Question

Which of the following is true regarding setting personal debt limits? Can be more than one answer.

a. Your mortgage loan and all credit card charges, especially those paid in full every month, are included in the debt payments-to-disposable income method.

b. The debt limit according to the continuous-debt method is a four-year payoff period.

c. For most people, your debt limit should be lower than what creditors are willing to offer.

d. Under the debt-to-income method, the recommended maximum debt limit should be 50%.

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Place the following items in order of most to least weight on your FICO score. Items that are of equal weight should be listed in alphabetical order: A, B, C, D, E

Length of credit history

Payment history

Amounts owed

Taking on more debt

Types of credit used

Which of the following statements regarding the credit utilization ratio are true? Can be more than one answer.
a. The credit utilization ratio indicates the percentage of your total debt obligation held in the form of credit cards balances.

b. The purpose of the credit utilization ratio is to identify how heavily a borrower relies on individual cards as well as all your cards.

c. The credit utilization ratio is used to evaluate a borrower’s payment history, and indicates the percentage of credit cards that have been paid late during the last three years.

d. The Fair Isaac Corporation believes that a borrower should not maintain a balance that is greater than 30% of the credit limit of a single credit card.

Think about activities that can contribute to creating a strong credit history. Which of the following actions will contribute to this outcome?

Will this activity help build a strong credit history?	No	Yes
Close most of your old existing credit card accounts
Ask a bank for a small, short-term loan; put the money in savings; and pay the loan back on time.
Use your credit card frequently and accrue a large outstanding balance.
Open a savings account and manage it properly.

Which of the following is an indication that you are using too much credit and may be approaching or in financial distress? Can be more than one answer.

a. Running out of money

b. Your credit card balances are within 30% of the card’s credit limit.

c. Using cash advances to pay other credit cards

d. Not knowing how much you owe

e. You pay your bills in full and on time.

Answer 1

Ques 1)

a) True; As per Debt to disposable income method, the ratio takes into account all debt payments due from a borrower divided by his gross monthly income. These debts include all mortage loan payments, credit card charges payable in a month.

b) True; Continuus debt method relies on a 4 year payoff period, it says that if a borrower is unable to be debt free every 4 years, then he is depending on debt too much.

c) True; the debt limit set by borrowers should be less than what lenders are willing to offer so as to ensure timely repayments.

d) True; Debt to income ratio= Monthly Debt/ Gross monthly income the recommended maximum debt to income ratio is 50%, i.e, debt is 50% of income. Beyond this level, it is advisable for an investor to go for credit management counselling .