Understanding Credit

What is credit? Ability to borrow money or obtain goods by paying little or no money at the time of purchase. Your promise to pay the original cost later or over time plus interest. Ask the group to volunteer some reasons why credit is important. (Be ready for nonspecific answers and be tolerant and even encouraging of letting people tell their stories. Listen attentively, pull out the general information that can be used by the entire class and jump in if students share too much personal information.) Write the participants ideas on the board or easel pad.

Why do you need credit? Buying a home Getting a job Getting phone service Renting an apartment Finance an automobile Spreading out payments for expensive items Qualify for insurance Get a loan Obtain a credit card Talk about some different types of credit. Any loan, including mortgages and car loans, in which the total debt is divided into amounts that must be repaid regularly with interest over a specific length of time is installment credit. Another kind of loan is open-ended credit (also called revolving credit) which includes credit cards and some home equity loans. Open-ended credit allows borrowers to draw on a certain line of credit when needed as long as they make regular payments on the outstanding balance. Non-installment credit includes monthly charge cards like American Express.

Types of Credit Installment Credit Revolving Credit Fixed number of monthly payments Car loans, mortgages Revolving Credit Short-term, open-ended Assigned credit limit Available credit fluctuates as you make purchases & payments Option to make full or partial payment HELOCs, credit cards Credit, charge & debit cards Visa, MasterCard, Discover Affinity cards Rewards cards Secured cards Retail and gas cards Stored value (prepaid) cards Charge cards Debit cards Installment credit: Requires you to make a fixed number of monthly payments until the original loan amount is repaid in full, along with all finance charges. Examples of installment credit include car loans and home loans (mortgages). Revolving credit: Also known as short-term or open-ended credit. Allows you to borrow money, up to an assigned credit limit, over and over again. The amount of your available credit shrinks as you use it and grows again as you repay the borrowed money. (See lesson plan for an example of revolving credit to share with the class.) Gives you the option to pay the entire outstanding balance or to pay a part of the balance and carry over the remainder to the following month. You will pay interest on the debt you “revolve.” Interest is the lender’s fee for allowing you to use its money. Examples of revolving credit include credit cards and lines of credit, such as overdraft protection for your checking account and a home equity line of credit (HELOC). Banks, credit unions, credit card companies, retailers, mortgage companies and others offer revolving credit accounts.

Food for Thought In 2007, credit card customers who revolved their debt (didn’t pay the balance in full each month) paid $18.1 billion in penalty fees to credit card companies. Source: “Don’t Get Clobbered By Credit Cards,” by Gary Weiss Announce a 20-minute break. Leave this slide onscreen during the break.

Good vs. bad credit Good credit Bad credit Reliable in paying bills Companies willing to extend credit Bad credit Unreliable in paying bills Bills are paid late Debts are abandoned Filed for bankruptcy Questions to ask: What is the difference between good credit and bad credit? Having bad credit is a condition, not a disease, it can be repaired and has nothing to do with whether people are good people or bad people. How might people get bad credit? Stress that a poor credit history often comes from bad money management practices, not from having a low income.

Borrowers’ responsibilities Borrow only what you can repay Read and understand the credit contract Pay debts promptly Notify creditor if you cannot meet payments Report lost or stolen credit cards promptly Credit is a give-and-take deal. The lender trusts that you will live up to your responsibilities as a borrower. By living up to your responsibilities, over time you build good credit. Whether your credit history is perceived as positive or negative depends on how reliable you have been in repaying loans or credit.

How can I get credit? Establish an account Ask a local company Find a co-signer Get a secured credit card Use it responsibly for a year or two Pay all bills promptly Don’t bounce checks Questions to stimulate discussion: How long do you think it takes to build a credit history? It can take from six months to two years of on-time payments and responsible use of credit to build the kind of credit history most lenders like. Sometimes it is easier to try to get your first credit account close to home. Try a local lender, department store or a credit union—a financial institution run by its members instead of by a for-profit company. What is a secured credit card? A secured credit card is a credit card backed by money you deposit and keep in a bank account. The deposit serves as security for the credit card. If you don’t pay several credit card bills or if you walk away from the account (default), the money in your account will be used to cover that debt.

Why is credit denied? No credit history Too much outstanding credit Credit not handled responsibly in the past Victim of fraud Does everyone have a credit history? Many people do not have a credit history, including people who have never had a loan or a credit card. People who recently entered the work force or are new to the country may not have credit histories. Married women who acquired credit under their husband’s name may not have a credit history, either. What kind of fraud could affect your credit? Credit fraud is a crime that comes in many forms—but the bottom line is that someone is using your credit accounts or your good name without authorization. If you don’t realize it happened, it can negatively impact your credit. Victims of credit fraud are not liable for unauthorized charges, but the hassle of unraveling it can be frustrating and time-consuming. Examples of credit fraud: Crooks steal credit cards from mail boxes before you even receive them. Sales employees and waiters swipe your card through "readers" and create duplicates to be sold on the black market. In the crime known as identity theft, an impostor uses your Social Security number and other personal information to set up credit accounts and buy goods and services on credit. You lose your wallet and before you know it, someone else is using your credit cards for a shopping spree.

What is a credit report? Record of your loans, credit cards, payments and outstanding debts Lenders report your credit usage to companies called ‘Credit Reporting Bureaus’ Equifax TransUnion Experian Can my credit report be used to discriminate against me? No. To protect you from unfair treatment, your report doesn’t contain information about your race, religion, political party, medical history, lifestyle or any criminal record. What is a credit report used for? Your credit report is used by banks, stores and finance companies to predict the risks of lending you money, based on your history of making payments. Potential landlords and employers use your credit file to evaluate how responsible you are with your personal finances. The decision on whether to rent you a place to live or give you a job can be based on whether you pay your bills on time.

Details on your credit report Your name, birthdate, past addresses, employer Credit accounts Company name, account number, date opened, months reviewed, date of last activity, high credit, terms, balance, past due, status, date reported, previous payment history Companies that requested your credit file — ‘inquiries’ Public information Bankruptcy Court judgments against you Past due child support payments Property tax liens Ask students to review the sample credit reports in their folders and discuss. (See Good Credit Leader’s Guide, pages 3-7.)

Who can get a copy of the report? You Only those who can prove a legitimate need Banks Credit card companies Landlords or real estate companies Employers Insurance agencies Explain that credit bureaus do not allow everyone to see your credit report. Only those who can prove a legitimate need may have a copy. In almost all cases, your written or oral permission or your signature on a credit application is required for companies to access your credit. Before allowing access to credit reports, credit bureaus require businesses and individuals to sign contracts in which they agree to use the data properly. ‘INQUIRIES’ ... On your credit report, you will see listed the names of everyone who has requested a copy in the last six months to two years, depending on the type of inquiry.

Credit Scores How your score can affect you: Interest Rates If your rate goes up on 1 card it can go up on another Insurance Rates Some Employers Use It When Hiring

An Example 30-year fixed = $1348/mo On a $225,000 home: 6% Interest Rate 30-year fixed = $1348/mo 5% Interest Rate 30-year fixed = $1207/mo. $141.14/mo. difference $50,810 over 30 yrs

How Your Score Is Calculated FICO® scores are calculated based on your rating in five general categories: Payment History Amounts Owed Length Of Credit History New Credit Types Of Credit Used

What’s A Good Score? FICO Scores Range From 300 – 850 In the eyes of most lenders, FICO credit scores above 700 (750) are very good. Recent changes in the economy have changed what lenders as a very good score

Improving Credit Scores Pay Bills On Time (Get current, stay current) Pay Off Debt – Don’t Move It Around Don’t Close Unused Credit Cards As A Short-Term Strategy To Raise Your Score Don’t Open New Credit You Don’t Need. Repair Errors (Outstanding Debts You Paid) Pay Down Balances To 20-30% Of Credit If You Have 1 Or 2 Old Cards You Haven't Used Put A Little On The Card And Then Pay It Off Do This About 1 Every 6 Months

What to do with your credit report... Once you have your credit report: Check it carefully. Look for accounts that might not be yours. Verify all credit limits/balances. Make sure accounts you’ve closed say ‘Closed at consumer’s request.’ You have the right to: See what is in your report Have an accurate report Have mistakes corrected Tell your side of the story Know who has seen your report Segue into the personal realm by talking about what people should do when they receive a copy of their own credit report.

Filing a dispute Fill out the form/letter enclosed with your bureau report; and return back to the bureau Bureau must respond in 30-45 days If after hearing from the bureau, you disagree with its response you may add up to a 100-word statement Take time on this one, some students may be faced with writing an effective letter or statement, help them to understand and appreciate that this is not an insurmountable obstacle and that they may be able to get help with it if needed.

Reporting credit fraud You may need to fill out a police report. Credit reporting agencies have a special 1-800 number to call if you are a victim of fraud. This topic is of value because people with good credit are at risk of credit fraud.

Not All Debt Is Evil Credit is a valuable tool, yet many people misuse and overuse it.

Using Credit Wisely Know your credit limit and don’t exceed it Charge only as much as you can repay Pay more than the minimum, if possible Pay by your due date (and time!) Use a debit card, not a credit card, to get cash Don’t accumulate too much debt Avoid penalty fees and rates Consider optional fee-based services carefully Contact a credit counselor (www.nfcc.org or www.aiccca.org) Go over each item in the list: If you think you may need to use more than your available credit, call your card issuer in advance to request an increase. Make sure you have sufficient funds in your bank account to cover your credit card payment and avoid a bounced check fee. If payments become difficult, stop using credit and work on paying down your debt. Pay more than the minimum whenever possible. Pay off your balance completely whenever possible. (See lesson plan for example to share with class.) Some creditors require your payment to arrive not only by a certain date, but by a certain time that day. Make sure you understand exactly when your payment is due, and submit it in plenty of time to arrive and be posted. If you send your payment by mail, allow at least seven days for the payment to reach your issuer. Choose another method of payment--online bill-pay, pay-by-phone or automatic payments, for example--if it will prevent your payment from being late. Credit card cash advances are a very expensive way to get cash--much more expensive than an ATM withdrawal using your debit card. Keep debt to 50% or less of available credit. (According to one source, those utilizing at least 50% of their credit lines have an average credit score of 645, compared to the national average of 674.) Be sure you understand--and fulfill--all the terms and conditions in the cardholder agreement so you can avoid penalty fees and rates. You do not have to purchase optional fee-based services and products, such as credit protection insurance or identity theft monitoring services, to qualify for a credit card. In some cases, as with the identity theft prevention service, you can achieve the same protection yourself--free! (Point out the section in the Staying on Track with Credit brochure that explains how to get your credit report from each credit bureau once per year, at no charge. You can also “freeze” your credit file with a password to prevent unauthorized use. Depending on your state and whether or not you are an identity theft victim, you may be able to place the freeze free or for a nominal fee. If you have trouble paying your bills, contact a credit counselor immediately to discuss your situation and determine how to get back on track. Write down the two NFCC numbers on your whiteboard or easel: 800-388-2227 (English) or 800-682-9832 (Spanish).

Warning Signs: Too Much Debt Making only the minimum payment Maxing or nearly maxing out credit cards Not knowing how much is owed Using credit cards to purchase items that used to be purchased with cash Paying off one card with another card Phone calls or letters from creditors

Lowering Your Debt Ask Your Credit Card Company To Lower Your Interest Rate If Your Card Company Wont Lower – Shop For A Lower Rate Card Set up a tight budget and stick to it. Find ways to save money – America Saves Set realistic goals

If You Are In Trouble Stop Borrowing! Contact Your Creditors Review the Fair Debt Collection Act Speak with a credit counselor National Foundation for Credit Counseling www.debtadvice.org Debt Management Plans

Resources For Students DFI’s Right on the Money – Financial Know-How For College Students www.dfi.wa.gov/consumers/collegebookorder.htm FTC Credit Web Site www.ftc.gov/credit AICPA www.360financialliteracy.org/Life+Stages/ College/ Bad Credit Hotel www.controlyourcredit.gov/