve a FICO score since utilization accounts for 30% of the score.
CFC Debt Management and Credit Planning 2
What is the primary purpose of a debt management plan (DMP) administered by a nonprofit credit counseling agency?