Credit and Debt
The Credit and Debt domain tests how credit reports and scores are built, how loans and revolving accounts differ, and how repayment choices affect total cost. Expect questions on APR, minimum payments, utilization, collections, and the basic bankruptcy chapters.
Credit reports and scores
A credit report records payment history, balances, account age, inquiries, and public-record items. FICO-style scores weigh payment history most heavily, then amounts owed, especially credit utilization. Utilization is balance divided by credit limit; lowering it generally helps. Hard inquiries from new credit applications can lower a score temporarily; soft inquiries do not. Closing an older card can hurt because it reduces available credit and may shorten average account age.
Debt mechanics
Revolving credit, such as a credit card, lets you borrow up to a limit and carry a balance. Installment debt, such as an auto loan, has fixed payments. APR expresses the yearly cost of credit, including specified fees, but it does not capture every cost. A grace period avoids interest only when the statement balance is paid in full. Minimum payments are designed to keep the account current, not to retire debt quickly. Avalanche repayment targets highest APR first and minimizes interest; snowball targets smallest balances first for motivation.
Worked example
A card balance is $3,000 at 22% APR, and the minimum payment is 2% of the balance, with a $25 floor. Monthly interest is $3,000 × 0.22 ÷ 12 = $55. The minimum is $60, so only $5 goes to principal in month one. The next balance is about $2,995, and interest remains near $54.91. Paying only the minimum stretches repayment over many years and can cost more in interest than the original purchase. Paying $200 monthly cuts principal faster and reduces future interest because interest is charged on the remaining balance.
Traps that cost marks
Do not confuse a credit score with a credit report; the free annual report does not include every score. Paying a collection account does not automatically remove an accurate negative item. Debit cards do not build credit. Co-signing makes you legally responsible. Chapter 7 is liquidation; Chapter 13 is a repayment plan. A lower monthly payment often means a longer term and more total interest.