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 Based on trust that payment will be made in the future Creditor: the bank or lender who makes the loan or offers credit Debtor: the person who owes money to a creditor examples: credit card, a home loan, car loan, etc.

Where Your Credit Scores Come From and Who Calculates Them In the U.S., your creditworthiness (being good enough to have credit) is represented by a numerical score that comes from your credit files FICO (Fair Isaac Corporation) calculates and reports a score widely used by mortgage lenders (for home loans) and the three big credit reporting agencies The three credit reporting bureaus: Experian, TransUnion and Equifax Each has their own method for determining your score The range is between 300 - 850 So, what goes into your score?

Derogatory Marks

What Your Score Is Based On: (FICO) Payment History: (35%) your record of making payments This and Debt Burden are the two 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 Will result in a high minimum payment It can take years to pay off high debt with only minimum payments

Debt Burden: (30%) This is a ratio expressed in percent of how much debt you have compared to your total credit limit Creditors look at this when deciding whether to: Offer you new credit (like a new card or loan) Increase the amount of credit you already have Ideally your Debt Burden should be between: 0 – 10% of total credit limit Keep it below 30% to avoid hurting your score

Length of Credit History: (15%) The average age of the accounts on your report and the age of the oldest account Avoid closing credit accounts: Closing accounts will cause your score to drop Instead: keep the account open and occasionally use it for a small purchase and then immediately pay it off

Derogatory Marks: (10%) Negative information on your credit report that will cause your credit score (and credit worthiness) to drop. Includes: late payments (remember paying on time is #1) lien – a claim on property or an auto made 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 (credit card). Usually after 6 months delinquency

repossession - when a bank or lender takes back possession of an auto because the borrower stops making payments foreclosure - when a bank takes back possession of a home because a borrower stops making payments (or some other serious problem) bankruptcy – when a person is legally declared unable to pay their debts Almost all debts discharged (gotten rid of) The above three are very serious and will stay on your report for 7-10 years and will hurt your ability to get credit

If you ever get into financial trouble… CCCS – Consumer Credit Counseling Services 1-800-431-8157 Services include: financial education budgeting assistance Debt Management Plans All services are FREE!

Credit Inquiries & New Credit: (10%) Credit Inquiries – refers to when others inquire about your credit Often called “Soft” searches - won’t hurt your score pre-screened offers of credit you get in the mail prospective employers may do this before offering you a job landlords do this when you apply to rent an apartment or commercial space for a business New Credit - refers to when you apply for credit Often called “Hard” searches - will hurt your credit score when you apply many 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: There are different types of credit a person can get 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 charge fees for many things: exess 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