CFC Debt Management and Credit Planning 3

Question 1

Which of the following best describes the 'debt avalanche' method compared to the 'debt snowball' method?

Accepted Answer

Avalanche targets the highest interest rate first; snowball targets the smallest balance first

Answer

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.

Question 2

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?

Accepted Answer

Cancelled or forgiven debt is generally treated as taxable income by the IRS

Answer

Under IRS rules, cancelled or forgiven debt is generally considered taxable income reported on Form 1099-C, unless specific exclusions (insolvency, bankruptcy) apply.

Question 3

What is the maximum credit utilization ratio generally recommended by financial advisors to maintain a healthy credit score?

Accepted Answer

30%

Answer

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.

Question 4

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?

Accepted Answer

$558,000

Answer

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.

Question 5

Which credit bureau report scoring model is most widely used by mortgage lenders in the United States?

Accepted Answer

FICO Score 2/4/5 (classic models)

Answer

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.

CFC - Certified Financial Consultant Practice Test

CFC - Certified Financial Consultant Practice Test

CFC Debt Management and Credit Planning 3