FFC Debt and Credit Management 5 — Questions and Answers
Question 1: A client is overwhelmed with multiple high-interest debts and wants to simplify payments. A debt consolidation loan would be MOST beneficial if:
- The new loan's interest rate is higher than all existing debts
- The client closes all existing credit cards immediately after consolidating
- The new loan carries a lower interest rate than the existing debts (Correct answer)
- The loan term is extended to the maximum possible to lower payments
Correct answer: The new loan carries a lower interest rate than the existing debts
Debt consolidation saves money only when the new loan's rate is lower than the weighted average rate of the debts being consolidated.
Question 2: Which of the following is an example of a predatory lending practice a Financial Fitness Coach should warn clients about?
- A 30-year fixed-rate mortgage at the market rate
- A payday loan with a 400% APR targeting low-income borrowers (Correct answer)
- A 0% APR credit card promotional offer for 12 months
- A secured personal loan requiring collateral equal to the loan amount
Correct answer: A payday loan with a 400% APR targeting low-income borrowers
Payday loans with triple-digit APRs targeting vulnerable consumers are a classic example of predatory lending.
Question 3: What is the recommended credit utilization ratio to maintain for optimal credit score health?
- Below 10%
- Below 30% (Correct answer)
- Below 50%
- Below 70%
Correct answer: Below 30%
Credit experts generally recommend keeping utilization below 30%, with the highest scorers typically using under 10%.
Question 4: A client is 60 days past due on a credit card. Which step should a Financial Fitness Coach FIRST recommend?
- File for bankruptcy immediately to stop collection activity
- Contact the creditor to negotiate a hardship payment arrangement (Correct answer)
- Ignore the account until the collector offers a settlement
- Close the account to prevent additional fees
Correct answer: Contact the creditor to negotiate a hardship payment arrangement
Proactively contacting the creditor to discuss a hardship plan can prevent further damage and may result in waived fees or temporary reduced payments.
Question 5: Which statement about student loan debt is MOST accurate for a Financial Fitness Coach advising US clients?
- Federal student loans are dischargeable in Chapter 7 bankruptcy without restriction
- Income-driven repayment plans tie monthly payments to the borrower's discretionary income (Correct answer)
- Private student loans offer the same forgiveness programs as federal loans
- Defaulting on federal student loans has no impact on tax refunds
Correct answer: Income-driven repayment plans tie monthly payments to the borrower's discretionary income
Federal income-driven repayment (IDR) plans calculate payments as a percentage of discretionary income, making them more manageable during financial hardship.
Question 6: Which organization is a client MOST likely to contact for free or low-cost credit counseling services?
- A commercial debt settlement company charging 15-25% of enrolled debt
- A National Foundation for Credit Counseling (NFCC) member agency (Correct answer)
- A payday loan storefront
- A private equity-backed debt buyer
Correct answer: A National Foundation for Credit Counseling (NFCC) member agency
NFCC member agencies are nonprofit organizations that provide free or low-cost, accredited credit counseling services to consumers.
Question 7: What is the main difference between a 'debt settlement' company and a nonprofit credit counseling agency?
- Credit counseling agencies charge higher fees than debt settlement companies
- Debt settlement companies negotiate with creditors to accept less than the full amount owed, often for profit (Correct answer)
- Nonprofit agencies primarily help clients file for bankruptcy
- Debt settlement companies are regulated by the CFPB and always improve credit scores
Correct answer: Debt settlement companies negotiate with creditors to accept less than the full amount owed, often for profit
For-profit debt settlement companies negotiate lump-sum settlements below the full balance, charging significant fees, while nonprofit counselors help manage payments without seeking debt reduction.
FFC Debt and Credit Management 5
A client is overwhelmed with multiple high-interest debts and wants to simplify payments.
A debt consolidation loan would be MOST beneficial if: