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Quiz: Credit and Debt Management

Test your understanding of credit and debt management concepts.

1. What is the single largest factor in calculating your FICO credit score?

  1. Credit utilization ratio
  2. Payment history
  3. Length of credit history
  4. Types of credit used
Show Answer

The correct answer is B. Payment history accounts for 35% of your FICO score—the largest single factor. It tracks whether you pay bills on time. Credit utilization (A) is second at 30%. Length of credit history (C) is 15%, and credit mix (D) is 10%. Consistently paying all bills on time is the most important thing you can do for your credit score.

Concept Tested: Payment History

See: Credit Score Factors

2. What is credit utilization ratio?

  1. The number of credit cards you own
  2. The percentage of available credit you're currently using
  3. How often you apply for new credit
  4. The total amount of debt you owe
Show Answer

The correct answer is B. Credit utilization is calculated as (Total Balances / Total Credit Limits) × 100. For example, if you have $3,000 in balances and $10,000 in total credit limits, your utilization is 30%. Keeping utilization below 30% (ideally below 10%) helps your credit score. Option A describes number of accounts. Option C describes hard inquiries. Option D describes total debt without context of available credit.

Concept Tested: Credit Utilization Ratio

See: Credit Utilization

3. You have $5,000 in credit card debt at 18% APR. Using the debt avalanche method, what should you do?

  1. Pay only the minimum payment each month
  2. Pay the minimum on all debts, then put extra money toward the lowest balance first
  3. Pay the minimum on all debts, then put extra money toward the highest interest rate debt first
  4. Close the credit card account immediately
Show Answer

The correct answer is C. The debt avalanche method prioritizes paying off the highest-interest debt first while making minimum payments on other debts. This minimizes total interest paid. Option A prolongs debt and maximizes interest. Option B describes the debt snowball method (targeting smallest balance first). Option D can hurt your credit utilization and credit score.

Concept Tested: Debt Avalanche Method

See: Debt Repayment Strategies

4. What is considered an excellent FICO credit score?

  1. 600-650
  2. 650-700
  3. 700-750
  4. 750-850
Show Answer

The correct answer is D. FICO scores range from 300-850, with 750+ considered excellent. This qualifies you for the best interest rates and terms. 700-749 is good, 650-699 is fair, 600-649 is poor, and below 600 is very poor. Excellent credit can save you tens of thousands of dollars over your lifetime through lower interest rates on mortgages, auto loans, and other credit.

Concept Tested: FICO Score

See: Understanding Credit Scores

5. Which type of debt is generally considered "good debt"?

  1. Credit card balances for vacation expenses
  2. Payday loans for emergency cash
  3. Student loans for education that increases earning potential
  4. High-interest personal loans for luxury purchases
Show Answer

The correct answer is C. "Good debt" is borrowed money that has the potential to increase your net worth or earning capacity, like student loans for valuable education, mortgages for appreciating property, or business loans for profitable ventures. Bad debt (options A, B, D) is borrowed money for consumable items or depreciating assets, especially at high interest rates.

Concept Tested: Good Debt vs Bad Debt

See: Types of Debt

6. What should you do if you can't pay your credit card bill in full one month?

  1. Pay at least the minimum payment to avoid late fees and credit damage
  2. Don't pay anything and hope the company forgets
  3. Close the account immediately
  4. Apply for more credit cards to have more available credit
Show Answer

The correct answer is A. Always pay at least the minimum payment by the due date to avoid late fees ($25-40), penalty APR (up to 29.99%), and damage to your credit score. Then work to pay more than the minimum as soon as possible to reduce interest charges. Option B destroys your credit. Option C can hurt your utilization ratio. Option D doesn't solve the underlying problem and could worsen your debt situation.

Concept Tested: Minimum Payments

See: Managing Credit Cards

7. What is the main difference between secured and unsecured debt?

  1. Secured debt has collateral that can be seized; unsecured debt does not
  2. Secured debt always has higher interest rates
  3. Unsecured debt is always better for your credit score
  4. Secured debt cannot be reported to credit bureaus
Show Answer

The correct answer is A. Secured debt is backed by collateral—property the lender can seize if you don't pay (mortgages secured by houses, auto loans secured by cars). Unsecured debt has no collateral (credit cards, personal loans, medical bills). Option B is backwards—secured debt typically has lower rates because of reduced lender risk. Options C and D are false.

Concept Tested: Secured vs Unsecured Debt

See: Debt Types

8. How long do negative marks typically stay on your credit report?

  1. 1 year
  2. 3 years
  3. 7 years
  4. Permanently
Show Answer

The correct answer is C. Most negative information (late payments, collections, charge-offs) remains on your credit report for 7 years from the date of first delinquency. Bankruptcies can stay for 7-10 years depending on type. Hard inquiries stay for 2 years but only affect your score for 1 year. Options A and B are too short. Option D is incorrect—negative marks do eventually fall off.

Concept Tested: Credit Report

See: Credit Reports

9. You have three debts: $500 at 12% APR, $2,000 at 18% APR, and $1,000 at 15% APR. Using the debt avalanche method, which debt should you pay off first?

  1. The $500 debt (smallest balance)
  2. The $2,000 debt (highest interest rate)
  3. The $1,000 debt (medium amount)
  4. Pay all three equally
Show Answer

The correct answer is B. The debt avalanche method prioritizes the highest interest rate debt first to minimize total interest paid. Pay minimums on the $500 (12%) and $1,000 (15%) debts, then put all extra money toward the $2,000 debt at 18% APR. Once that's paid off, tackle the 15% debt, then the 12% debt. This saves the most money on interest charges.

Concept Tested: Debt Avalanche Method

See: Debt Repayment Strategies

10. What is a hard inquiry on your credit report?

  1. When you check your own credit score
  2. When a lender checks your credit because you applied for credit
  3. When your credit card company reviews your account
  4. When you dispute an error on your credit report
Show Answer

The correct answer is B. A hard inquiry occurs when a lender checks your credit report because you applied for credit (credit card, loan, mortgage). Hard inquiries can lower your score by a few points and stay on your report for 2 years. Option A is a soft inquiry (doesn't affect score). Option C is account monitoring (soft inquiry). Option D is a dispute process, not an inquiry.

Concept Tested: New Credit Inquiries

See: Credit Inquiries