Understanding Credit

1. Understanding Credit

2. 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.

3. Why do you need credit? • Buying a home • Getting a job • Getting phone service • Renting an apartment • Finance an automobile • Spreading out payments for expensive items • Qualify for insurance • Get a loan • Obtain a credit card

4. Types of Credit Installment Credit • Fixed number of monthly payments • Car loans, mortgages Revolving Credit • Short-term, open-ended • Assigned credit limit • Available 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 cards • Rewards cards • Secured cards • Retail and gas cards • Stored value (prepaid) cards • Charge cards • Debit cards

5. Food for Thought • In 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

6. Good vs. bad credit Good 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

7. Borrowers’ responsibilities • Borrow only what you can repay • Read and understand the credit contract • Pay debts promptly • Notify creditor if you cannot meet payments • Report lost or stolen credit cards promptly

8. How can I get credit? • Establish an account • Ask a local company • Find a co-signer • Get a secured credit card • Use it responsibly for a year or two • Pay all bills promptly • Don’t bounce checks

9. Why is credit denied? • No credit history • Too much outstanding credit • Credit not handled responsibly in the past • Victim of fraud

10. What is a credit report? • Record of your loans, credit cards, payments and outstanding debts • Lenders report your credit usage to companies called ‘Credit Reporting Bureaus’ • Equifax • TransUnion • Experian

11. Details on your credit report • Your 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 information • Bankruptcy • Court judgments against you • Past due child support payments • Property tax liens

12. Who can get a copy of the report? • You • Only those who can prove a legitimate need • Banks • Credit card companies • Landlords or real estate companies • Employers • Insurance agencies

13. Credit Scores • How 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

14. An Example • On 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

15. How Your Score Is Calculated • FICO® scores are calculated based on your rating in five general categories: • Payment History • Amounts Owed • Length Of Credit History • New Credit • Types Of Credit Used

16. 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

17. Improving Credit Scores • Pay Bills On Time (Get current, stay current) • Pay Off Debt – Don’t Move It Around • Don’t Close Unused Credit Cards As A Short-Term Strategy To Raise Your Score • Don’t Open New Credit You Don’t Need. • Repair Errors (Outstanding Debts You Paid) • Pay Down Balances To 20-30% Of Credit • If You Have 1 Or 2 Old Cards You Haven't Used Put A Little On The Card And Then Pay It Off • Do This About 1 Every 6 Months

18. 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 report • Have an accurate report • Have mistakes corrected • Tell your side of the story • Know who has seen your report

19. Filing a dispute • Fill out the form/letter enclosed with your bureau report; and return back to the bureau • Bureau 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

20. Reporting credit fraud • You 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.

21. Not All Debt Is Evil • Credit is a valuable tool, yet many people misuse and overuse it.

22. Using Credit Wisely • Know your credit limit and don’t exceed it • Charge only as much as you can repay • Pay more than the minimum, if possible • Pay by your due date (and time!) • Use a debit card, not a credit card, to get cash • Don’t accumulate too much debt • Avoid penalty fees and rates • Consider optional fee-based services carefully • Contact a credit counselor (www.nfcc.org or www.aiccca.org)

23. 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

24. 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

25. If You Are In Trouble • Stop Borrowing! • Contact Your Creditors • Review the Fair Debt Collection Act • Speak with a credit counselor • National Foundation for Credit Counseling www.debtadvice.org • Debt Management Plans

26. Resources For Students • DFI’s Right on the Money – Financial Know-How For College Students • www.dfi.wa.gov/consumers/collegebookorder.htm • FTC Credit Web Site • www.ftc.gov/credit • AICPA • www.360financialliteracy.org/Life+Stages/College/ • Bad Credit Hotel • www.controlyourcredit.gov/