1. The Good, The Bad, and The Ugly
How to Manage Your Credit So You Can Be in Control
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2. About Me Nancy Lee Ma, CEO and Founder of Crystal Clear Profits, Inc.
30 years as a CPA. Mother of 3 children, involved with schools before my first child was born. Sole owner with a traditional accounting practice as well as teaching entrepreneurs how to manage their finances, and teaching students financial literacy.
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What Is Credit?
Credit is a loan where you promised to pay back the money you borrowed plus interest charged.
Most familiar type of credit is a credit card. Credit cards work a little differently than a regular loan.
Other types of credit or loans consist of mortgages for a home, car loan, or personal loans.
Generally loans are used to purchase higher priced items such as a appliances, travel expenses, or online expenses. Use of credit cards for everyday purchases can get some in trouble.
The most common example of using credit is: Go to the store and swipe your credit card and then sign your name for the purchase.
28 days later or even sooner, depending upon when you charge your purchase, you will receive a statement that says you charged $xxx.xx to purchase an item.
If you don’t pay the money back within the time allotted such as the 28 day period, you will need to pay interest on the amount that you borrowed.
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How Does It Work?
Along with the privileges of becoming an adult, your parents are no longer obligated to care for you and they are no longer responsible for any of your actions or your debts.
In order to get credit, you need to build up your credit by building up a credit history and a credit score.
You must apply for a loan or fill out a credit card application. The amount of credit and the interest rate the companies charge depends upon your credit score and history. Student credit cards help build up credit. Most major banks offer student credit cards and will usually be $500.
Start establishing your credit by making sure that whatever you charge, you pay within three weeks.
A credit card statement usually has a billing cycle of 28 days. For example if you have a statement and it has a cutoff date of February 10 and you charged my senior class photos on January 24, that charge would show up on the February 10th statement.
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How Does It Work?
You would then have approximately 28 days to pay off the balance. If you don’t pay the balance by the due date, then you will be charged interest on the balance. In some special cases, there are promotions where there is no interest charged for 12 months.
For a loan – this is usually a borrowing of money for a longer term such as three years or more. The most common are for a home or auto purchase.
You fill out an application listing your assets – bank accounts, plus investments. You also fill out income and expenses. This information is important to keep when preparing to apply for any kind of loan, including student loans for college.
A debt or credit means owing money to someone else. Any time you borrow money, you must pay interest. Interest is additional money that you must pay back on the original amount of money that your borrowed.
An example of a simple interest calculation would be: I borrow $100 today and in 28 days, I agree
to pay you 10% interest on the balance of the $100 (100 x .10)= $10 so I would have to repay you $110.
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6. Why Is Credit So Important?
Credit it used by banks and credit card companies to determine how trustworthy and responsible you are. You must have credit in order rent an apartment, buy a car, or open an account with some businesses.
Your credit score will determine how much money banks will loan you or how much you can have for a credit limit.
If you have excellent credit, your interest rate is the lowest that banks and credit card companies charge their best customers.
If you have good credit, your interest rate is still good but will be slightly higher.
If you have average credit, your interest rates are higher.
If you have bad credit, you will have difficulty getting banks and credit card companies to loan you any money.
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7. How Is The Credit Determined?
FICO – Fair Isaac Corporation created a standard scoring model for financial institutions to use and was based on your credit history.
Scores
Excellent 750 and above
Good 700 to 749
Fair 650 to 699
Poor 550 to 649 (below 640 is considered sub-prime) where the interest rates are higher
Bad 550 and below (most likely will not be able to borrow)
Factors – payment history, amount owed, length of credit history, types of credit, new credit
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8. Sample Credit Card Statement
A- Account Number
B – Account Summary – Previous Balance + current month charges – payments made = New Balance
C- Credit Line
D – Remaining Credit Line Available
E – New Balance
F- Minimum Payment
G- Due Date of Payment
H – FICO Score
I- Rewards
J-Payment Coupon
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9. How Does It Work? K – Transactions Payments and Credits
Merchandise Purchased
Any Fees
Interest Charged
L – Interest Calculation
Purchases 19.99%
Cash Advances 23.99%
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Good Credit
Score range
Excellent 750 and above
Good 700 to 749
You pay your bill every month by the due date. Very few if any late payments
You have your credit for more than a few years.
You don’t use all of your available credit. For example, if you have a credit limit of $5,000 and you keep your credit at $1,500 or 30% then
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Bad Credit
Score range
Fair 650 to 699
Poor 550 to 649 (below 640 is considered sub-prime) where the interest rates are higher
Difficulty in getting a loan to purchase a car, and renting an apartment
How good credit became bad-
Using credit to purchase items that won’t provide you with future income, or go up in value and spending for instant gratification.
Examples: clothing, going out to eat, going to the movies, purchasing music, playing video games, etc.
Bad credit serves an instant gratification and something that you didn’t plan to spend and is generally for smaller items. And, most likely, you haven’t planned on how to repay the loan or credit card.
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Ugly Credit
Score
Bad 550 and below
Unable to get loans, may affect your job, unable to rent a home or apartment.
Your interest rates are the highest – between 18-30%
How credit became ugly.
You have missed payments or are unable to repay your loans and credit card minimum payments.
You might also have negative comments on your credit report.
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14. Options for Getting Out of Debt and Raising Your Credit Score
Set up a budget to identify your total available money to pay down your debt.
Pay off the smallest credit card balances first in addition to your monthly minimum payment.
Next pay off the balances with the highest interest rates.
Consolidate your debt into one loan so that there is only one payment.
Work with the credit card companies to negotiate an amount of repayment.
Work with a credit counseling company to pay down your debt.
Sell some of your belongings to use the cash to pay down the credit card.
If you own a home, re-finance your home to get additional cash out to pay off the credit cards.
Obtain your credit report at least monthly to monitor your score. Write letters and dispute any credit report errors.
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15. Best Practices for Managing My Credit
Develop habits of saving up first before you purchase an item so that you can immediately pay off the credit card without having to pay the interest on the credit card balance.
Watch the due dates of the credit card balance. A late payment will make your credit score go down.
Check your FICO score at least monthly. Maybe more often if you are trying to establish credit to purchase a large item in the future.
Review your statements monthly for the charges. There is an increase in identity theft and credit card theft. Protect your credit card number and do not let other people use your credit card.
Do not charge more than your means of repayment. The outstanding balances on your credit card
will have you paying interest on the amount that you borrowed and could mean reducing your credit
score.
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16. Best Practices for Managing My Credit
Only purchase large items, emergency items or purchases where you are unable to pay by cash.
Ask or develop a policy -
If I purchase the item on credit, will the value of the item increase in value over time?
Will the item that I purchase become as asset in which I can use to help me generate more
Income for me and my family?
Is this an emergency? You don’t have the means to pay with cash now but you set the intention of paying back the loan as quickly as possible.
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Summary and Review
Key takeaways
Maintain a good to excellent credit score so that when the time comes for you to need to borrow money to purchase a home or car, you have an very good credit score.
Never charge more than you have the means to repay.
Think carefully about charging purchases for instant gratification.
Establish a practice of only charging on the credit card when absolutely necessary or when cash cannot be used.
Do’s
Apply for a student credit card with no more than $500 with the approval of your parents.
Payoff your entire credit card balance every month on time.
Don’ts
Charge more than you can afford to repay unless it’s an major emergency and you have a plan to repay with 3-6 months.
Open multiple credit cards just because the credit card companies send you a credit card invitation. Research to find the best one by looking at the interest rate and rewards offered.
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