Pathways to Success Getting and Managing Credit lesson #10

1. Pathways to SuccessGetting and Managing Creditlesson #10 By Sissy Osteen, Ph.D., CFP PowerPoint by Cindy Clampet

2. Today you will learn: • What is a good credit history • What is a good credit rating • The 3 Cs of getting credit

3. The 3 Cs of Credit • Capacity—how much credit can a person handle? Capacity is the person’s ability to pay. • Character—Are you reliable? Do you pay bills on time? A good record of employment is important • Collateral—An item to secure the credit purchase such as a savings account to purchase a car with a loan • Do the word search on page 1 of your booklet

4. Building a credit history • In order to get credit, lenders want you to have a good credit history. But if you have never borrowed money, it is hard to get a credit history. So what can you do? • Open a checking and savings account—lenders think this is important • Get a cell phone in your name and billed to you. Phone service is a form of credit because you use the service and pay for it later • Go to a store that offers a 60 day credit account. Ask the owner if you can open an account to purchase a few things. When the bill arrives, pay it right away • Apply for a bank credit card with a low limit. • Ask the bank for a short term loan, pay it off within 3-5 months, on time.

5. Credit bureaus • Lenders report your credit history to credit bureaus. There are 3—Experian, Trans-Union, and Equifax. • Lenders tell the credit bureaus how much you have borrowed and whether you are making your payments on time, if you have missed payments, if you have a lot of loans from different lenders, if and when you have paid off loans • If you ask for a loan from a new lender, he will look up your credit history.

6. Credit Scores • Based on a person’s credit history, each person will receive a credit rating, called a credit score. • A good credit score shows that a person repaid bills from credit cards, department stores, or a car loan on time. A good credit score is important. • A person who is late or fails to make payments get a poor credit score. A poor credit score may keep you from getting credit in the future. Or it could keep you from renting a place to live or getting a job!

7. What if you already have bad credit? • You can improve your credit over time. You don’t need a company to do this for you. They may charge you to do what you can do yourself. • 1) get a free copy of your credit report. www.annualcreditreport.com • 2) check your report and make sure it is correct. If not, follow the directions to get it corrected • 3) if you have old bills, pay them off a little at a time until all bills are paid.

8. More things to do… • Sometimes banks offer “secured” credit cards. You put down $100, and they give you $150 worth of credit. But be sure to pay it back ON TIME!! • Avoid small loan companies. They will loan you money, but there is NO LIMIT on the amount they can charge you in interest. • If you cannot work this out alone, contact a Consumer Credit Counseling Service. They can help with reading and correcting your credit report and work out a plan to help you make things better. This service is free. Contact them at www.nfcc.com

9. Using Credit—pros and cons • Reasons for using credit • You can buy an item when you don’t have the cash to pay for it • You can use things while paying for them • You can buy things on sale when you don’t have cash • You may need credit for an emergency or to make a large purchase such as a car • Reasons for not using credit • It costs more than paying cash • You might buy things you don’t need • You might buy more than you can pay for • A person may not shop for the best buy.

10. Credit applications • Look at the sample application on page 9 of your booklet • Take time to complete the application. • Always answer honestly to the best of your ability • Use a black or blue pen, not pencil

11. Selecting a credit card—things to consider • Annual fee • Finance charge (Annual Percentage Rate—APR) • Grace period • Payment date • Extra benefits • Be sure to read the fine print!!

12. Features to consider • Finance charge—look for a card with a low monthly finance charge. Generally, bank cards have lower finance charges • Annual fees—find a card with a low fee or FREE! Don’t get a card that charges you a fee each time you use the card. Also, look to see that the fee isn’t going up after 6 months. • Grace period—a 25 day grace period is common. This is the time between the billing date and due date of payment. You are actually getting a free loan when you pay the entire balance before the due date.

13. More features… • Payment date—if you can choose a payment date, pick one just after the date you receive your paycheck. • Credit Life Insurance—(costs extra) It pays off your bill if you die. It is very expensive and not worth the cost • Extra benefits—there may be a point system, a small life insurance policy, travel discount options. These may not be worth the extra cost. • Default rates—your interest rate may go up a lot if you are late on payments.

14. Compare! • On page 13 of your booklet, you will see 4 credit card offers. Compare the features of each credit card and choose the one that you think is the best. Fill out the answers to the questions on page 13.

15. Use your Credit Card Wisely!! • Always budget your credit buying • Limit the number of credit cards you have—two is best, major cards can be used to buy most things • Use credit only when doing so is to your benefit • Keep records. Place your credit card receipts in one place. Know how much you have charged so money will be available to pay the bill. • Buy items that will outlast the time it takes to pay for it. • Make payments on time!! • Never throw statements (bills) in the trash! Shred them so someone can’t steal your account number and use your account.

16. Helpful tips… • Never give your credit card number over the phone unless you made the call • Look at your monthly bill carefully for mistakes or wrong charges call the credit card company if there is a mistake • Keep a list of your credit cards and numbers and a phone number for the company. Keep this in a safe place so you have the information if your card is lost or stolen • Report a lost or stolen card at once • Contact the card company if you cannot make the payment on time. Most will work with you if you’ve been ill or laid off.

17. Credit Costs Money • If you decide to buy on credit, it will cost you more than if you pay cash. There will be interest charges added if you don’t pay in full by the due date. • If you are late with a payment, there will be a late fee. • If you go over your credit limit, there will be another fee. • These fees add up and can make a purchase very expensive.

18. Control Credit • Use credit only when you know you can pay for what you buy. • Keep credit payments to less than 15% of your take-home pay. This includes credit card purchases and car loans, other loans. • If you cannot pay on time, you may lose what you bought, and all the money you have already paid on that item. • You will also have a poor credit score. • See the example on page 17 of your booklet

19. Problems • Look on page 18 of your booklet. Help the people make some credit decisions. Fill in the blanks in your booklet. • Discuss answers

20. Reminders… • You pay money to use credit • Before you buy with a credit card, find out how much it will cost after you have made all the payments. • Ask yourself…do you need the item NOW? • Can you wait and save the money to buy the item at a later time? • Getting a good credit score and wisely managing credit are important to good money management.