Debt and Credit Management
Credit fundamentals
Understand how credit scores are built (payment history, amounts owed, length of history, new credit, credit mix) and how they affect borrowing costs. Know the difference between secured and unsecured debt, revolving versus installment credit, and the implications of co-signing.
Consumer debt
Credit cards carry high rates and compound against the borrower. Know minimum payment traps, grace periods, and the cost of carrying balances. Student loans, auto loans, and mortgages differ in term, rate structure (fixed versus variable), and tax treatment.
Mortgage decisions
Compare amortizing loans and understand how the payment splits between principal and interest over time; early payments are mostly interest. Know points (prepaid interest), escrow, and refinancing break-even: closing costs ÷ monthly savings = months to recover.
Worked example
Refinancing costs $4,800 and saves $200 per month. Break-even = 4,800 / 200 = 24 months. If the client plans to stay longer than 24 months, refinancing is favorable; otherwise, it is not.
Debt reduction strategies
The avalanche method targets the highest interest rate first (minimizes total interest); the snowball method targets the smallest balance (psychological wins). Both require listing debts and paying minimums on all but the focus debt.
Traps
Questions confuse APR with the effective rate, ignore compounding, or treat co-signed debt as not belonging to the co-signer.