FFC Debt and Credit Management 4 — Questions and Answers
Question 1: Which factor does NOT directly affect a FICO credit score?
- Credit utilization ratio
- Total number of on-time payments
- Annual household income (Correct answer)
- Average age of credit accounts
Correct answer: Annual household income
Income is not a factor in FICO score calculations; scores are based solely on credit-related behaviors reported to bureaus.
Question 2: A client's credit card has a $5,000 limit and a $2,000 balance. What is their credit utilization rate on this card?
- 20%
- 25%
- 40% (Correct answer)
- 60%
Correct answer: 40%
Utilization = $2,000 ÷ $5,000 = 40%; experts generally recommend keeping utilization below 30%.
Question 3: What is a 'goodwill letter' in the context of credit management?
- A formal dispute letter challenging inaccurate information on a credit report
- A letter requesting a creditor remove an accurate late payment as a courtesy (Correct answer)
- A letter from a debt collector offering a settlement
- A request to the credit bureau to add positive accounts
Correct answer: A letter requesting a creditor remove an accurate late payment as a courtesy
A goodwill letter is a polite request to a creditor asking them to remove an accurate negative item, often citing an otherwise positive history.
Question 4: Under federal law, how long can a Chapter 7 bankruptcy remain on a consumer's credit report?
- 5 years
- 7 years
- 10 years (Correct answer)
- 15 years
Correct answer: 10 years
Chapter 7 bankruptcy can remain on a credit report for up to 10 years from the filing date.
Question 5: A client receives a settlement offer from a debt collector for 40% of the original balance. Which consequence should the coach make the client aware of?
- The settled debt will be reported as 'paid in full' with no negative impact
- The forgiven amount may be taxable income reported on a 1099-C (Correct answer)
- Settling resets the statute of limitations as if the debt were new
- Credit bureaus are required to remove settled debts immediately
Correct answer: The forgiven amount may be taxable income reported on a 1099-C
When $600 or more of debt is forgiven, the IRS requires the creditor to issue a 1099-C, and the forgiven amount may be counted as taxable income.
Question 6: What does the term 'derogatory mark' refer to on a credit report?
- A note added by the consumer disputing an account
- Negative information such as late payments, collections, or bankruptcies (Correct answer)
- A flag indicating the account is brand new
- A comment from an employer who ran a background check
Correct answer: Negative information such as late payments, collections, or bankruptcies
Derogatory marks are negative items like late payments, charge-offs, collections, and bankruptcies that lower a credit score.
Question 7: Which type of credit account, if added to a thin credit file, can help establish credit history MOST quickly for a client with no credit?
- A personal installment loan from a family member
- A secured credit card reported to all three major credit bureaus (Correct answer)
- A prepaid debit card
- A cell phone plan
Correct answer: A secured credit card reported to all three major credit bureaus
A secured credit card that reports to all three bureaus builds an official credit history, whereas prepaid cards and informal loans do not.
FFC Debt and Credit Management 4
Which factor does NOT directly affect a FICO credit score?