Presentation on theme: "Credit Counseling & Repair"— Presentation transcript:
1 Credit Counseling & Repair The National Economics DepartmentFinancial Freedom CampaignNAACP
2 Agenda What is Credit? Pros & Cons Types of Credit Understanding Financial InstitutionsImportance of Building CreditCredit Building V.S. Non Credit BuildingWhat is Predatory LendingUnderstanding Credit Scores & Credit Reports
3 What is CREDIT? Credit: Money you borrow and plan to repay. It allows you to make a purchase without having to pay the entire price at once.Interest: Is the cost of borrowing money.Any time a bank, family member, or business lends you money and you agree to pay it back, you are using credit. In most cases there is a charge for borrowing the money.
4 Know the FACTS Cons Pros Credit Costs $$$Credit =TemptationEasy to lose trackHelpful for EmergenciesIts ConvenientIncreased purchasing powerOther Disadvantages: (1) When you make a purchase using credit, you commit to using your future income to repay the loan; (2) Lenders will report missed payments to the credit bureaus; (3) Mismanaged Credit may result in repossession of items; (4) Lenders and Employers require a copy of your credit report
5 Types of CreditRevolving Credit: Allows you to borrow money at any time up to a set limit. The most common types are credit cards. Installment Credit: A loan that must be repaid over a specific period of time. This type of credit is common for larger purchases such as a home, car, or education. Non-installment or Service Credit: Allows you to pay for a used service at a later date usually without an interest charge. (i.e. A utility bill)Revolving Credit: As you pay the money back, it becomes available to borrow again. The lender allows you to pay back the money in a lump sum or over an extended period of timeInstallment Credit: You establish a payment plan with your lender to repay the loan on a regular basis over a period of time. The interest is determined in advance and factored into your set monthly payments.Non-installment Credit: Often if you pay the complete sum within a specified period of time, (30-60 days) you do not have to pay fees.
6 Types of Credit Continued Secured Credit: Requires you to provide something of value to guarantee that you will repay your debt.It is usually used for installment loans. If you fail to repay, the lender takes your item as repaymentUnsecured Credit: Does not require a guarantee (collateral)
7 Understanding Financial Institutions Financial Institutions: Establishments that provide services, such as investments, loans and deposits.Some offer Depository Services, which means that you are able to open a checking and savings accountFederal Deposit Insurance Corporation (FDIC) & National Credit Union Share Insurance Fund (NCUSIF) = Government backed insurance for your fundsFDIC and NCUSIF : The government regulates these financial institutions and insures consumer deposits for up to $100,000 per account.
8 The Importance of Building Credit Its hard TO GET credit if you HAVE NOT ALREADY ESTABLISHED a credit history.Without a history, Lenders can’t tell if you are RESPONSIBLE with your money (by paying your bills on time, etc.) or not.Building credit is NECCESSARY to proving your creditworthiness.
9 Ways To Build Your Credit Apply for a secured credit cardYour credit card limit will match the amount you have deposited into an account.Use a co-signerThe co-signer’s good credit will serve somewhat like an insurance for your credit behaviorUse retailer programs(i.e. Gas Station Cards, etc) They are generally easier to qualify for and can help you to establish a credit record.Get a credit card with a reputable credit building institutionAn institution that will protect and help you to grow your money.
10 Credit Building Lending MissionCredit Building AdvantagesBanksThese for-profit financial institutions are the largest source of deposits and credit in the economy.Protects your moneyThe money you deposit in a bank is 100% insured (up to $250,000) by the Federal Deposit Insurance Corporation (FDIC) which means if anything ever happens to the bank, your money will be returned to youHelps increase your moneyGenerally, when you open a deposit account with a bank, you earn money called interestBanks offer different interest rates on accounts, but the longer you keep your money in your account, the more interest your account earnsOffer helpful servicesi.e. Special Savings Plans for College, or Special Rates on a Car loan, etc.Bank accounts make you think twice about how you spend your moneyHaving to make a trip to the bank, write checks, or use the ATM becomes a conscious decision to spendYour money’s there when you need it, but by thinking about your purchase, you can save more, ultimately, by making wiser decisions
11 Credit Building Lending MissionCredit Building AdvantagesCredit UnionsThese nonprofit cooperative financial institutions exist to serve their members’ financial needs.Credit Union benefits include the following:Typically offer free accounts with no minimum balance requirements.Interest rates on savings, certificates of deposit, and some checking accounts are often higher than those offered by banks.Also, interest charged for loans and credit are often lower.In fact, some credit unions are regulated such that the interest rate on loans and credit cards must not exceed a certain rate.Source:
12 Non- Credit Building Lending MissionCredit Products & TermsAlternative FinanceServicesThese for- profit businesses make consumer and commercial loans. They focus on servicing customers with poor credit historiesAlternative Finance Services usually charge higher interest rates and more fees then Traditional Lenders.Loans are often short termCommon Examples:Payday LoansCar Title LoansTax Refund Anticipation Loans
13 What is Predatory Lending? Predatory Lenders:Direct a borrower away from loans with more affordable rates. Instead, the applicant is offered a loan with a high interest rate, questionable fees, or unnecessary charges.Predatory lenders often target low and moderate income people, people of color, and the elderlyMany Check Cashing and Payday loan places have predatory lending practices.
14 Predatory Lending Cont. Take the following steps to avoid predatory lendersTurn away loan offers from anyone who calls you on the telephone, comes to your door or send you s without invitation.Be wary of high pressure sales pitches, such as claims that an offer is only good for a limited timeConsult with a local nonprofit or consumer credit counseling agency whenever possibleAvoid loans that include extras that you do not needTry to read all document’s before signingInvestigate Interest
15 Ask yourself…. Is this purchase a need or a want? Do I really need the item right now, or can I wait until I have the cash?How much do I have to pay to borrow this money?How will this credit payment affect my household budget each month?Will I still have this item when I finish paying for it?Should I go home and sleep on my decision before using my credit to make a purchase?
16 The Credit ScoreA Credit Score: is used to predict how likely an individual is to repay a new loan based on the financial institutions experience with consumers.There are various computer models used. In general the computer model assigns points to information on a credit reportA FICO Score: The credit scores used by the credit bureaus are produced from a software developed by the Fair Isaac and Company.When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they'd take by loaning money to you. FICO scores are the credit scores most lenders use to determine your credit risk.You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you.FICO scores are provided to lenders by the major credit reporting agencies.Source: myfico.com
17 Credit Bureaus/Inquiries U.S. Credit SystemCreditorsPublic RecordsCollection AgenciesCredit Bureaus/InquiriesData FurnishersTransUnionEquifaxExperian
18 The FICO Score: Factors that influence credit 35% Payment History30% Amounts Owed15% Length of Credit History10% New Credit10% Type of Credit in UseSource:
19 Racial Credit Score Disparities Source: Bridging the Gap: Credit Scores and Economic Opportunity in Communities of Color” September 2010
20 Racial Disparities in Credit Scores Fair Isaac: The percentage of individuals from high minority areas with relatively low credit scores was twice as large as the share of individuals from other areasFederal Reserve: Fewer than 40% of consumers who lived in high-minority areas had credit scores over 701, while nearly 70% of consumers who lived in mostly white neighborhoods had scores over 701Harvard’s Joint Center for Housing: Median credit score for whites in 2001 was 738, but for Blacks it was 676 and Hispanics it was 670Freddie Mac: Blacks were three times as likely and Hispanics twice as likely to have FICO scores below 620 as whitesSource: The Racial Wealth Gap and Access to Mainstream Credit Presentation by the Washington State Asset Building Coalition, June 2011
21 The Credit Report: Explored Credit Report: A record of how you have paid your credit card debt and other loans.It reflects the following:How much debt you haveIf you’ve made your payments on timeWhether or not you’ve paid back your loans
22 The Credit Report: Explored Credit reports are complied by national credit reporting agencies called credit bureausThere are three Credit Bureaus:TransUnionEquifaxExperian
23 Credit Report: Explored Note:There are multiple credit scores available for you.Different scoring models are used with different institutions (Vantage Scoring System v. FICO Scoring system).The FICO score is the most commonly used one, as it is the one used by the three credit bureaus.
24 The Credit Report: Explored Information typically included:Common errors on the reportIndentifying InformationName, Address, SocialCredit InformationDates opened, credit limitsPublic Record InformationBankruptcy, ForeclosuresInquiriesOthers who looked at reportDuplicate InformationUninvited InquiriesItems that should no longer be listed on your credit reportVisit to get access to credit scores for freeIf you find an error on your report, contact the creditor and try to resolve the problem. In addition, you will want to complete and send a letter of dispute to the credit bureau.You can also ask the credit bureau to send you a statement of explanation, about an item on your credit report.
25 Want GOOD Credit??? Tip 1: Pay your bills on time Tip 2: Contact your lenders immediately if you foresee a payment problemTip 3: Borrow at a minimumTip 4: Do not overdraft accountsTip 5: Understand loan terms/agreements before signingOther tips: (6) Be cautious about co-signing or guaranteeing loans for others; (7) Apply for a secured credit card; (8)Avoid Excessive inquiries into your credit report; (9) Review your credit report at least once a year and correct any inaccurate information; (10) Keep you track of your credit on your own
26 Protecting Your Finances Keep the original copies of your documents in a safe place.Keep your important computer files safe.Make copies of all of your important documents.Keep a copy of your important papers in safe, or storage that is secure and outside of the home, in case of an emergencyMonitor your accounts regularly
27 Recognizing Credit Repair Scams The company wants you to pay for credit repair services before they provide any services.The company recommends that you do not contact any of the three major national credit reporting companies directly.The company tells you they can get rid of most or all the negative credit information in your credit report, even if that information is accurate and current.The company suggests that you try to invent a “new” credit identity — and then, a new credit report — by applying for an Employer Identification Number to use instead of your Social Security number.The company advises you to dispute all the information in your credit report, regardless of its accuracy or timeliness.Credit repair organizations must give you a copy of the “Consumer Credit File Rights Under State and Federal Law” before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before you sign anything. And before signing, know that a credit repair company cannot:make false claims about their services charge you until they have completed the promised servicesperform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.Source: FTC.gov
28 YOUR RIGHTSEach of the nationwide consumer reporting companies Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.It doesn’t cost anything to dispute mistakes or outdated items on your credit report.No one can legally remove accurate and timely negative information from a credit report
29 Where To Get Help Annual Credit Report: www.annualcreditreport.com Experian:Equifax:TransUnion:National Foundation For Credit Counseling:Federal Trade Commission: Choosing a Credit CounselorDepartment of Justice: List of Credit Counseling Agencies-Better Business Bureau: See if there are any alerts on the organization you are consideringAssociation of Independent Consumer Credit Counseling Agencies:
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