Mr. Rosenstock Economics San Fernando High School Credit and Banking Mr. Rosenstock Economics San Fernando High School

Basic Terms Credit: the ability of a customer to obtain goods or services before payment, it is based on the trust that payment will be made in the future Creditor: the bank or lender who makes the loan Debtor: the person who owes money to a creditor, for things like: credit card debt, a home loan, car loan, etc.

Where Your Credit Scores Come From and Who Calculates Them In the U.S., your creditworthiness (how likely you are to pay your bills) is represented by a numerical score that is based on your credit files FICO (Fair Isaac Corporation) calculates and reports a score widely used by mortgage lenders (Home loans) and the three main credit reporting agencies. Range: 300 - 850 Three major credit reporting bureaus: Experian, TransUnion and Equifax Each has their own method for determining your score and the range generally is between 300 - 850 So, what goes into your score?

Derogatory Marks

What Your Score Is Based On: (FICO) 35%: Payment History: your record of making payments. This along with Debt Burden are the most important factors in your credit score Make your payments on time Always pay more than the minimum amount if you can’t pay off the debt completely Interest on debt adds up quickly and will result in a high minimum payment if you don’t stay on top of your debt

30%: Debt Burden: debt to limit ratio, number of accounts with balances, amount owed across different types of accounts, and the amount paid down on installment loans Best = 0 – 10% Keep it below 30% to avoid hurting your score 15%: Length of Credit History: the average age of the accounts on your report and the age of the oldest account You should avoid closing credit accounts Closing accounts will negatively affect your score Instead: keep the account open and occasionally use it for a small purchase and then immediately pay it off

10% Derogatory Marks: Presence or lack of negative information 10% Derogatory Marks: Presence or lack of negative information. Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, late payments can cause a FICO score to drop lien – a claim on property or an auto by a creditor seeking payment of debt judgment – a court ruling that can lead to seizure of property and wages settlement - an agreement between the creditor and debtor to accept less than the full amount of debt owed as payment charge off – when a creditor writes off the debt on an account (usually credit card). Usually after about 6 months delinquency

repossession - when a bank or lender takes back possession of an auto or property foreclosure - when a lender attempts to force the sale of property to recover the balance of the loan

Avoid asking for credit within six months of a previous application 10%: Credit Inquiries & New Credit: “Soft” searches won’t hurt your score: pre- screened offers of credit, prospective employer searches, landlord does a search for apartment/commercial space rental “Hard” searches hurt your credit: avoid applying for credit multiple times in a month or two Avoid asking for credit within six months of a previous application You end up appearing desperate for credit

Types of Credit: (installment, revolving, charge, mortgage, consumer finance). Consumers can benefit by having a history of managing different types of credit Installment – auto, student loans Revolving – majority of credit cards (you are allowed to make payments each month on outstanding balance) Mortgage – the loan given on a home or commercial property Consumer finance – payday and car title loans STAY AWAY! These are predatory loans with extremely high interest – up to 300% or more!

Excellent Credit: 750+ Good Credit: 700-749 Fair Credit: 650-699 So what does your score mean? Excellent Credit: 750+ Good Credit: 700-749 Fair Credit: 650-699 Poor Credit: 600-649 Bad Credit: below 600

Establishing Credit If you haven’t already: Open a checking account at a bank or credit union Open a savings account (the interest is poor but you can link it to your checking to protect from insufficient funds)

Bank vs. Credit Union Owned by shareholders Paid board runs bank For profit Will “nickel and dime” you with fees for transactions to “account maintenance” Offer industry standard rates on savings and loans Owned by members (you) Volunteer board runs bank (that could be you) Not for profit Fees kept to minimum if at all Offer better rates on savings and loans Customer service is a priority

Two Good Credit Unions Near You… Premier America Credit Union 18001 Chatsworth St. Granada Hills (800)-772-4000 Pacoima Development Federal Credit Union 13168 Van Nuys Blvd. (818) 899-8506