1 Slide 1 Credit The information provided in this e-course is intended for educational purposes only and does not constitute specific advice for you as an individual. When evaluating your particular needs, please contact your own tax or financial advisors. Credit. Credit can be a great thing, but it can also get you in trouble if you're not careful. Understanding credit and managing it appropriately is a key financial skill that everyone should learn. In this module, I'll help you understand how to get credit and when to use it. You'll learn how interest rates work and why your credit score is so important. First, let's talk about what credit is and how to get it.
2 Slide 2 What is Credit? Credit is when a person purchases and receives goods or services in advance and agrees to make payments later. Often the payments happen over time and the seller charges interest. If you have good credit, you re able to purchase things that it might take you years to save for, like a car or a new home. Unfortunately, credit can also be mismanaged, leading people down a road of financial and personal hardship.
3 Slide 3 Good Credit How do I get good credit? Everyone starts out with good credit You build good credit over time You have to save up to buy good credit Try to pay cash and avoid using credit So, how do you get good credit? Do you start out with it or do you get it by not using it? Click on what you think is the best answer for how to get good credit.
4 Slide 4 Good Credit No one starts out with good or bad credit; you have to build it. This can be a challenge as you apply to lenders for credit who may reject your application because you don t have any credit! What do you do? You may actually have a history of credit. If you have a gym membership or a student loan, you ve probably already established some level of credit. Your history may be very short, which may be the reason for a denial, but you still might have some history. If you re careful not to borrow too much, and you make payments on time, you can establish good credit over time.
5 Slide 5 Good Credit If you had plenty of money to buy everything you need, you wouldn t need credit, but most people don t have that luxury. While having savings may help, it s your record of using credit responsibly that establishes good credit. This can be a challenge as you apply to lenders for credit who may reject your application because you don t have any credit! What do you do? You may actually have a history of credit. If you have a gym membership or a student loan, you ve probably already established some level of credit. Your history may be very short, which may be the reason for a denial, but you still might have some history. If you re careful not to borrow too much, and you make payments on time, you can establish good credit over time.
6 Slide 6 How Do I Get Credit? Bank or Credit Union Secured Credit Card Cosigner Store Credit Card If you don t have any credit history or if it s not enough to get a credit card, you ll need to look at some other options for developing your credit. Click on each of the buttons to learn ways to build your credit history.
7 Slide 7 Bank Exit Bank or Credit Union Secured Credit Card Cosigner Store Credit Card Ask your bank or credit union Start with a visit to the bank that holds your checking account. Your bank or credit union may be able to offer a secured line of credit or a secured credit card. A secured line of credit means that the financial institution may take money from your checking account or other personal property in the event that you don t pay your bill. To learn other ways to build credit, select one of the other buttons or click Exit when you're done.
8 Slide 8 Secured Credit Card Exit Bank or Credit Union Secured Credit Card Try a secured credit card Cosigner Store Credit Card A secured credit card requires you to deposit money with the creditor, usually an amount between a few hundred to a couple of thousand dollars. This amount determines your credit line. You re often limited to a percentage of the deposit, often 50% to 100%. Secured cards have an annual fee and higher interest rates. If you decide to get a secured card, make sure that you pay the balance off each month to avoid paying the higher interest. Many secure card issuers will allow you to convert your card to an unsecured card with higher limits after you ve established a history of timely payments, typically eighteen months. To learn other ways to build credit, select one of the other buttons or click Exit when you're done.
9 Slide 9 Cosigner Exit Bank or Credit Union Use a co-signer Secured Credit Card Cosigner Store Credit Card You may be able to establish your credit worthiness by getting a credit card with a cosigner who already has good credit. This can enhance your chances for approval. The cosigner should be aware that he is equally liable for the debt that is accumulated on the credit card. To learn other ways to build credit, select one of the other buttons or click Exit when you're done.
10 Slide 10 Store Credit Card Exit Bank or Credit Union Apply for a store card Secured Credit Card Cosigner Store Credit Card Another way to build credit is to apply for a store credit card. These cards typically have low credit limits and approval requirements and tend to have high interest rates every month. Even though you're limited to using the card in that retailer's store, remember that your goal is to demonstrate that you can handle credit responsibly. To learn other ways to build credit, select one of the other buttons or click Exit when you're done.
11 Slide 11 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Most credit cards are unsecured credit, meaning that they re issued without having to put up any collateral. This means that lenders will charge you a higher interest rate, since they are assuming greater risk. With so many choices, how do you pick the best one? Click on each of the buttons to learn how. Get the lowest interest rate possible. Since credit agreements can vary in terms of their interest rates, fees and penalties, credit card companies are required to provide you with an annual percentage rate, or APR, to clarify the rates for each card they offer. The APR is expressed as a percentage number, which represents the actual yearly cost of funds over the term of a loan. Beware of introductory offers that have a low APR to begin with, but the rate expires after a few months. In addition, always read the fine print to ensure you understand how the APR is calculated. Beware of kickback offers. Some credit cards may offer a monthly rebate on the amount of credit used each month. For instance, if you charge $100 on a card that offers a 1% rebate, your balance would be reduced by $1. You certainly can see some savings, but it will only be on new purchases. This benefit is really only helpful to those who pay off their balance each month. Watch out for points. Many credit cards offer the opportunity to earn points for every dollar charged to them. The more you charge, the more points you ll earn. After earning a certain number of points, such as 20,000, you ll be able to get a free item or a gift card. Unless you re
12 going pay off the balance every month, you d be better off charging less and saving to purchase the item if you really need it. Beware of annual fees. Some credit cards require that you pay an annual fee of $25 to $50 just to have the card. You can also pay penalty fees if your payment is late or you exceed your card s approved credit limit.
13 Slide 12 Unsecured Credit Cards You can start with sites which allow you to search for credit cards based on the type of card, your credit score, or the financial institution that issues the card. Websites such as these provide a wealth of information for consumers, as well as a variety of calculators to help you estimate payments.
14 Slide 13 When to Use Credit Now you understand what credit is and how to build your credit history, but does that mean you should always use the credit you have available?
15 Slide 14 Using Credit Wisely Can I afford the payments? Do I really need this? Of course not. Just because you have credit, doesn't mean that you should always use it. Your goal should be to avoid charging any amount that you can't afford to pay in one payment cycle. Don't charge purchases if you don't need to. It's surprising how charges can quickly mount up when you're unable to pay off the balance with a single payment. Your goal should be to maintain a low debt to income ratio. To determine your ratio, add your housing debt and any other recurring debts, such as car loans or credit card debt, and then divide by your gross monthly income. Most lenders encourage you to maintain a ratio of 36% or less.
16 Slide 15 Good Debt vs. Bad Debt Randy wants to go to college, but he can t afford it without student loans. What do you think he should do? Wait until he saves enough money to go to school, since all debt is bad Take the student loans to go to school, since some types of debt are ok But credit is about more than just credit cards. You know to keep down your credit card balances, but does this mean that you should never have any kind of debt? Let s look at an example. Randy wants to go to college, but he can t afford it without student loans. What do you think he should do? Select an answer by clicking on one of the boxes.
17 Slide 16 Good Debt vs. Bad Debt While Randy could wait and save money, it could take him a very long time before he d be able to start school. Instead, he could take student loans. Debt can be good if it leads to the creation of wealth in the long run. Student loans allow individuals to pursue higher education, which may improve their earning potential. Another example of good debt is a home mortgage, since home values historically have risen over the long term. In addition, today s federal tax code allows you to deduct the mortgage interest from your taxes. You could also use a loan to open new businesses or to expand existing ones. Debt is worth it when you can help improve your situation over time. But the use of credit doesn t make sense when purchasing items that are disposable and the balance isn t repaid before the due date. The items that you ve purchased continue to lose value while you continue to accrue interest. It means that you re paying more than the actual purchase price of an item that s losing value.
18 Slide 18 Interest Rates Before you take on any kind of debt, you should understand how interest works. Interest is a percentage of your loan amount that a lender charges you for using their money. The percentage you re charged can vary widely. Let s take a look at the factors that affect the interest rate you pay.
19 Slide 19 Interest Rate Factors Economy Credit Line Relationship Credit Risk Getting the lowest interest rate should be your prime objective in getting a credit card or any kind of credit. You don t have control over all of the factors that affect your interest rate, but you should try to find the best rate you can to avoid high interest charges. Click on each of the buttons to learn the factors used to determine your interest rate.
20 Slide 20 Economy Exit Economy Credit Line Relationship Credit Risk One factor that determines the interest rate you ll be charged is the general level of interest rates in the American economy. Rates are affected by the Federal Reserve, the economic environment and the demand for borrowing money. Select one of the other buttons or click Exit when you re done.
21 Slide 21 Credit Line Exit Economy Credit Line Relationship Credit Risk The specific details of your credit line, such as the amount you re borrowing, the terms of the loan, and whether it s been secured by collateral, help to determine your interest rate. Select one of the other buttons or click Exit when you re done.
22 Slide 22 Relationship Exit Economy Credit Line Relationship Credit Risk Your relationship with your financial institution also influences your interest rate. Many institutions will lower the interest slightly if you agree to have the repayment automatically deducted from your checking account. Select one of the other buttons or click Exit when you re done.
23 Slide 23 Credit Risk Exit Economy Credit Line Relationship Credit Risk Your interest rate is influenced by your credit risk. Your credit risk can be determined by such factors as your income, employment history, credit history and your credit score. Select one of the other buttons or click Exit when you re done.
24 Slide 24 Credit Rating Your interest rate may also be influenced by your credit rating. If you have good credit, you're more likely to be offered better interest rates. You need to make sure your credit rating is as strong as it can be. Credit bureaus can let you know how you're doing. Typically when you apply for a credit card or loan, information about your borrowing and repaying habits is reported to one or more credit bureaus. Based on your credit history, credit bureaus calculate a credit rating or score, a number that represents your credit worthiness. There are a number of factors that influence your credit score. But first, you need to know where to find that score.
25 Slide 25 Credit Bureaus Three credit bureaus in the United States, Experian, Equifax, and TransUnion track your credit history. Your creditors report to them monthly and data is also obtained from court records. The types of credit that are reported to these bureaus include credit cards, car loans, mortgages, personal loans, student loans, and other forms of credit. Non-credit expenses such as rent, utilities, and medical bills are not reported unless they are unpaid and referred to a collection service. The bureaus don t always collect the same information, so your credit reports may differ.
26 Slide 26 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Credit reports have four sections - personal information, trade lines, public records and inquiries. Click on the arrow in the top right corner to learn about each of these sections. Personal information: Personal information includes your name and any former names you may have used, your current address and previous addresses and sometimes your employment history. Trade lines: Trade lines are the majority of your credit report. This section includes all of your creditors and account numbers, the dates the accounts were opened, the credit limits or the original balances, balance and payment patterns for the previous 24 to 36 months, and if any accounts are in collection. Public records: This section shows public records that are related to your credit worthiness such as liens, foreclosures, and bankruptcies. Inquiries: The inquiries section lists anyone who has accessed your credit report. There are two types of inquiries - hard and soft. A hard inquiry is one that is the result of an application that you made for credit. A soft inquiry occurs if you request your own report or a vendor requests it for pre-approval offers.
28 Slide 27 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Everyone makes mistakes. How do you know your credit score is right or that you're protected against fraud? The Fair Credit Reporting Act provides you with a number of rights. These rights help protect your money and privacy and prevent others from taking advantage of you. Click on each of the buttons to learn about your rights. Right to a free credit report - You have the right to request a free copy of your credit report from each of the three credit bureaus once every twelve months. You can request them through the Annual Credit Reporting Request Service (www.annualcreditreport.com) or you can contact the three companies. You re also entitled to a free report if you are denied credit, insurance, or employment due to your credit history. Right to accurate information - You have the right to have accurate information reflected in your report. In the event that you discover an error in your report, you can send a letter or complete an on-line form to notify the credit bureau of the incorrect information. If you have any documentation that supports your claim, you should include it. The credit bureau has thirty days to investigate. If there is no change to your report and the information is inaccurate, you can contact the creditor directly to see if it will remove the information. If working with the credit bureau and creditor doesn t resolve the issue, you may add a brief statement to your credit report. It will allow anyone pulling your report to hear your side.
29 Right to privacy - You also have the right to privacy. Only those who have a recognized need may access your report. This would include landlords, creditors and insurers. Employers must have your written permission before they may access your information. Right to proper credit card practices - The CARD Act (Credit Card Accountability Responsibility and Disclosure Act) was passed in 2009 to curtail many improper credit card company practices. The Act detailed the information that your card issuers must provide you, established new rules regarding interest rates, fees, and limits and changed billing and payment practices.
30 Slide 28 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Let s talk more about how your credit score is calculated. Your credit score is a numeric summary of your credit history. It s intended to predict your credit risk or the likelihood that you repay what you borrow. The most common credit score is the FICO, which ranges from 300 to 850. A higher score means you can get credit more easily and typically get lower interest rates. Your FICO score is comprised of several factors that are weighted differently. Click each number to learn more. Payment history (35%) This looks at the timing of your bill paying. If you are frequently late in paying your bills by their due dates, your score will suffer. ] Outstanding balances (30%) If you re carrying large amounts of debt, especially if you re utilizing a high percentage of your available credit, you re lowering your score. Length of credit history (15%) - The longer accounts have been open, the better for your score. New credit applications (10%) While many inquiries on your credit report can lower your score, all mortgage or auto loan inquiries that occur within a short period of time are considered just one inquiry for scoring purposes. Types of credit in use (10%) If you have a variety of accounts (credit cards, retail accounts, loans), your score can be increased as it can demonstrate your ability of handling different types of debt.
32 Slide 29 PROPERTIES On passing, 'Finish' button: On failing, 'Finish' button: Allow user to leave quiz: User may view slides after quiz: User may attempt quiz: Goes to Next Slide Goes to Next Slide At any time At any time Unlimited times Based on what you ve learned about credit scores, which of these will help increase your score? After you select your answer, click Submit. These are all good ways to increase your credit score. First you need to know your starting point, so get a report from all three credit bureaus. If you notice an error, work with the credit bureaus to correct it. Always pay your bills on time. Your payment history represents the biggest portion of your FICO score. You should carefully consider when to open any new accounts, since new accounts lower your credit score. Finally, pay down your balances. Pay more than the required minimum payment or you ll be paying off your debt for a long time. A credit card with a $1000 balance, a 19% interest rate and a minimum monthly payment of $26 would take approximately 5 years to pay off. In addition, you d accrue $ in interest. If you paid $50 a month instead of $26, your balance would be repaid in 2 years and you would only pay about $200 in interest.
33 Slide 30 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Paying down excessive debt and increasing your credit score isn t easy, and it isn t going to occur overnight. It requires some sacrifice and discipline, but the payoff will be worth it. It may seem overwhelming to start, but by following these steps, you can do it! Click the numbers at the bottom of the screen to walk through the steps. 1 - First, stop increasing the size of your debt. Put away your credit cards until you have your debt under control. You may even find you won t need them. 2 - The next step is to determine what you spend your money on. Most debt doesn t come from a single large purchase, but rather numerous small purchases that have amassed over time. It s easy to think that a purchase here and there won t matter, but it can build up. Write down everything that you spend in a month, down to the penny. 3 - Next, put your monthly expenses into one of three categories: must have, should have and nice to have. Must haves are those expenses that you must have to survive such as housing, food and health care. Should haves are those things that you need but you could live without, such as new clothes. Nice to haves are those items that enhance your life but are not essential, such as a newspaper subscription or your daily $4 coffee. This exercise gives you an idea of how you spend your money and where you can cut back. 4 - Now that you have an idea of what you can give up, you can calculate the amount you can put towards paying down your debt. Make a simple spreadsheet or just list your outstanding
34 debts. You ll need the name of the creditor, your total balance, your minimum monthly payment and the interest rate for each debt. 5 - Now you need to prioritize your debts to determine where to apply the extra money. Your first priority should be any debts that are overdue or that carry really high interest rates. 6 - If you have multiple debts, the snowball effect can be helpful. This is where you pay off the debt with the highest interest rate first, while paying the minimum amount on your other debts. Once you ve completed paying off the first debt, take the amount you were paying, in addition to the minimum you were already paying, and dedicate that to the bill with the next highest interest rate and so on. The snowball effect strategy helps you identify where to dedicate your resources and will minimize the amount of interest you pay on all of your debts.
35 Slide 31 Credit On the Web Financial Literacy You've done it! You're ready to build your credit history and make every decision count. You understand how to get good credit and the best ways to use credit. You can determine how to get the best interest rate and understand why your credit score is so important. Understanding credit is just one more step towards your goal of financial literacy. For more information about credit, click the On the Web link to go to the Federal Reserve website. To view our other Financial Literacy presentations, select the Financial Literacy link.