FiCEP Credit Reports and Scoring 2 — Questions and Answers
Question 1: Which factor has the greatest impact on a FICO credit score?
- Length of credit history
- Payment history (Correct answer)
- Credit utilization ratio
- Types of credit used
Correct answer: Payment history
Payment history accounts for approximately 35% of a FICO score, making it the most influential factor.
FICO scores use five weighted factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Even one 30-day late payment can significantly drop a score.
Question 2: A client has a credit utilization ratio of 78%. What does this indicate?
- They are using credit well; target is 80%
- They are using too much available credit; target is below 30% (Correct answer)
- This ratio only matters for business credit
- This is healthy for building credit
Correct answer: They are using too much available credit; target is below 30%
A 78% utilization ratio is considered high. The recommended target is below 30%, with below 10% being ideal.
Credit utilization is the second most important FICO factor at 30%. A 78% ratio signals heavy credit dependence, which increases perceived risk. Strategies to improve include paying down balances and requesting credit limit increases.
Question 3: How long does a Chapter 7 bankruptcy remain on a credit report?
- 5 years
- 7 years
- 10 years (Correct answer)
- 15 years
Correct answer: 10 years
A Chapter 7 bankruptcy stays on credit reports for 10 years from the filing date.
Chapter 7 bankruptcy remains for 10 years from filing; Chapter 13 remains for 7 years. Despite the long reporting period, the negative impact diminishes over time as positive payment history is built.
Question 4: What is the difference between a hard inquiry and a soft inquiry on a credit report?
- There is no difference
- Hard inquiries occur when applying for credit and can lower scores; soft inquiries do not affect scores (Correct answer)
- Soft inquiries lower scores more
- Hard inquiries are only from mortgage lenders
Correct answer: Hard inquiries occur when applying for credit and can lower scores; soft inquiries do not affect scores
Hard inquiries result from credit applications and may lower scores by a few points; soft inquiries do not affect scores.
Hard inquiries occur when a consumer authorizes a lender to check their credit for a lending decision. Each may reduce the score by 2-5 points. Soft inquiries include personal credit checks and pre-approvals and never affect scores.
Question 5: A client finds an unfamiliar account on their credit report. What should the counselor recommend?
- Ignore it if in good standing
- File a dispute with all three bureaus, place a fraud alert, and consider a credit freeze (Correct answer)
- Close the account and move on
- Wait to see if it resolves itself
Correct answer: File a dispute with all three bureaus, place a fraud alert, and consider a credit freeze
Unknown accounts may indicate identity theft and require disputes, fraud alerts, and potentially a credit freeze.
The recommended response includes filing disputes with all three bureaus, placing a fraud alert, considering a credit freeze, filing an identity theft report at IdentityTheft.gov, and filing a police report.
Question 6: Which credit score range is generally considered 'good' by most lenders?
- 300-579
- 580-669
- 670-739 (Correct answer)
- 740-799
Correct answer: 670-739
A FICO score of 670-739 is classified as 'good,' qualifying borrowers for favorable terms on most credit products.
FICO scores are categorized as Poor (300-579), Fair (580-669), Good (670-739), Very Good (740-799), and Exceptional (800-850). A 'good' score typically qualifies consumers for competitive interest rates.
FiCEP Credit Reports and Scoring 2
Which factor has the greatest impact on a FICO credit score?