NAB Lending and Credit 1 — Questions and Answers
Question 1: What factors make up a credit score?
- Payment history, amounts owed, length of credit history, new credit, and credit mix (Correct answer)
- Only income level
- Only the number of credit cards
- Only the amount of debt
Correct answer: Payment history, amounts owed, length of credit history, new credit, and credit mix
FICO scores consider five factors: payment history (35%), amounts owed (30%), length of history (15%), new credit (10%), and credit mix (10%).
Question 2: What is the difference between a fixed-rate and adjustable-rate mortgage?
- Fixed-rate keeps the same interest rate throughout; adjustable-rate can change based on market conditions (Correct answer)
- There is no difference
- Fixed rates are always lower
- Adjustable rates never change after the first year
Correct answer: Fixed-rate keeps the same interest rate throughout; adjustable-rate can change based on market conditions
Fixed-rate mortgages lock in one interest rate for the entire loan term, while adjustable-rate mortgages (ARMs) can change periodically based on a reference interest rate.
Question 3: What is a debt-to-income ratio?
- The percentage of gross monthly income that goes toward paying debts (Correct answer)
- The total amount of debt divided by total assets
- A credit score calculation
- The interest rate on all debts combined
Correct answer: The percentage of gross monthly income that goes toward paying debts
DTI ratio compares monthly debt payments to gross monthly income, used by lenders to assess borrowing capacity.
Question 4: What is the purpose of a credit report?
- To provide a detailed history of your credit accounts, payment behavior, and financial reliability (Correct answer)
- To show your bank account balance
- To list your employment history
- To calculate your tax liability
Correct answer: To provide a detailed history of your credit accounts, payment behavior, and financial reliability
Credit reports compiled by bureaus like Equifax, Experian, and TransUnion detail your credit history, helping lenders assess your creditworthiness.
Question 5: What is collateral in lending?
- An asset pledged to secure a loan that the lender can claim if the borrower defaults (Correct answer)
- The interest rate on a loan
- A type of insurance
- The loan application fee
Correct answer: An asset pledged to secure a loan that the lender can claim if the borrower defaults
Collateral is property or assets that a borrower offers as security. If the borrower cannot repay, the lender can seize the collateral.
Question 6: What is the difference between prequalification and preapproval for a mortgage?
- Prequalification is an estimate based on self-reported data; preapproval involves verification and a conditional commitment (Correct answer)
- They are the same thing
- Preapproval is less thorough
- Prequalification guarantees a loan
Correct answer: Prequalification is an estimate based on self-reported data; preapproval involves verification and a conditional commitment
Prequalification gives a rough estimate of borrowing capacity, while preapproval involves document verification and carries more weight with sellers.
NAB Lending and Credit 1
What factors make up a credit score?