Understanding Good Credit vs. No Debt

What is a key characteristic of Good Credit?

• Having no financial liabilities

• Paying off all loans immediately

• A credit score above 700

• Not using any credit accounts

Answer explanation

A key characteristic of good credit is having a credit score above 700, which indicates responsible credit management. The other options do not accurately reflect good credit practices.

What does living with No Debt signify?

• High credit utilization

• A history of missed payments

• Financial freedom from repaying borrowed funds

• A mix of different types of credit accounts

Answer explanation

Living with No Debt signifies financial freedom from repaying borrowed funds, allowing individuals to allocate their resources towards savings and investments rather than debt obligations.

Which factor is most significant in calculating your credit score?

• Types of credit accounts

• Length of credit history

• New credit inquiries

• Payment history

Answer explanation

Payment history is the most significant factor in calculating your credit score, accounting for about 35% of the score. It reflects your track record of making payments on time, which is crucial for lenders.

A benefit of having Good Credit is (a)  

• Limited housing options
• Higher interest rates on loans
• Easier access to credit
• Difficulty obtaining loans

Answer explanation

Having good credit allows for easier access to credit, meaning lenders are more likely to approve loans and credit applications. This can lead to better financial opportunities and lower costs over time.

What is a strategy to eliminate Debt?

• Increase spending as income grows

• Focus on paying off high-interest debts first

• Open multiple new credit accounts

• Ignore budgeting

Answer explanation

Focusing on paying off high-interest debts first is effective because it reduces the overall interest paid, helping to eliminate debt faster. This strategy prioritizes the most costly debts, leading to better financial health.

Match the following scenarios with their consequences.

• Low-risk insurance profile

• Better rental opportunities

• Strong credit score

• Easier access to credit

• Poor credit history

• Lower insurance rates

• Excellent rental history

• Higher interest rates on loans

Answer explanation

A downside of poor credit is that it often leads to higher interest rates on loans. Lenders view individuals with poor credit as higher risk, resulting in increased costs for borrowing.

What does a credit score typically range from?

• 400 to 900

• 100 to 500

• 300 to 850

• 200 to 700

Answer explanation

A credit score typically ranges from 300 to 850. This range is used by lenders to assess creditworthiness, making 300 to 850 the correct choice among the options provided.

What is a practical tip for balancing Good Credit and No Debt?

• Pay credit card balances in full each month

• Use credit for purchases you can't afford

• Apply for new credit accounts frequently

• Ignore credit reports

Answer explanation

Paying credit card balances in full each month helps maintain good credit by ensuring timely payments and low credit utilization, while also preventing debt accumulation.

When might it be sensible to take on Debt?

• To increase lifestyle inflation

• To avoid budgeting

• For emergency expenses

• For unnecessary luxury items

Answer explanation

Taking on debt for emergency expenses is sensible as it allows you to manage unexpected costs without disrupting your financial stability. The other options promote unnecessary spending or poor financial habits.

What is a common form of consumer credit?

• Credit cards

• Mortgages

• Student loans

• Personal loans

Answer explanation

Credit cards are a common form of consumer credit, allowing individuals to borrow money for purchases and pay it back later, often with interest. They are widely used for everyday transactions.