Credit is . . . . your ability to borrow money or obtain goods by paying little or no money at the time of purchase.
Credit is a resource It might be compared to the water at the bottom of a well. It’s nice knowing that you can draw upon when you need it. But it is bad when it’s used up.
terminology . . . . The “Extension of Credit” is the provision of resources (such as money) by one (the “creditor,” “lender”, “mortgagee” or “lessor”) to another (the “debtor,” “borrower” “mortgagor” or “lessee”) without the other paying in full at time of delivery, resulting in the creation of an obligation (the “debt”, “indebtedness”, “mortgage” or “lease”) either to repay the money or return the resources (or material(s) of equal value) at a later date.
Why do you need credit? Buy a home or rent an apartment Get a job Get telephone service Finance an automobile Spread out payments for expensive items Qualify for insurance Get a loan at preferred rates Obtain a credit card
People with good credit save money
They can save ≈ $250,000 in consumer interest during their working lives
They can save more than $250,000 on a 30-year fixed $300,000 home mortgage.
They can save up to $50 a month on a 3 year car loan.
credit trivia 15% of the U.S. population (35-50 million people) are “un-score-able” because they have no credit files or thin files. 25 % of the U.S. population have poor credit scores (less than 650 FICO). Credit Card Debt is a $2-Trillion a year industry.
Your credit report
What is a credit report? A record your loans, credit cards, payments and outstanding debts. Lenders report your credit usage to companies called “Credit Reporting Agencies” (“CRAs”).
What is in a credit report? Current and past payment information On-time and late payments Outstanding credit limits and balances Information from public records Names of companies who have asked for a copy of your report Most information stays on your credit report for up to 7 years – some for as long as 10 years.
Who can get a copy of the report? You Those who can prove a legitimate need Banks Credit card companies Landlords or real estate companies Employers
How can you get a copy? www.annualcreditreport.com You’ll need to provide this information: Full name Social Security number Addresses for past 2-5 years Telephone number Birth date
Accuracy The Fair Credit Reporting Act (FCRA) of 1971 regulates credit-reporting agencies (CRAs). It creates rules CRAs are required to follow in putting together your credit report. Information about “you” must be verified as accurate before it goes in your credit reports.
More on accuracy If “reasonable procedures” have not been correctly followed, verified inaccuracies must be removed from your credit reports. The Big-3 credit reporting agencies are Experian (formerly TRW), Equifax and Trans Union.
Your fico score Your Credit Is Measure By . . .
Once upon a time . . . . . When you wanted to borrow money
You went to your local banker.
Gave him your tax returns, financial statement and a list of credit references.
He looked you in the eye.
He made a subjective decision whether you were a good credit risk.
It worked because of the limited demand for credit.
Times have changed . . . Retailers realized that they could increase sales by making consumer credit easily available. The birth of the consumer credit industry increased the demand for credit, requiring a more objective and quicker method of evaluating an individual’s credit.
Enter “fico” FICO is an acronym for “Fairs Isaas Credit Organization,” the company that developed the current system for credit rating. Five primary factors are used to calculate a FICO score, although the exact formula is a secret. While the formula is a secret, informed people have made “educated guesses.”
What makes up your FICO score 35% Payment histories on your credit accounts, with the more recent history weighted more heavily.
Total amount of debt outstanding.
Length of time you’ve been a credit user (a longer history is better if you made timely payments).
Very recent history - your efforts to obtain loans or credit lines in the past few months.
Mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards.
How long things stay on reports Bankruptcy 10 Years
Advantages of fico Consumers obtain loans faster Credit decisions tend to be fairer Older credit problems count for less More credit is available Interest rates may be lower over all With an understanding of how the system works, you can improve your credit score and access to credit
The Higher the better FICO scores range from 300-850 Historically, 680 or more makes you a “prime borrower” Less than 680 makes you a “sub-prime” borrower Below 550 it is difficult to borrow money With a FICO score >750 a home mortgage interest rate will, on average, be 4% lower than someone with a FICO score of 500 - thousands of dollars difference over the life of a mortgage.
Factors under your control The longer you have a particular credit card the better (it takes time to develop a credit history) Pay your bills on time Keep your account balances below 50% of your available credit Be careful about co-signing or guarantees Avoid excessive inquiries
How “Inquiries” count HARD INQUIRIES - Inquiries by potential creditors (including credit cards you apply for) count against you. SOFT INQUIRIES - Credit reports you pull yourself or from a consumer site do not count. Marketing inquiries also fall in this category. When applying for Home Mortgage or Auto Loans, FICO counts multiple inquiries during a 30-day period as just one inquiry.
Re-Building & keeping good credit
Rebuilding good credit It takes time and patience to establish good credit. Each person’s situation is different and lenders have wide-ranging requirements.
Pay on time A recent history of on-time payments on all of your credit accounts reported to a major credit bureau is the best way to improve a credit score. Six to twelve months of on-time payments can build a score of 600 with no other history. Six months of on-time payments toward a loan can increase a score 50-100 points.
Ways to rebuild good credit Apply for a credit card or small loan Find a co-signer if necessary Get a secured credit card Use a Debit Card
Keeping your good credit Get a copy of your credit report at least once a year and review it carefully. Pay your bills on time. Apply only for credit that you really need. If you divorce or separate, make sure that joint accounts are closed. Close unneeded accounts (with caveats).
Closing credit card accounts Closing and consolidating cards can adversely affect your score, and here's why – suppose that: You have 4 credit cards with $5,000 limit each. You owe $1,000 on each (20% of your available credit). You transfer the balances of 3 of the cards to one card and close the other 3. You still owe $4,000 and it is within your $5,000 credit limit. But, now you are using 80% of available credit.
Credit problem warning signs Living from paycheck to paycheck Skipping, making late or minimum payments Credit card balances at or near credit limits Not knowing how much you really owe Using cash advances to pay bills Having credit cards declined Increasingly larger monthly payments
Resources Nat’l Foundation Credit Counseling - www.nfcc.org NFCC Debt Advice - www.debt advice.org/ Mapping Your Future - http://www.mapping-your-future.org/features/dmbudget.html Bankrate - www.bankrate.com College Is Possible - www.collegeispossible.org For Students www.practicalmoneyskills.com www.myfico.com www.annualcreditreports.com www.transunion.com www.equifax.com www.experian.com