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Unit 7: Credit- You’re in Charge?. Section 10.2 – How to Qualify for Credit. Section 10.2 How to Qualify for Credit. Goals: Explain how lenders judge your creditworthiness. Describe factors that determine your credit rating. Your Creditworthiness.
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Unit 7: Credit- You’re in Charge? Section 10.2 – How to Qualify for Credit
Section 10.2 How to Qualify for Credit • Goals: • Explain how lenders judge your creditworthiness. • Describe factors that determine your credit rating.
Your Creditworthiness • To get a loan, you must demonstrate your creditworthiness. • Creditworthiness is a measure of your reliability to repay a loan. • Lenders judge creditworthiness on the “3 C’s of credit”: • Character • Capacity • Capital
Three C’s of Credit- Character 1. Character- a measure of your sense of financial responsibility. • Lenders want to know if you are dependable. If you take your obligations seriously. To do this they will look at your credit history. • Credit history is a record of your past borrowing and repayments. • Always paying your bills on time is one of the most important factors in being able to get credit in the future. • Young people may get credit by asking an adult to cosign a loan. • Cosigning a loan means you agree to pay the loan if the other person defaults. You are legally responsible and it can affect your future credit score if the person you cosign for does not pay.
Three C’s of Credit-Capacity & Capital 2. Capacity-a measure of your financial ability to repay a loan. • When you apply for a loan, lenders will require you to state your other debts. They will calculate this as a percentage of your income to judge whether or not your income can support another payment. 3. Capital- is the value of what you own, including savings, investments, and property. The more capital you have the safer it is for a lender to give you a loan.
Your Credit Rating • Lenders get information from two places: • Loan applications • Credit Bureaus • Loan applications basically give lenders information regarding the applicants assets (capital) to liabilities (debts) to determine if another payment is possible.
Your Credit Rating • Credit bureaus- is a company that collects information about consumer’s credit history and sells it to lenders. • They maintain records on virtually every adult who has ever made payments on anything. • They get their information from stores, banks, utility companies, court records.
Your Credit Rating • When you apply to borrow money the lending institution will buy your credit record from a credit bureau. The lender will then analyze the information and give you a credit rating. • Credit rating is a measure of your creditworthiness.
How is your credit rating calculated? • Based upon your credit report data, a computerized scoring system called FICO will give you a score between 300-850. (850 being the best) • The score is based upon the following factors from your credit report: • Payment history • Current debt • Length of credit history • New accounts & inquiries • Type of credit used
Ways to increase your credit rating! • Pay down all the credit balances but concentrate on paying down those that are “maxed” out first. • Use the credit that you have regularly, but limited amounts. • Pay all of your bills on time, even if they are not credit type bills (i.e. utilities)
