Credit

The reputation one has built in his or her dependability in regard to paying back borrowed money

50 year old person who has bought several cars, two houses, and other items with millions of borrowed dollars never having missed a payment will have good credit

Creditors, or people lending money, would be more than willing to lend him money

On the other hand, someone who has a credit history of paying late or not paying at all will have difficulty borrowing money To what sort of person would you be willing to lend money?

Banks and other creditors use the services of credit agencies to decide whether or not to lend someone money

These agencies keep track of people’s tendency to pay back borrowed money If people do not pay on their debt, the creditor will report them to the credit agencies

When those people go to borrow again, they might be turned down This credit history follows us for seven years

When considering someone’s credit health, financial institutions consider four aspects of an individual. These are known as the 4 C’s

4 C’s Credit History- when money was borrowed in the past, how faithfully was it paid back? Character- Does the person have a criminal past?

Capacity to Pay- What is the person’s monthly income and can he or she handle a monthly payment schedule? Capital- How much does the person have in the bank? Or does the person have capital resources that could be considered collateral (objects that can be handed over to the bank in the event the person doesn’t pay the loan)?

Many people today borrow more money than they can afford to pay back A major reason for this is credit cards

Credit cards- money is lent at high interest rates- usually between 15 to 20% for people just starting out Credit cards are issued through and managed by banks

They work through massive computer systems by companies like Mastercard or Visa While credit cards do afford holders a certain amount of financial freedom, they often get people into trouble

Credit Cards  Apply for at least one in college  Use as a convenience, pay it off each month  Charge at least one thing each month  Only get one to three cards

Credit Cards  Credit card should not have an annual fee  Should get a card with some type of reward  Cash back is best  Gas  Airline miles (takes a long time, difficult to use before expire)

Credit Cards Steer clear of store credit cards  They have high interest rates  People end up having multiple cards all of a sudden

You are entitled to one free credit report a year Get one and look at it 3 main credit bureaus:  Trans Union  Equifax  Experian

Keep same credit card for as long as possible- do not keep closing and opening new ones Length of history is one criterion to be judged by

Credit Scores:  FICO (Fair Isaac Corporation)  Range typically between  660 borderline sub-prime (high risk)  Vantage Score started Spring 2006 may replace FICO scores are

FICO Factors 35% punctuality of payments in the past 30% capacity used (maxed out?) 15% length of credit history 10% type of credit used (installment, revolving, etc.) 10% recent applications for credit/ recent credit obtained