1. CREDIT How do you build credit? Mr. Jones and Mrs. Smith make the same amount of money, but on loans, Mr. Jones pays more. Why? What may determine if you can buy a house or car? We only think of banks looking at this number, but who else may take a peak at it and why?

2. Credit Bureaus First things first Credit Bureaus They contain all the information on how YOU handle your financial responsibilities

3. Credit Bureau Collect information from lenders about their experience with YOU. – You pay a VISA card on time/late, they find out – You pay Victory Motors on time/late, they find out – You pay your mortgage on time/late, they find out – Etc…

4. Credit Bureau They also find other personal and financial information on you… They know your employer Your income Savings Debts

5. Credit Bureau How does a Credit Bureau make money? Lenders buy your information from them – This allows them to see if you’re a good risk or a bad risk – Credit bureaus get information from all your lenders and put them into one credit report

6. Credit Report Credit Report: is a collection of information obtained from your creditors reflecting the extent of your credit and payment history. Lenders use this information to determine if they will loan you money and at what interest rate.

7. Example You apply for a credit card… You give them all your information – Name, address, employer, other credit cards etc… The credit card company then contacts a Credit Reporting Agency (Credit bureau) and reviews your credit report If credit card company approves, then you have a credit card Once you start using the card, the company reports your payments history to the Credit bureau.

8. Credit Report The three major credit-reporting agencies are: 1) Equifax (800-685-1111) 2) Experian (888-397-3742) 3) Trans Union (800-888-4213) You can obtain a free annual credit report at www.annualcreditreport.com www.annualcreditreport.com You should check your report at least once/twice a year Not all reports are the same…

9. How lenders Interpret your Report Some things on your report may seem ok to you, but to lenders, they may look at you as a risky borrower.

10. Lenders Interpret… 1) Inquiries (Act of asking for information) Every time you apply for credit, or have someone run your credit, it’s called a hard inquiry THESE ARE BAD!!! These may wrongly imply you… – Need a lot of credit or – Planning to take on large debt Make sure if you are car/home shopping, they don’t run your credit unless you are buying from them.

11. Other Inquiries Other types of inquiries- Your own request to view your report, employers requests, etc… don’t show up on your report These are called SOFT INQUIRIES These aren’t bad

12. Lenders Interpret 2) Open Credit Accounts: If you have too many open accounts, it could be bad 3-4 credit cards are ok If you have more, and don’t use some, close them A lot of available credit can be good/bad Account doesn’t close because you cut your card up!!!

13. Lenders Interpret 3) Missed Payments Always make at least the minimum payment Missed payments will stay on your record for 7 years!!!

14. Lenders Interpret 4) Maxed-out Credit lines: Maxing out credit line is a BIG red flag Example: Your credit card will allow you to charge $5,000, and you go and spend $5,000. That’s maxed out

15. Lenders Interpret 5) Debt to Income Ratio: How much debt you have compared to how much you make Example… Unsecured credit card debt that is more than 20% of annual income is SCARY TO LENDERS What is unsecure credit?

16. Credit Score The most common scoring method is used from FICO. – Fair, Isaac and Company 3 major credit bureaus (Experian, Equifax, and Trans Union) worked with Fair Isaac and came up with the scoring method – Early 1980’s

17. Credit Score/Grade The score is just like a grade in school I take scores from… Tests Attendance Participation Worksheets I Combine scores, and you get grade

18. The normal number range is from… 300 – 850 (Higher = better) Approximate breakdown of how your score is determined is the following…

19. Calculating Your Credit Score 1) 35% of the score is based on your…. PAYMENT HISTORY Why do you think this is the number one factor? Lenders want to see if, and how promptly you pay your bills

20. #1 Payment History The score is affected by… How many bills paid late How many were sent out for collection Any bankruptcies you have declared Does it matter when one of these have happened? – Paid a bill late 10 years ago vs. 10 days ago

21. #1 Payment History YES The sooner one of these has happened, the bigger impact it will have on your score. Why? It says you’re unstable RIGHT NOW.

22. Calculating Your Credit Score 2) 30% of your score is based on… OUTSTANDING DEBT What does this mean? It is how much you owe

23. #2 Outstanding Debt It looks to see if you have a… Car loan Student loans Home loan How many credit cards you have that are maxed out, and their credit limits

24. #2 Outstanding Debt Credit Card/Credit Limit The more cards you have at their limits, the lower your score. Why? Rule of Thumb!!!! Keep your card balances below 30% of their limits The BEST/OPTIMAL way to increase your score is to keep them under 10% of their limits

25. #2 Outstanding Debt 30% or less of their limits Example: Have a credit card with $5,000 limit $5,000 x 30% (.3) = $1,500 Do not borrow more than $1,500 on that particular card

26. Calculating Your Credit Score 3) 15% is based on… The length of time you have had credit The longer you have had established credit, the better it is for your overall credit score. Why? Because past payment history gives an accurate prediction of your future actions.

27. #3 Length of Time Example: Who would you trust more? 30 year veteran cardiologist performing heart surgery on you, or newbie right out of medical school? You want the one with the good track record!! You don’t want too many cards, but don’t get rid of your oldest card!!!

28. #4 Calculating Your Credit Score 4) 10% of your score is based on… NEW CREDIT Opening new credit will affect your score negatively for a short period of time Your score will go back up once you prove you are capable of paying back the new credit

29. Calculating Your Credit Score 5) 10% of the score is based on the types of… CREDIT MIX What does this mean? It will help your score if… You have had experience with several different kinds of credit accounts Installment loans (Car, House), Revolving Credit (Credit Card), Retail Credit etc…

30. #5 Different Credit Accounts Examples of different credit accounts Revolving credit accounts and installment loans. What is an example of each? Revolving credit = Using Credit Card Installment Loan = Car, student, home loan – Set payment for a certain amount of time

31. Different Methods There are different methods some lenders use to figure your credit score Some look at… Your income – Is this fair or not? How long you have been employed at the same job – What does this tell them?

32. What Your Score Affects Not being careful with credit = Paying for it later on Low score = harder to get loan for items you want EVEN IF YOU DO GET THE LOAN, A LOW SCORE WILL MAKE IT MORE EXPENSIVE Why?

33. What Your Score Affects Low score = higher you’ll pay…why? LOWER SCORE means you are a HIGHER RISK HIGHER RISK = HIGHER INTEREST HIGHER INTEREST = HIGHER PAYMENTS HIGHER PAYMENTS = YOU ARE WASTING YOUR HARD-EARNED MONEY!!!!!!!!!!!!

34. What Your Score Affects On a brighter side, HIGHER SCORE = LOWER INTEREST RATE – Keep in mind, this is NOT the only thing that affects your interest rate

35. Credit Score Bandwagon Besides banks and lenders, who else uses your credit score? Landlords Insurance Companies – Is this fair? Employers – Is this fair?

36. REVIEW Improving your credit score