Credit Made Simple Presented by the Financial Aid Office and the Medical Alumni Association
What is credit? • “Credit” is a promise to pay later, under designated terms, for goods and services • Your “credit” means your credit file, or credit report • There are three credit reporting agencies: Equifax, Experian, and TransUnion • Each agency keeps a separate credit file for you, and each may have different information
What is a credit report? • A credit report is the collection of your credit history and records maintained by a credit reporting agency • The report includes personal identifying information, as well as a history of your credit usage and payments • Negative information (such as late payments) stays on for seven years, except bankruptcy - which can stay on your credit report for up to 10 years • Get your credit report for free at www.annualcreditreport.com
How to Read a Credit Report This example is from Equifax and is available on their website. Every credit report will look different! The personal information section lists your name, social, date of birth, addresses, employer, and any consumer statements. It is common to have errors and misspellings in this section of your credit report.
Summary The summary section shows all of your accounts, listing the total balances and how many accounts are past due.
Summary The summary section will give a list of your accounts and their information in short format. Your credit report may also have a more detailed summary section, where accounts are listed by status: Open, Closed, In good standing, Past Due, etc.
Account Detail Your credit report will then show details for each credit account that you have, whether it’s open or closed. The account details show the type of loan, your balance, loan terms, payment amounts, and payment history. Closed accounts will continue to show on your credit report for seven years.
Revolving Account Detail Revolving accounts, such as credit cards, will show the current balance, the “high credit” (highest balance ever held), and the credit limit. It is not unusual for your payment history to be missing for some months. A payment status of “NR” (Not Reported) is fine.
Inquiries After your account information, your credit report will show all of the inquiries about you. There are two types: Hard inquiries: Inquiries into your credit history as a result of you attempting to obtain credit. Soft inquiries: Not caused by you seeking credit. Could be a promotional inquiry from a credit company, or one of your existing creditors monitoring your credit report.
Other information Your credit report will also list any collections and public records such as judgments, bankruptcies, and liens.
Errors on your credit report If you find an error: • Contact the creditor and ask them to fix it • They have 30 days to respond • Send the credit bureau documentation • If it’s corrected, the bureau must send you a copy of your new report • If it’s not, the bureau must tell you who investigated the error, and you can add a statement to the report • Mortgage companies can use a rapid rescoring service to correct errors
What is a credit score? • In theory, it is an estimate of the likelihood you will pay your debt • Formula was created by the Fair, Isaac Company • The majority of scores range from 500-850, yours will be different at each reporting agency
What determines my score? The exact formula is a secret, but this is the overall breakdown: Estimate your credit score: moneycentral.msn.com/investor/creditreport/main.asp
Why do I need good credit? • Your credit history is one of the things a lender looks at when evaluating an application for credit, along with your income, assets, and other debt • A good credit history makes it easier to get new credit when you need it • Having good credit will get you the best interest rates on new credit, including mortgages and car loans • Generally a score over 720 will get you the best rates • Many landlords and employers check credit • Utility companies and insurance companies may check your credit
How can I build my credit? Build good credit by paying your bills on time. • If you have no credit history, there are several ways to begin: • Get a credit card (use it wisely!) • May have to start with a secured credit card • A debit card or check card won’t do it • Get added as a joint owner to your parents’ or spouse’s existing credit card • Apply for a credit card at a local store • Have your parents or spouse co-sign for a credit card or loan – keep in mind, this legally obligates them to pay the loan back if you don’t! http://www.ftc.gov/gettingcredit/
How to improve your credit There is no quick fix! • Get a copy of your credit report • Look at what is helping and what is hurting, and check for errors • Pay off your debt • Pay all of your bills on time, even if it’s just the minimum payment • Don’t apply for new credit • Use no more than 30% of your available credit
How to hurt your credit • Pay Late • Late payments remain on your credit report for seven years. Bankruptcies remain for ten years. • The later the payment, the more it hurts • Lose touch with your lenders • Fail to correct mistakes on your report • Close old accounts • Fail to pay traffic tickets and fines • Co-sign for a loan • Settle a current debt for less than you owe
Things that don’t matter • Demographic information on your credit report • Your race, gender, or age • Your job, salary, or geographic area • Interest rates on existing accounts • Consulting a credit counseling service • Checking your own credit • Promotional and other “soft” inquiries • Multiple inquiries for a mortgage or car loan within 14-45 days: shop around! • Getting married
Credit Cards • You only need one to build your credit • Use it and pay it off every month (your usage is still reported to the credit bureaus) • Avoid annual fees if possible • Avoid fees and rate increases for going over the limit or paying late • If you do carry a balance: You can sometimes negotiate better rates • Safer than carrying cash • Might cause you to spend more • Read the fine print for both terms and protections you might not know about
New credit card rules – Highlights • Credit card companies must wait until you’re at least 60 days late to impose a penalty interest rate • Can regain previous rate by paying on time for 6 months • No other retroactive rate hikes • No more rate hikes for being late on another account • Must give 45 days’ notice before raising rates • Must send out bill at least 21 days before due date • Payments made by 5 p.m. on due date are on time • If payment date is on a weekend or holiday, next day is considered on-time • Must credit payments to highest-rate debt first • New limits on increasing the minimum amount due • Borrowers can now decide whether to be allowed to go over their credit limit, no more than 3 over-limit fees • Students under 21 with no income need co-signer • New rules regarding gift cards (like Visa gift card)
Student Loans • Stafford loans have no credit check • PLUS loans require a basic credit check • Federally guaranteed student loans do not show up on your credit report until you are out of school • Student loans show on your credit report as an installment loan, similar to a mortgage or car loan, but their existence generally don’t help or hurt • Paying late can hurt your score • Student loans will affect your debt-to-income ratio
Using credit to your advantage • Many credit cards offer “points” or “miles” for every purchase • Good credit can get you a better rate on your car insurance • Good credit may mean you do not have to pay a deposit to your utility companies • Using a credit card, especially on large purchases, protects you • Using a credit card may help you with budgeting – or it may hurt you!
Credit Pitfalls Beware: • Easy credit • High credit limits and interest rates • Free stuff and discounts for signing up • Low- or no-interest promotional offers • Fees: overlimit fees, late fees, annual fees, new made-up fees • Bills may be due within two weeks when you get them in the mail
What to do if you’re in trouble • Contact your creditor immediately • Make a budget, with a plan to pay off your debts: Good credit begins with a good budget. • Come talk to your financial aid counselor • If you need credit counselor, find someone accredited with no or low up-front fees, like www.clearpointcreditcounselingsolutions.org You may need a credit counselor if: • You can’t even pay the minimums on your credit cards • You’re consistently late on your regular bills • Your efforts to work with your creditors have failed • You are being harassed by collection agencies
Identity Theft “Identity theft” is when someone uses your accounts, or uses your personal information to obtain credit accounts Common ways identity thieves get info: • Phishing scams • Phone scams • Financial documents in your trash or mail • Stealing your purse or wallet You are not liable for the damage caused by an identity thief, but fixing it can take a lot of time and energy.
How to prevent identity theft • Shred sensitive documents • Get your bills by email and pay bills online • Never respond to phone or email requests for information • Nearly all legitimate companies will request information by regular mail. If you have any concerns, contact the company directly. • Carry only necessary documents in your purse or wallet • Usually it is not worth paying a credit monitoring service unless you have reason to believe you are at risk
Steps to take If you think someone has your information, or if you are a victim of identity theft: • Review your credit report • Place a fraud alert on your credit report • Equifax: 1-888-766-0008, www.equifax.com • Experian: 1-888-397-3742, www.experian.com • TransUnion: 1-800-680-7289, www.transunion.com • Close the affected accounts • File a complaint with the local police • File a complaint with the FTC: www.consumer.gov/idtheft
Resources • The Federal Trade Commission: www.ftc.gov/credit • Opt out of unsolicited credit card offers: 1-888-5-OPTOUT (1-888-567-8688) • Personal Finance on CNN Money: money.cnn.com/pf • Planning on MSN Money: moneycentral.msn.com/planning/home.asp • Glossary of credit terms: www.equifax.com/credit-information/ credit-glossary
The Financial Aid Office For help with budgeting, credit, or any financial concerns, come by the Financial Aid Office any time, Monday-Friday, 8-5. Dennis (A-H) Margaret (I-R) Nancy (S-Z)