1. The ABCs of Credit Credit Scores Establishing Credit Maintaining Good Credit Credit Cards Managing Credit Challenges

2. CREDIT DEFINITIONS Credit Trust given to another person for future payment of a loan, credit card balance, etc. Creditor A person or company to whom a debt is owed. 2

3. THE FIVE Cs OF CREDIT C = Capacity C = Capital C = Collateral C = Conditions C = Character 3

4. 5 Cs Capacity: Capacity to repay is the most critical of the five factors. It is the primary source of repayment — existing cash and your income. Potential lenders also will want to know about other possible sources of repayment, such as investments that can be liquidated if needed to make a repayment. Capital: Capital is the money you personally have and is an indication of how much you have at risk should you experience job or other income loss. Collateral: Collateral or guarantees are additional items of value you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan. Conditions: Conditions describe the intended purpose of the loan. Will the money be used for personal use, a car, a home, or home repairs? Character: Character is the general impression you make on the prospective lender and is based on your credit report and credit history (your past use of credit).

5. WHEN TO USE CREDIT Can you describe a situation when it is a good time to use credit and when it is NOT a good time to use credit? 5

6. When to use/ not use When to Use Credit Great to have in times of emergencies, family crisis, unexpected illness, etc. Could be a convenient way to manage income by keeping track of spending—provided bills are paid in full each month. Allows the benefit of having large items such as a home, car, and appliances while still paying for them. When Not to Use Credit Can lead to spending beyond one’s means because it is so convenient and easy to use. If one is tempted to live on credit. When credit takes away the opportunity to use the income that pays off the credit, which is needed for other things. When there is concern that the credit cards and credit account numbers may be stolen and used by others.

7. QUESTIONS TO ASK BEFORE USING CREDIT Questions may vary but should include some of the following: 1. Is this a necessity or luxury item? 2. Do I really need this good or service? 3. Can I meet my obligation to pay for it without hurting my existing cash flow? 4. Do I really understand all of the terms and obligations that I must agree to when purchasing this? 5. Do I realize that this would cost less if I paid cash? 6. Have I really thought about the consequences of making this purchase? 7. Can I repay the debt in a timely fashion to avoid finance charges? 7

8. WHAT IS A CREDIT SCORE? A credit score is a number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time. A credit score is a number that changes as the elements in a credit report change. A credit score has broad use and impact. Your credit past is your credit future. FICO ® scores, one of the most common credit scoring systems, vary between 350 and 850. VantageScore SM, a new credit scoring system developed by the three credit bureaus, ranges from 501-990. 8

9. WHAT MAKES UP A TYPICAL CREDIT SCORE? Notice: No mention of salary!!!! 9 Source: Fair Isaac and Consumer Federation of America, 2005

10. IMPROVING YOUR CREDIT SCORE Pay bills on time. Get current and stay current. Don’t open a lot of new accounts too rapidly. Correct mistakes. Shop for loan rates within a focused period of time. Keep balances low on revolving credit. Pay off debt. Check your credit report. 10

11. TYPES OF CREDIT 11 Cash Credit: Receiving money as a loan. Sales Credit: Buying goods and services now with the promise to pay for them in the future. Secured Credit: Requirement to promise something of value to guarantee repayment of credit. Revolving Credit: A predetermined line of credit that is constantly renewed as it is repaid. I.O.U.: A written promise to pay a debt. Single Payment Credit: Buying goods and services now with the promise to pay “in full” at a predetermined time. Installment Credit: Buying goods and services with the agreement that payment will be made at fixed intervals over a period of time, with each payment carrying interest charges. Other Types of Credit: Utility bills, rent, and similar payments that can negatively impact your credit if not paid.

12. SOURCES OF CREDIT What are other sources of credit? What sources of credit should be avoided? Why? Banks Credit Unions Retail Stores Finance Companies Savings & Loan Associations Internet Stores 12

13. STEPS TO TAKE TO AVOID ABUSIVE LENDING 1.Have you shopped around for the best deal? 2.Do you feel the lender pressured you to take the loan? 3.Do you understand the terms of the loan? 13

14. COMMON PARTS OF A CREDIT APPLICATION Reason for Loan Personal Identification Information Employment Information Mortgage/Rental Information Documentation Required (for some applications) Current Debts Credit References Collateral (for some applications) Bank References Signature and Date 14

15. QUESTIONS TO ASK WHEN APPLYING FOR CREDIT 1.What is the annual fee? 2.What is the annual percentage rate (APR)? 3.When are payments due? 4.What is the minimum payment required each month? 5.Is there a grace period? 6.Are there other fees associated with the credit, such as minimum finance charges? 7.What is the credit limit? 8.What are the penalties for late or missed payments? 9.What are the terms and conditions of the credit? What else is included in the fine print? 15

16. Maintaining Good Credit Overview Debt to income thermometer Credit process Credit reporting agencies Credit safeguards for consumers Credit reports, ratings and scores Establishing a credit history 16

17. DEBT-TO-INCOME THERMOMETER 17

18. THE CREDIT PROCESS CREDIT HISTORY CREDIT BUREAU CREDIT REPORT CREDIT SCORE CREDIT RATING 18

19. SAMPLE CREDIT REPORT 19

20. CREDIT SAFEGUARDS FOR CONSUMERS Truth In Lending Act Consumers must be fully informed about cost and conditions of borrowing. Fair Credit Reporting Act Protects the privacy and accuracy of information in a credit report. Makes an individual’s credit files available to him or her. Equal Credit Opportunity Act Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance. Fair Credit Billing Act Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts. Fair Debt Collection Practices Act Prevents abuse by professional debt collectors; applies to anyone employed to collect debts. Generally does not apply to banks or other businesses collecting their own debts. 20

21. THE FAIR AND ACCURATE CREDIT TRANSACTION ACT One of the primary objectives behind the Fair and Accurate Credit Transaction Act (the FACT Act) is to help consumers fight the growing crime of identity theft. The following are some highlights of the Act. Free credit reports Fraud alerts and Active Duty alerts Truncation: credit cards, debit cards, Social Security Number Red flags Disposal of consumer reports Credit scores 21

22. THINGS TO DO TO ESTABLISH AND MAINTAIN GOOD CREDIT What can everyone do to establish and maintain good credit? Always pay your bills on time. Have checking and savings accounts that are current. Avoid late fees. Get a copy of your credit report every year. Check to make sure it is accurate, and report any problems with it immediately. Do not live off credit or be tempted to use credit to spend beyond your means. Use credit card numbers only when you are sure the transaction is secure. 22

23. Credit Cards Overview Types of credit cards Shopping for a credit card Costs of credit 23

24. TYPES OF CREDIT CARDS Private Label Issued by a single source Can only be used at a single source Examples: Department Stores, Gasoline Companies General Label Issued by a single source Can be used in many places Examples: Bank Card, Major Credit Card 24

25. SHOPPING FOR A CREDIT CARD DECISIONS, DECISIONS... ANNUAL FEE? APR? COMPUTATION METHOD? GRACE PERIOD? FINANCE CHARGE? CREDIT LIMIT? CARD INCENTIVES? 25

26. QUESTIONS TO ASK WHEN SHOPPING FOR A CREDIT CARD Annual fee Annual percentage rate (APR) Minimum payment Computation method Grace period Finance charges Card incentives 26

27. 27 COSTS OF CREDIT How much can credit cost? If you make only the minimum payment for an item, here are some examples of what you might actually pay and how long it will take you to pay it. http://www.federalreserve.gov/creditcardcalculator/http://www.federalreserve.gov/creditcardcalculator/

28. Managing Credit Challenges Overview Warning signs of credit abuse Credit card reductions Correcting credit errors Resources and assistance 28

29. MEASURING THE SERIOUSNESS OF CREDIT TROUBLE SIGNS Rate how serious you think each of the following trouble signs is. 1 = Not Serious 4 = Very Serious Trouble Signs 29 Delinquent Payments Default Notices Repossessions Collection Agencies Lien Garnishment Others?

30. Excellent credit score: 720 and Up Credit scores in this range will open up the best interest rates and repayment terms for loans. If you want to make major purchases, such as an investment property, this credit score range is where you want to be. Good credit score: 680 to 719 A credit report score in the 680-and-up range is good news for you. You can still get decent terms from lenders, although not as nice as those offered to borrowers with truly excellent credit scores. If you're shopping for a first home, a score in this range is certainly considered to be a good credit score, and it will get you an acceptable mortgage. You'll likely also be able to refinance your mortgage for better terms on an existing payment structure. Average credit score: 620 to 679 This is the absolute minimum credit score you can carry and still get fair mortgage terms. Smaller-ticket items that require financing are doable in this range, which is several notches below a good credit score. However, you'll be better served by reviewing your credit history re port and taking steps to improve your credit score. Poor credit score: 580 to 619 Although you won't necessarily have any problems getting loans with a credit report score in the high-500 to low-600 range, you'll get those loans on lenders' terms. Be ready for higher interest rates, and expect finance charges that will hit you right in the wallet. The good news is that you can build your credit score from here by monitoring your credit reports and by being responsible with your finances. Note that this range is also the lowest workable credit score range if you're shopping for auto financing. Bad credit score: 500 to 579 If your credit falls somewhere in this credit score range, financing terms will cost you big-time. For long-term loans, such as a 30-year mortgage, expect to see interest rates that are at least three percent higher than interest rates awarded to borrowers with good credit. For shorter-term loans, like a 36- month auto loan, the effects of your bad credit score are even more pronounced. Expect interest rates almost double those offered to consumers with good credit scores. Miserable credit score: Less than 500 At this point, your credit score is so bad that getting any type of financing is almost impossible. If you can get loans, they'll carry nearly punitive interest rates. If your credit report score is below 500, it's time for action. Get a copy of your credit history report, and make an appointment with a credit counselor.

31. WARNING SIGNS OF DEBT PROBLEMS 31 1.Delinquent Payments 2.Default Notices 3.Repossessions 4.Collection Agencies 5.Judgment Lien 6.Garnishment

32. CREDIT CARD REDUCTIONS Paying only the minimum payments on your credit card may seem appealing, but if only minimum payments are made, it can take years, and sometimes decades, to achieve full repayment. Paying the minimum amount due keeps your credit history clean, but it also costs you more. http://www.federalreserve.gov/creditcardcalculator/ http://www.federalreserve.gov/creditcardcalculator/ 32

33. CORRECTING CREDIT ERRORS 1.Circle the incorrect items on your credit report. 2.Write a letter to the reporting agency, telling them which information you think is inaccurate. Provide supporting documentation. 3.Send all materials by certified mail. 4.Send a similar letter to the creditor whose reports you disagree with. 5.The reporting agency will conduct an investigation. 6.If negative information is accurate, it can stay on your report for 7-10 years. 33

34. CORRECTING CREDIT PROBLEMS Take responsibility for actions. Communicate with creditors. Debt Consolidation Credit Counseling Bankruptcy 34

35. Correcting Credit Problems Take responsibility for actions. Examine spending patterns; recognize ways to correct bad habits. Establish a plan of action for getting out of debt, and stick with it. Communicate with creditors. Contact creditors to let them know there are temporary financial problems; request an adjustment in payment schedule. Debt Consolidation. Consolidate, or merge, several debts into one new loan with manageable payments.. Do not continue to take on more debt.. Beware of unscrupulous debt consolidators. Shop around for the best deal. Credit Counseling Get professional guidance from trained individuals. Credit counselors will work with an individual to get him or her out of debt and establish a sound financial management plan. See the appendix of this curriculum for information on credit counselors. Bankruptcy Bankruptcy should be the last step for anyone; a person files with the court to be released from debts. Filing for bankruptcy seriously affects one’s ability to obtain credit in the future. Chapter 7: Most serious of the two types of bankruptcy; when the property of a debtor is sold, and the money obtained is used to pay off creditors. Chapter 11: When the debtor is allowed to keep property, but develops a plan of action that the court approves for repaying debts. Chapter 13: In this typ e of bankruptcy, the debtor keeps all of his or her property and makes regular payments on the debt after filing for bankruptcy.