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Understanding credit


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Learn how to use credit as a tool.

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Understanding credit

  1. 1. A Lifetime of Leverage - Understanding Credit Knowledge and Tools on The Keys to the Financial Kingdom Nick Wolff, Region VI Staff
  2. 2. Overview <ul><ul><li>How banks evaluate you for credit </li></ul></ul><ul><ul><li>Credit score elements </li></ul></ul><ul><ul><li>Credit monitoring </li></ul></ul><ul><ul><li>Building credit </li></ul></ul><ul><ul><li>How you should use credit </li></ul></ul><ul><ul><li>Money making ideas </li></ul></ul>
  3. 3. Why Should I Care? <ul><ul><li>Your financial limit is determined by credit </li></ul></ul><ul><ul><li>Costs of borrowing (Car, Home, etc.) can be substantially higher </li></ul></ul><ul><ul><ul><li>Example: Score of 650 could be $250/month more than one with 750 </li></ul></ul></ul><ul><ul><li>Other non-debt expenses (i.e. Insurance rates) can be greater </li></ul></ul><ul><ul><li>Employers look at your credit score when hiring </li></ul></ul><ul><ul><li>Your financial flexibility is impacted </li></ul></ul>
  4. 4. LEVERAGE
  5. 5. Leverage <ul><ul><li>Lever allows you to amplify the impact of your efforts </li></ul></ul><ul><ul><li>You can use it to either make you poorer or richer much more quickly </li></ul></ul><ul><ul><li>If you are seeking to become wealthy, you need to learn to use leverage </li></ul></ul>
  6. 6. 5 C’s of Credit <ul><ul><li>Character – History of making your payments; Personal Reputation </li></ul></ul><ul><ul><li>Capacity – Cash flow shows you can pay </li></ul></ul><ul><ul><li>Capital – Net Worth; Sell to pay debt </li></ul></ul><ul><ul><li>Collateral – Securitize the debt </li></ul></ul><ul><ul><li>Conditions – Environment </li></ul></ul>
  7. 7. What is your Credit Score <ul><ul><li>3 Digit Number that helps lenders determine the probability you won’t pay your bills/debts </li></ul></ul><ul><ul><li>They probably don’t know you personally </li></ul></ul><ul><ul><li>350 to 850 </li></ul></ul><ul><ul><li>3 Providers – Credit Reports </li></ul></ul><ul><ul><ul><li>Transunion </li></ul></ul></ul><ul><ul><ul><li>Experian </li></ul></ul></ul><ul><ul><ul><li>Equifax </li></ul></ul></ul><ul><ul><li>Fair Issac (FICO) – Agency that creates Credit Score </li></ul></ul>
  8. 8. Approximate Score Ranges <ul><li>Category Score % Default </li></ul><ul><ul><li>Very Low Risk 720+ <1% </li></ul></ul><ul><ul><li>Low Risk 680 to 720 1 to 2% </li></ul></ul><ul><ul><li>Moderate Risk 600 to 680 2 to 5% </li></ul></ul><ul><ul><li>High Risk 500 to 600 5 to 15% </li></ul></ul><ul><ul><li>Very High Risk Under 500 15% </li></ul></ul>
  9. 9. Who Reports <ul><ul><li>Credit cards </li></ul></ul><ul><ul><li>Banks – Lines of credit or auto loans </li></ul></ul><ul><ul><li>Student loan lenders </li></ul></ul><ul><ul><li>Some utility companies </li></ul></ul><ul><ul><li>Anyone else you owe money to CAN report. Most only do so if you do not pay </li></ul></ul><ul><ul><li>Some only report to one bureau </li></ul></ul>
  10. 10. Components of Credit Score <ul><ul><li>Payment History (about 40 to 45%) </li></ul></ul><ul><ul><li>Utilization (about 30 to 35%) </li></ul></ul><ul><ul><li>Age of Credit Lines (about 15%) </li></ul></ul><ul><ul><li>Recent attempts to obtain credit – inquiries (about 10%) </li></ul></ul>
  11. 11. Payment History <ul><ul><li>Your record of keeping your promises </li></ul></ul><ul><ul><li>Greatest impact is usually the past 2 years </li></ul></ul><ul><ul><li>Most items are removed from report within 7 to 10 years </li></ul></ul><ul><ul><li>Bankruptcy is 10 years </li></ul></ul><ul><ul><li>Keep bad items old </li></ul></ul>
  12. 12. Utilization <ul><ul><li>Types of credit – Banks like to see diversity </li></ul></ul><ul><ul><ul><li>Revolving </li></ul></ul></ul><ul><ul><ul><li>Installment – (Student Loans, Auto) </li></ul></ul></ul><ul><ul><ul><li>Securitized or Mortgage </li></ul></ul></ul><ul><ul><li>Utilization – Outstanding Balance / Limit </li></ul></ul><ul><ul><li>Primarily based on revolving balances </li></ul></ul><ul><ul><li>Credit Score drops beyond 50% and drops more severely beyond 90% </li></ul></ul><ul><ul><li>Student loans & health care bills have relatively low impact </li></ul></ul>
  13. 13. Age of Credit Lines <ul><ul><li>Lenders like to see a track record </li></ul></ul><ul><ul><li>Only comes with time </li></ul></ul><ul><ul><li>Don’t close the oldest accounts unless you’re paying to keep them open </li></ul></ul><ul><ul><li>Use each card every 6 months </li></ul></ul>
  14. 14. Seeking more credit <ul><ul><li>Lenders assume if you are seeking more credit you are having financial problems </li></ul></ul><ul><ul><li>If you seek more credit, do so in chunks (all in one day) </li></ul></ul><ul><ul><li>Inquiries stay on record for 2 years </li></ul></ul>
  15. 15. Credit Scores <ul><ul><li>3 Scores based on the 3 credit reports </li></ul></ul><ul><ul><li>Credit cards and installment loans lend on the high score </li></ul></ul><ul><ul><li>Mortgages lend on the middle score </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><ul><li>Free report annually </li></ul></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><ul><li>Buy credit scores – about $45 to $50 </li></ul></ul></ul>
  16. 16. Get to know your banker!
  17. 17. Questions?
  18. 18. Credit Monitoring <ul><ul><li>Consider using a credit monitoring service </li></ul></ul><ul><ul><li>Monthly fee: $10 to $20/month </li></ul></ul><ul><ul><li>Free access to all 3 credit reports </li></ul></ul><ul><ul><li>Estimates of FICO score (FAKO) daily </li></ul></ul><ul><ul><li>Notifies you of changes immediately </li></ul></ul><ul><ul><li>Allow you to freeze report if you suspect identity theft </li></ul></ul><ul><ul><li>Provide tools & recommendations on how to improve your score </li></ul></ul><ul><ul><li>Identity theft insurance </li></ul></ul>
  19. 19. True Credit Report
  20. 20. True Credit Report
  21. 21. Every service uses a different algorithm Another service gives me scores of 730, 780 and 781, respectively. (FAKO)
  22. 22. Applying for New Credit <ul><ul><li>Know the answer before you ask </li></ul></ul><ul><ul><ul><li>Review your credit report & scores </li></ul></ul></ul><ul><ul><ul><li>Don’t be unrealistic in what you ask for </li></ul></ul></ul><ul><ul><li>Correct errors on your report. Approximately ¼ of all Americans have at least 1 error on their credit reports. </li></ul></ul><ul><ul><li>Some people say the maximum credit you can be extended is 5 times your annual income </li></ul></ul>
  23. 23. Applying for Credit Cards <ul><ul><li>Look at credit score </li></ul></ul><ul><ul><li>“ No-doc” or “stated” income </li></ul></ul><ul><ul><ul><li>Will verify with your profession </li></ul></ul></ul><ul><ul><li>Sometimes auto loans too </li></ul></ul><ul><ul><li>Want to see 2 years of continuous employment </li></ul></ul>
  24. 24. Applying for Mortgages <ul><ul><li>Look at Credit Score – Middle Score </li></ul></ul><ul><ul><li>“ Full Doc” </li></ul></ul><ul><ul><ul><li>2 months of paycheck stubs </li></ul></ul></ul><ul><ul><ul><li>2 years tax returns </li></ul></ul></ul><ul><ul><ul><li>Savings account statements </li></ul></ul></ul><ul><ul><ul><li>2 years of W-2’s </li></ul></ul></ul><ul><ul><ul><li>2 years of addresses </li></ul></ul></ul>
  25. 25. Couples <ul><ul><li>Know both of your scores </li></ul></ul><ul><ul><li>You can apply for credit as a couple </li></ul></ul><ul><ul><ul><li>Combined income </li></ul></ul></ul><ul><ul><ul><li>Use the lower of the scores </li></ul></ul></ul><ul><ul><ul><li>Use the credit reports of both </li></ul></ul></ul><ul><ul><li>It might be cheaper to just be held by one person </li></ul></ul>
  26. 26. Questions?
  27. 27. How Do I Raise My Score?
  28. 28. How to Raise Your Score <ul><ul><li>Payment History – Pay your bills on time! </li></ul></ul><ul><ul><ul><li>Pay your bills the day you receive them. </li></ul></ul></ul><ul><ul><ul><li>Auto deduct your minimum payment </li></ul></ul></ul><ul><ul><ul><li>Open more credit accounts to lessen impact of bad accounts </li></ul></ul></ul><ul><ul><ul><li>Call lenders and ask them to take bad items off </li></ul></ul></ul>
  29. 29. How to Raise Your Score <ul><ul><li>Utilization </li></ul></ul><ul><ul><ul><li>Work the numerator </li></ul></ul></ul><ul><ul><ul><ul><li>Pay off revolving credit lines </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Convert revolving credit lines to installment loans </li></ul></ul></ul></ul><ul><ul><ul><li>Work the denominator – “App Spree” </li></ul></ul></ul><ul><ul><ul><ul><li>Get more credit </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Do not get yourself into trouble </li></ul></ul></ul></ul><ul><ul><ul><li>Carry credit at providers that do not report </li></ul></ul></ul><ul><ul><ul><li>Carry credit in a business entity. (Don’t report on your credit and don’t care about utilization) </li></ul></ul></ul>
  30. 30. How to Raise Your Score <ul><ul><li>Age of credit lines </li></ul></ul><ul><ul><ul><li>Do not close your old accounts </li></ul></ul></ul><ul><ul><ul><li>Open accounts as a joint account holder of another’s credit accounts (NOT authorized user) </li></ul></ul></ul><ul><ul><ul><li>Patience – It’ll come in time </li></ul></ul></ul>
  31. 31. How to Raise Your Score <ul><ul><li>Seeking more credit (Inquiries) </li></ul></ul><ul><ul><ul><li>Don’t apply for credit often </li></ul></ul></ul><ul><ul><ul><li>Inquiries </li></ul></ul></ul><ul><ul><ul><ul><li>Soft – Do not impact your score </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hard – Lower score </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Some say 3 points per inquiry </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Less impact if inquiries are within a day or two </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Bumping </li></ul></ul></ul><ul><ul><li>This is smallest component </li></ul></ul>
  32. 32. Questions?
  33. 33. Financial Management <ul><ul><li>Credit cards – Minimum 1 to 2 percent of balance (20 year amortization) </li></ul></ul><ul><ul><li>Auto Loan – Based upon amortization </li></ul></ul><ul><ul><ul><li>(2 to 5 (6) years) </li></ul></ul></ul><ul><ul><li>Student Loans – Based upon amortization </li></ul></ul><ul><ul><li>Mortgage – Based upon amortization </li></ul></ul><ul><ul><li>HELOC – May be interest only </li></ul></ul>
  34. 34. Building Credit
  35. 35. You can build credit <ul><li>Be Sure You Want To Do This </li></ul><ul><ul><li>Keep high credit scores </li></ul></ul><ul><ul><li>Demonstrate responsibility with ever growing credit lines </li></ul></ul><ul><ul><li>Charge up to ½ the limit, pay off in 3 months </li></ul></ul><ul><ul><li>Ask for increases – Every 6 months </li></ul></ul><ul><ul><li>Some say cap at about 5 times annual income </li></ul></ul>
  36. 36. App Spree Be sure this is right for you!!!
  37. 37. What if I Get Into Trouble? <ul><ul><li>NEVER miss a mortgage payment </li></ul></ul><ul><ul><li>If you stop paying a car loan, they can take your car </li></ul></ul><ul><ul><li>All credit cards report – but no security </li></ul></ul><ul><ul><li>Some utilities report – but can turn power off </li></ul></ul><ul><ul><li>Student loan lenders report, but can help you with other programs (forbearance or change payment plans) </li></ul></ul><ul><ul><li>Call your lenders. They want to work with you. </li></ul></ul><ul><ul><li>Keep lines of communication open. </li></ul></ul><ul><ul><li>Don’t ignore problems. They don’t go away. </li></ul></ul>
  38. 38. What if I am REAL trouble? <ul><ul><li>Have lenders put you on a payment plan </li></ul></ul><ul><ul><li>Get a credit counselor or financial advisor </li></ul></ul><ul><ul><li>Increase your income – Get another job </li></ul></ul><ul><ul><li>Sell your stuff </li></ul></ul><ul><ul><li>Last resort – Bankruptcy (10 years) </li></ul></ul>
  39. 39. How You Should Use Credit <ul><ul><li>Credit is a tool </li></ul></ul><ul><ul><ul><li>Buy today and pay tomorrow </li></ul></ul></ul><ul><ul><ul><li>Easy access </li></ul></ul></ul><ul><ul><ul><li>Financial safety blanket </li></ul></ul></ul><ul><ul><li>Don’t buy junk with credit cards. </li></ul></ul><ul><ul><li>If you do, don’t maintain a balance </li></ul></ul>
  40. 40. How You Should Use Credit <ul><ul><li>Use them for convenience </li></ul></ul><ul><ul><li>Use them for rewards </li></ul></ul><ul><ul><li>Use them to build a credit history </li></ul></ul><ul><ul><li>Use them for leverage </li></ul></ul><ul><ul><li>Use them to make money </li></ul></ul>
  41. 41. Credit Arbitrage <ul><ul><li>Pull out big bucks from credit line at 0% </li></ul></ul><ul><ul><li>Put money in money market savings accounts </li></ul></ul><ul><ul><li>Make payments from savings account when needed </li></ul></ul><ul><ul><li>Pay off credit line at end of incentive </li></ul></ul><ul><ul><li>Keep interest </li></ul></ul><ul><ul><li>2 to 4% free money – Infinite ROI </li></ul></ul>
  42. 42. How I Use Credit <ul><li>Private Lending – Be the Bank! </li></ul><ul><ul><li>Borrow $25,000 on credit card </li></ul></ul><ul><ul><ul><li>(incentive 2% for 12 months) </li></ul></ul></ul><ul><ul><li>Total Cost: Bank fee $75 </li></ul></ul><ul><ul><li>Lend it at 12% </li></ul></ul><ul><ul><li>Interest rate spread: 10% </li></ul></ul><ul><ul><li>Net interest earned: $2,500 </li></ul></ul><ul><ul><li>Rate of return: 3,333% </li></ul></ul>
  43. 43. My Credit Profile <ul><ul><li>High Score: 767 </li></ul></ul><ul><ul><li>Middle Score: 747 </li></ul></ul><ul><ul><li>Total Available Credit </li></ul></ul><ul><ul><ul><li>Personal: 175,350 </li></ul></ul></ul><ul><ul><ul><li>Business: 118,800 </li></ul></ul></ul><ul><ul><li>Utilization </li></ul></ul><ul><ul><ul><li>Personal: 46% </li></ul></ul></ul><ul><ul><ul><li>Business: 36% </li></ul></ul></ul><ul><ul><li>Net income from credit lines: $670.50 / month </li></ul></ul><ul><ul><li>Active Seeker of Credit and “Bumper” </li></ul></ul>
  44. 44. Summary <ul><ul><li>Good credit is the key to the financial kingdom </li></ul></ul><ul><ul><li>Credit is an excellent tool if used well </li></ul></ul><ul><ul><li>You can make borrowing cheap </li></ul></ul><ul><ul><ul><li>(and profitable if you want to) </li></ul></ul></ul><ul><ul><li>You have tools to increase your credit score </li></ul></ul>
  45. 45. Thank you for your ongoing service to Alpha Phi Omega!