H&R Block Budget Challenge Mini Lesson Credit Score and Credit Cards

Steps To A Great Credit Rating Significance of Your Credit Rating >Determines the interest rate you receive on car and home loans (interest rates quoted are only for those with highest ratings) >Determines if approved for the loan and how much will be lent! Credit Rating: What is a Good Rating? >850 is the highest rating possible. 720 is the US median rating. >Most lenders require 760+ to obtain the best/lowest interest rate >Manage to a 760+ >Check your “FICO” rating at least once per year (FICO Participants: Equifax, Experian, TransUnion) WWW.myfico.com and www.credit.com

Steps To A Great Credit Rating: Goal 760+ Pay your bills off on time and don’t miss payments. Set up payment reminders! Even a few days late on credit cards or bills can lower rating. Avoid a write-off to a collection agency on a dispute (major hit!). Pay credit cards off in full quickly. High credit card balances, even if paid off on time, hurt credit score regardless of your gross income. Aim for a favorable “utilization ratio” (actual balance on cards / credit limit on all cards). This is 30% of overall score! Consider making an extra payment after a large credit card charge. Keep the ratio below 20%. Be selective in adding new credit cards (10 point hit) and canceling cards (reduces utilization ratio). Having a variety of debt is good! Have your mortgage and/or car payment automatically paid. Check your score twice per year to manage 760+

Credit Card Vocabulary Credit Limit- the maximum amount a credit card company allows someone to borrow on a single card. Example: $1,500 credit limit. Finance Fees- or Interest- the cost of borrowing money. Amount charged by the credit card bank to the borrower for not paying back the new charges in full by the due date. Credit card interest rates are notoriously high (average 14% today). Late Fee-an additional fee incurred if the credit card minimum payment is received after the due date. Credit card companies only require you to pay a minimum payment but pay in full! (They tempt you!) Credit Utilization Rate-percentage of available credit used= Total Balance/Total Credit Limit. Kepp under 20% for best credit rating.

Strategies for managing a credit card: 1- Manage your account activity and balance online daily. 2- Monitor your utilization rates. Keep under 20%. 3- PAY ON TIME in Full… EVERY TIME! Consider automatic payment linked to your checking account. 4. Search for a card with no annual fee and good rewards.

Credit Cards Companies are in the Business to Make $$ How does a credit card company and bank make money? If the customer does not pay the balance IN FULL on the monthly bill by the due date, the customer will pay interest on unpaid balance. Pay in full! If a customer makes a late payment- past the due date, they will incur a late fee. The card may have an annual fee. Example: $95 The merchant must pays the credit card company every time you use the card. About 2% of charge.

Budget Challenge Credit Card Fees Are incurred 3 ways: 1- not paying your bill on time (late fee) 2- interest charged on unpaid balance if your balance is not paid in full 3- try not to take a cash advance with your credit card. They charge high interest rates on cash advances starting from the day you get the ATM advance!

Budget Challenge Credit Card Goal… Keep your utilization rate below 20% (go to 50% if you need to). It’s better to go to a higher utilization rate temporarily than to miss a payment. You will be given penalty points if your utilization rate is greater than or equal to 50% Daily graduated utilization rates are assessed until the credit card balance is paid If you exceed 100% of the utilization rate- you have gone over the credit limit and will incur 2 fees: A once a month fee A daily over the credit limit fee

During the Budget Challenge….. Pay attention to due dates Your credit card company is named: SURGE CREDIT The minimum payment is $15 each billing cycle ( a bad idea!) You may make multiple credit card payments throughout the month. You may want to do this if your utilization ratio goes over 50% and you have extra checking money to do so.

Your credit limit will likely be $1,000 All miscellaneous living expenses will be charged automatically on your SURE credit card. These charges will vary monthly. The average is between $500-$750 per month.

Overdraft Protection When you choose your bank account you may choose an account that has overdraft protection. When you have ODP if you make a payment and do not have enough money in your account to cover the payment, your credit card will be charged with the money you have borrowed to cover the bill.