What is credit? Ability to borrow money or obtain goods by paying little or no money at the time of purchase. Your promise to pay the original cost later.

Understanding Credit

What is credit?Ability to borrow money or obtain goods by

paying little or no money at the time of purchase.

Your promise to pay the original cost later or over time plus interest.

Why do you need credit?Buying a homeGetting a jobGetting phone serviceRenting an apartmentFinance an automobile

Spreading out payments for expensive items

Qualify for insuranceGet a loanObtain a credit card

Types of CreditInstallment CreditFixed number of monthly

paymentsCar loans, mortgages

Revolving Credit Short-term, open-endedAssigned credit limitAvailable credit

fluctuates as you make purchases & payments

Option to make full or partial payment

HELOCs, credit cards

Credit, charge & debit cards

Visa, MasterCard, Discover Affinity cardsRewards cardsSecured cards

Retail and gas cardsStored value (prepaid)

cardsCharge cardsDebit cards

Food for ThoughtIn 2007, credit card customers who revolved

their debt (didn’t pay the balance in full each month) paid $18.1 billion in penalty fees to credit card companies.

Source: “Don’t Get Clobbered By Credit Cards,” by Gary Weiss

Good vs. bad creditGood credit Reliable in paying

bills Companies willing to

extend credit

Bad credit Unreliable in paying bills Bills are paid late Debts are abandoned Filed for bankruptcy

Borrowers’ responsibilitiesBorrow only what you can repayRead and understand the credit contractPay debts promptlyNotify creditor if you cannot meet paymentsReport lost or stolen credit cards promptly

How can I get credit?Establish an account

Ask a local companyFind a co-signerGet a secured credit card

Use it responsibly for a year or twoPay all bills promptlyDon’t bounce checks

Why is credit denied?No credit historyToo much outstanding creditCredit not handled responsibly in the pastVictim of fraud

What is a credit report?Record of your loans, credit cards, payments

and outstanding debtsLenders report your credit usage to

companies called ‘Credit Reporting Bureaus’EquifaxTransUnionExperian

Details on your credit reportYour name, birthdate, past addresses, employer Credit accounts

Company name, account number, date opened, months reviewed, date of last activity, high credit, terms, balance, past due, status, date reported, previous payment history

Companies that requested your credit file — ‘inquiries’

Public informationBankruptcyCourt judgments against youPast due child support paymentsProperty tax liens

Who can get a copy of the report?YouOnly those who can prove a legitimate need

BanksCredit card companiesLandlords or real estate companiesEmployersInsurance agencies

Credit ScoresHow your score can affect you:

Interest Rates If your rate goes up on 1 card it can go up on

another

Insurance Rates

Some Employers Use It When Hiring

An ExampleOn a $225,000 home:

6% Interest Rate

30-year fixed = $1348/mo

5% Interest Rate 30-year fixed = $1207/mo. $141.14/mo. difference $50,810 over 30 yrs

How Your Score Is CalculatedFICO® scores are calculated based on your

rating in five general categories:

1.Payment History2.Amounts Owed3.Length Of Credit History4.New Credit5.Types Of Credit Used

What’s A Good Score?FICO Scores Range From 300 – 850

In the eyes of most lenders, FICO credit scores above 700 (750) are very good.

Recent changes in the economy have changed what lenders as a very good score

Improving Credit ScoresPay Bills On Time (Get current, stay current)Pay Off Debt – Don’t Move It AroundDon’t Close Unused Credit Cards As A Short-

Term Strategy To Raise Your ScoreDon’t Open New Credit You Don’t Need.Repair Errors (Outstanding Debts You Paid)Pay Down Balances To 20-30% Of CreditIf You Have 1 Or 2 Old Cards You Haven't Used

Put A Little On The Card And Then Pay It OffDo This About 1 Every 6 Months

What to do with your credit report...Once you have your

credit report:Check it carefully.Look for accounts

that might not be yours.

Verify all credit limits/balances.

Make sure accounts you’ve closed say ‘Closed at consumer’s request.’

You have the right to:See what is in your

reportHave an accurate

reportHave mistakes

correctedTell your side of the

storyKnow who has seen

your report

Filing a disputeFill out the form/letter enclosed with your bureau

report; and return back to the bureauBureau must respond in 30-45 days

If after hearing from the bureau, you disagree with its response you may add up to a 100-word statement

Reporting credit fraudYou may need to fill out a police report.Credit reporting agencies have a special 1-

800 number to call if you are a victim of fraud.

Not All Debt Is EvilCredit is a valuable tool, yet many people

misuse and overuse it.

Using Credit WiselyKnow your credit limit and don’t exceed itCharge only as much as you can repayPay more than the minimum, if possiblePay by your due date (and time!)Use a debit card, not a credit card, to get cashDon’t accumulate too much debtAvoid penalty fees and ratesConsider optional fee-based services carefullyContact a credit counselor (www.nfcc.org or

www.aiccca.org)

Warning Signs: Too Much Debt Making only the minimum payment Maxing or nearly maxing out credit cards Not knowing how much is owed Using credit cards to purchase items that

used to be purchased with cash Paying off one card with another card Phone calls or letters from creditors

Lowering Your Debt Ask Your Credit Card Company To Lower

Your Interest Rate

If Your Card Company Wont Lower – Shop For A Lower Rate Card

Set up a tight budget and stick to it. Find ways to save money – America Saves

Set realistic goals

If You Are In Trouble Stop Borrowing!

Contact Your Creditors

Review the Fair Debt Collection Act

Speak with a credit counselorNational Foundation for Credit Counseling

www.debtadvice.org

Debt Management Plans

Resources For StudentsDFI’s Right on the Money – Financial Know-

How For College Studentswww.dfi.wa.gov/consumers/collegebookord

er.htm

FTC Credit Web Sitewww.ftc.gov/credit

AICPAwww.360financialliteracy.org/Life+Stages/

College/Bad Credit Hotel

www.controlyourcredit.gov/