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FIN 200: Personal Finance. Topic 8-Credit I Lawrence Schrenk, Instructor. Learning Objectives. Discuss the sources and uses of credit in personal finance. ▪ Explain how your credit score is calculated and how you maintain a good credit rating. Describe how to avoid identity theft. ▪.
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FIN 200: Personal Finance Topic 8-Credit I Lawrence Schrenk, Instructor
Learning Objectives • Discuss the sources and uses of credit in personal finance.▪ • Explain how your credit score is calculated and how you maintain a good credit rating. • Describe how to avoid identity theft.▪
Types and Sources of Credit Three Types
Payments Patterns • Interest then Principal
Payments Patterns • Interest and Principal Simultaneously
Possible Advantages of Credit • Purchase of expensive items • Emergency funds • Tax savings • Anticipate a price increase • Convenience • Delay payment without interest • Avoid carrying cash • Spending record
Possible Disadvantages of Credit • Excess spending • Increased cost of purchase • Excessive debt • Increased monitoring • Identity theft
‘Good’ versus ‘Bad’ Debt • Good Debt–Investment • Home • Education • Car • Improvements increasing value of home • Borrowing at lower interest rate to reduce credit card debt • Bad Debt–Consumption
Credit Bureaus • Central Collection of Credit Information • Three Main Credit Bureaus • Experian • Equifax, and • TransUnion (Credit Report Guide) • Independent • May have different information and provide different scores
Credit Report, Part I • Identifying Information includes: • Name • Alias or AKA (Also Known As) • Current and previous addresses • Social Security number • Telephone number • Date of birth • Current and previous employers
Credit Report, Part 2 • Credit History provides an ongoing historical and current record of a consumer's buying and payment activities, including accounts such as: • Retail stores • Banks • Finance companies • Mortgage companies
Credit Report, Part 3 • Public Records include: • Tax liens • Court judgments (including child support judgments) • Bankruptcies
Credit Report, Part 4 • Inquiries include: • Regular inquiries: Credit grantors and other authorized parties who have requested a copy of the consumer's credit report with a legally permissible purpose. • Account review inquiries: Credit grantors with whom a consumer has an existing relationship and who are permitted to periodically review the information. • Promotional Inquiries: Companies, with a legally permissible purpose, that have obtained certain limited information about a consumer, such as name and address, in order to send targeted, mutually beneficial firm offers of credit or insurance.
Credit Score–FICO • Credit Score–FICO • Median US score is 723 • Range 300-850
FICO–Payment History • Account payment information • Credit cards, retail accounts, installment loans, etc. • Presence of adverse public records • Bankruptcy, judgments, suits, liens, wage attachments, etc. • Severity of delinquency • Amount past due • Time • Number of past due items on file • Number of accounts paid as agreed
FICO–Amounts Owed • Amount owing on accounts • Amount owing on specific types of accounts • Lack of a specific type of balance, in some cases • Number of accounts with balances • Proportion of credit lines used • Proportion of installment loan amounts still owing
FICO–Length of Credit History • Time since accounts opened • Time since accounts opened • by specific type of account • Time since account activity
FICO–New Credit • Number of recently opened accounts, ... • Number of recent credit inquiries • Time since recent account opening(s)... • Time since credit inquiry(s) • Re-establishment of positive credit history following past payment problems
FICO–Types of Credit Used • Number of (presence, prevalence, and recent information on) various types of accounts • Credit cards, • Retail accounts, • Installment loans, • Mortgage, • Consumer finance accounts, etc.
Financial Impact of FICO Score Calculator
Your Credit Report • Get and check your free credit report from each agency at AnnualCreditReport.com. • Each credit report; one per year • Do not use any other web site; do not get it from the guy playing the guitar on the TV commercial!
Further Information • Web Pages • MyFICO.com • Pamphlets • Understanding your FICO® score (MyFICO.com) • Your Credit Scores (MyFICO.com) • Credit Report Guide (TransUnion)
Identity Theft–Why Worry? • Loss of Money • Credit Score Weakened • Difficulty Opening New Accounts • Fraudulent Criminal Record
Some Key Information • Social Security Number • Driver’s License Number • Bank/Credit Card Account Numbers • PIN Numbers/Passwords • Date of Birth
Weak Points–Your Mail • Mailbox with Lock • Outgoing Mail in Postal Box • Shredder (Cross-Cut or Micro) • Mail with Personal Information • ‘Pre-Approved’ Credit Applications
Weak Points–Personal Information • Don’t Give Out Social Security Number • Don’t Carry Social Security Card or Use it on Checks, IDs, etc. • Outgoing Mail in Postal Box • Shredder (Cross-Cut) • Documents with Personal Information • Keep List of Important Data • Account Numbers • Telephone Numbers, etc.
Weak Points–Computer • Avoid Obvious Passwords, e.g., Birthday • Don’t Send Sensitive Information in E-Mails • Especially if Requested • Suspect Links in E-Mail and Attachments • Don’t Keep Passwords on your Computer • Password Protect • Laptop, Flash Drives, Back-Up Drives • Sensitive Documents
Computer Software • Anti-Virus • Anti-Spyware • Anti-Spam • Firewall • MyIDProtector
Active Measures • Check Credit Card/Bank Account Statements • Regularly Online • Check Credit Reports • www.AnnualCreditReport.com • Consider Credit Monitoring • Consider Identity Theft Insurance • NOTE: Terms, Coverage and Reimbursement Varies • Watch for the Unexpected: Credit Cards, Account Statements, Denials of Credit, etc.
Further Information • Federal Trade Commission • Identity Theft Resource Center (non-profit) • Identity Theft and You (MyFICO.com)
Ethical Dilemma • Rita is a medical office manager, and her brother, Juan has recently begun work for a health insurance company. Juan asks Rita if she will provide him with a list of all the doctors' patients who do not currently have health insurance, and she runs the list that includes names, addresses, telephone numbers, Social Security numbers, and brief medical histories. • a. Is Rita acting ethically? Explain. • b. What problems could Rita be creating for the practice's patients?