Credit and Debt
What this domain tests
Credit and Debt tests how scores are built, what borrowing really costs, and how to retire balances. Expect utilization, APR, minimum payments, credit reports, and debt-reduction strategies.
Core rules
- FICO weights: payment history 35%, amounts owed (utilization) 30%, length of history 15%, new credit 10%, credit mix 10%.
- Utilization = balance divided by limit. Under 30% is acceptable; under 10% is better. It is measured per card and overall, usually at statement closing.
- APR is the yearly all-in price of credit, including fees. The monthly periodic rate is APR divided by 12.
- Revolving debt such as cards has no payoff date; installment debt such as auto or student loans is scheduled. Secured debt is backed by collateral; unsecured is not.
- Avalanche targets the highest APR first and minimizes interest; snowball targets the smallest balance first for momentum. Both beat minimum payments.
- Lenders compare debt-to-income ratio (monthly debt payments divided by gross monthly income); many prefer 36% or lower.
Worked example
A $1,500 card balance at 24% APR has a monthly rate of 2%, so interest is $30. Pay $75: $30 covers interest, $45 reduces principal, and the new balance is $1,455. Pay the 2% minimum ($30) and the entire payment is interest, so the balance never falls. At that pace the debt outlives the purchase by decades.
Traps
Paying only the minimum; closing an old card and shrinking available credit, which raises utilization; assuming a 0% promotion lasts, when deferred interest can be charged retroactively if the balance is not cleared; co-signing, which makes you fully liable; believing a dispute removes accurate negative marks.