Financial Counseling Certification Program (FiCEP) Practice Exam

Which of the following actions is NOT effective in reducing debt?

1. Creating a repayment plan

2. Increasing monthly payments

3. Borrowing money from payday lenders

4. Negotiating lower interest rates

The correct answer is: Borrowing money from payday lenders

Borrowing money from payday lenders is not an effective action for reducing debt due to the high interest rates and fees associated with such loans. Payday lenders typically charge exorbitant interest, which can quickly lead to a cycle of debt rather than alleviating financial burdens. When individuals rely on payday loans, they often find themselves unable to repay the principal along with the steep interest, which can lead to borrowing additional funds to cover the existing debt—creating a detrimental cycle. In contrast, creating a repayment plan, increasing monthly payments, and negotiating lower interest rates are all strategies designed to actively manage and reduce debt. A repayment plan can help organize outstanding debts into a manageable structure, increasing monthly payments allows for faster debt reduction, and negotiating lower interest rates can lower the overall cost of borrowing, making it easier to pay down the principal.