FiCEP - Financial Counseling Certification Program Credit Reports and Scoring Questions and Answers 1 — Questions and Answers
Question 1: A client is reviewing their credit report and notices that multiple applications for an auto loan, all made within a two-week period, are listed. They are concerned this will significantly lower their credit score. How should a financial counselor explain the impact of these inquiries?
- Each inquiry will be treated as a separate event, likely causing a significant drop in their credit score.
- Credit scoring models will bundle these multiple inquiries into a single event, minimizing the negative impact. (Correct answer)
- Only the first inquiry will be considered, and all subsequent inquiries within 30 days are ignored.
- These are 'soft inquiries' and will have no effect on their credit score whatsoever.
Correct answer: Credit scoring models will bundle these multiple inquiries into a single event, minimizing the negative impact.
Modern credit scoring models like FICO and VantageScore recognize that consumers shop around for the best rates on certain types of loans, such as mortgages, auto loans, and student loans. To avoid penalizing consumers for this smart financial behavior, they treat multiple inquiries for the same type of loan within a short period (typically 14 to 45 days) as a single inquiry. This process is often referred to as 'rate shopping' or 'inquiry bundling'.
Question 2: Which of the following pieces of information is NOT found on a standard credit report?
- Payment history on a credit card account.
- Your current checking account balance. (Correct answer)
- Public records, such as a bankruptcy filing.
- The name of a lender who recently reviewed your credit for a loan application.
Correct answer: Your current checking account balance.
A credit report contains information about your credit history, including how you've paid your bills, loans, and other debts. It includes personal information, credit account details, payment history, public records (like bankruptcies), and a list of who has inquired about your credit. However, it does not include information about your income, the balance in your deposit accounts (like checking or savings), or your investment portfolio.
Question 3: Under the Fair Credit Reporting Act (FCRA), a consumer has the right to dispute inaccurate information on their credit report. What is the first step they should take?
- File a lawsuit against the creditor that reported the inaccurate information.
- Contact their local elected official to complain about the credit bureau.
- Pay a credit repair company to handle the dispute process.
- Notify the credit reporting agency (e.g., Equifax, Experian, TransUnion) in writing of the error. (Correct answer)
Correct answer: Notify the credit reporting agency (e.g., Equifax, Experian, TransUnion) in writing of the error.
The Fair Credit Reporting Act (FCRA) outlines a consumer's right to an accurate credit report. The first and most direct step in the dispute process is to notify the credit reporting agency that is reporting the error. Consumers should explain the error in writing and provide copies of any supporting documentation. The credit bureau must then investigate the dispute, usually within 30 days. It is also recommended to contact the company that provided the information (the furnisher) as well.
Question 4: A client is working to build their credit history. According to the FICO scoring model, which of the following factors carries the MOST weight in determining their credit score?
- The different types of credit they use (credit mix).
- The length of their credit history.
- Their payment history. (Correct answer)
- The number of recently opened accounts (new credit).
Correct answer: Their payment history.
The FICO scoring model, the most widely used credit score, is calculated based on five main factors. Payment history, which indicates whether bills are paid on time, is the single most important factor, accounting for approximately 35% of the score. The amount owed (credit utilization) is second at 30%, followed by length of credit history (15%), new credit (10%), and credit mix (10%).
Question 5: A financial counselor is explaining the difference between a 'hard' and a 'soft' credit inquiry to a member. Which of the following is an example of a soft inquiry?
- Applying for a new department store credit card.
- The member checking their own credit report through a free annual service. (Correct answer)
- Finalizing an application for a mortgage loan.
- Requesting a credit limit increase from a current credit card issuer.
Correct answer: The member checking their own credit report through a free annual service.
A soft inquiry (or soft pull) does not negatively affect a person's credit score. These occur when a person checks their own credit, when a company pre-screens them for an offer, or for background checks by potential employers or landlords. Hard inquiries occur when a consumer applies for new credit, like a loan or credit card, and these can cause a slight, temporary dip in the credit score.
Question 6: Which of the following is a key difference between the VantageScore and FICO credit scoring models?
- FICO scores range from 300-850, while VantageScore uses a 1-100 scale.
- VantageScore can typically generate a score for a consumer with a shorter credit history than FICO. (Correct answer)
- Only FICO considers payment history as a factor in its calculation.
- VantageScore is used exclusively by mortgage lenders, while FICO is used for auto loans.
Correct answer: VantageScore can typically generate a score for a consumer with a shorter credit history than FICO.
While both VantageScore and FICO models are widely used and analyze similar data, they have some key differences. One significant difference is the length of credit history required. FICO scores generally require at least one account to be open for six months or more. VantageScore models can often generate a score with only one month of credit history, making them accessible to consumers with 'thin' or new credit files. Both models now primarily use the 300-850 scale.
FiCEP - Financial Counseling Certification Program Credit Reports and Scoring Questions and Answers 1
A client is reviewing their credit report and notices that multiple applications for an auto loan, all made within a two-week period, are listed.
They are concerned this will significantly lower their credit score.
How should a financial counselor explain the impact of these inquiries?