Earning Extra Credit. Understanding what it takes to maintain and manage good credit now and for your future

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2 Credit 101 Why Credit is Important 3 Your Credit Score 5 FICO Scoring - From Good to Bad 7 Credit Bureaus 8 Credit-Worthy vs. Credit-Ready 9 Are you Drowning in Debt? 10 2

3 Why Credit is Important College is one of the most rewarding and challenging life experiences. Now that you are out of school, you are financially independent and now responsible for your own earnings. Establishing good credit is as essential as obtaining a college degree. However, the majority of graduates leaving college are in debt from student loans and credit cards. Debt doesn t always have to carry a negative connotation; it s sometimes a necessary reality of life, especially post-college. It s how you manage your debt properly that will lead you down the right road to success and financial freedom. This booklet is designed to teach you how to maintain and manage your credit. What is Credit? Credit is defined as borrowing money from a lender and repaying it at a later date, usually with accrued interest charged on top of the initial sum borrowed. When a lender issues credit, they are essentially telling the borrower they are confident in the borrower s ability and intention to repay their loan. The level of confidence lenders have in potential borrowers depends on certain factors, such as: a person s income, amount of outstanding debt, and how they repay their debt. What is a credit report? A credit report provides you with all of the information in your credit file which is maintained by a consumer recording company. A credit report also includes a record of everyone who has a received a consumer report about you with a certain amount of time ( inquiries ). You are entitled to receive a disclosure copy of your credit file from a consumer reporting company under federal law and the laws of various states. A credit report will produce a credit score, known as a FICO score, which establishes your credit rating. 3

4 What does a credit report contain? There are four main categories of information in your credit report. 1.Personal Information Your credit report contains information that identifies you, including the following: Name Social Security Number Date of Birth Current address and previous addresses Phone number Current employer and previous employers 2.Your Credit History Your credit report includes your history of bill paying with companies such as: Banks Mortgage companies Retail stores TWO Main Types of Credit Home loans, or mortgages, and personal or department store loans linked to items Revolving credit on credit cards Finance companies Utility companies 3.Inquiries Your credit report lists the lenders and credit grantors that have requested or received your credit report. The general rule is the fewer inquiries on your credit report, the better. 4.Public Records Your credit report lists any items that may affect your credit, including: Court judgments, including child support judgments Tax liens Bankruptcies Delinquencies 4

5 Your Credit Score What is a credit score? A credit score evaluates information in your credit file. Lenders use a credit score to help determine whether a person qualifies for a particular loan. Most credit scores estimate the risk a company incurs by lending a person money or providing them with a service specifically, the likelihood that the person will make payments on time. FICO Scores FICO scores judge your credit behavior with score ranges from The three-digit number determines your risk factor in lending money. The higher your FICO, the more likely you will be approved to borrow more money at favorable terms or rates. Five different categories exist in determining your FICO score, each weighted with varying degrees of importance. Payment History (35%) Are your bills paid on time? Past-due accounts, whether in collections or bankruptcies, will lower your FICO score. The most recent your past-due accounts are, the worse it will be for your credit score. Lenders are interested in how timely your pay your bills. Money Owed (30%) The amount of debt you owe on and the ratio between outstanding debt and available credit. Available credit is the sum of your usable credit lines. The lower the ratio of debt to available credit, the better. However, it is also important to look at how much available credit you have and this could affect your approval rate. For example, if you have an open credit card with no balance and a $5,000 credit limit that you know you will never use, and you are applying for a mortgage, you should close your available credit immediately in order to maximize your approval for a mortgage. Lenders look at outstanding debt, such as car or home loans and credit cards at their credit maximum. So, keep your card balances at 25% or less of their limits. 5

6 Duration of Credit History (15%) How long have you been borrowing? Then more extensive your credit history, the better your credit score because you have established creditworthiness. The more information about your past payment history gives a more accurate prediction of your future actions. New Credit (10%) Many new account inquiries in the last 12 months can lower your credit score. If you have applied for multiple credit cards or loans, you will have a lot of inquiries or credit hits on your credit report. Numerous credit inquiries can indicate you may be in some kind of financial trouble or may be taking on additional debt even if you have not used the cards or gotten the loans. This is why you should not apply for multiple loans with the hopes that one gets approved. FICO scores only count inquiries from the past year. Type of Credit (10%) The number of open credit accounts you have and the types of companies you have taken out credit with, such as department stores, can also affect your credit score. 6

7 FICO Scoring - From Good to Bad FICO Scoring (300 to 850) The Good: A FICO score above 668 is considered a good credit risk to lenders. Impeccable credit takes hard work. A flawless FICO score involves paying your bills on time, condensing the number of credit cards you have to two or three (especially eliminating department store cards that carry high interest rates), charging only up to 25% of you credit limit at a time, paying over the minimum payment, not abusing balance transfers and most importantly, checking your credit report yearly at a minimum. Not only does a high FICO score allow for a seamless borrowing process with high approval rates, but it also can guarantee you lower interest rates. The Average: A FICO score between is considered average. You may have missed a few payments that have gone days into delinquency or have an outstanding dispute on your credit report that has not been resolved. There may be some delays in the approval process so lenders can verify your income and assets. The national FICO score average is 678. The Ugly: A credit score below 483 is considered a poor credit risk. Also referred to as a subprime borrower, poor credit risk borrowers have two or more 30-day delinquencies in the last 12 months, one or more 60 day delinquencies in the last 24 months, a judgment, foreclosure, repossession or charge-off in the last 24 months, a bankruptcy in the last 5 years or a debt-toincome ratio of 50% or greater. Debt-to-income ratio is defined as your current income versus your current debt. To obtain a loan with poor credit can be a slow and painful process; a cosigner may be required and you may be taxed with a higher interest rate. So now you know there s a record to your borrowing, it s important to order your own credit report. After all, it s YOUR credit life, as personal as a daily journal, with all your successes and all your downfalls. 7

8 Credit Bureaus Did you know? Under the Federal Credit Reporting Act, you can obtain a FREE copy of your credit report once a year. Visit or call You can obtain up to three free credit reports yearly. However, the website will NOT provide your FICO score; you will need to pay a fee to obtain this critical piece of information. You can order your credit report and FICO scores through three major credit bureaus. Each credit bureau can report different credit information about you so you should request information from all three agencies. Note: Banks will request a tri-merge report (all three credit bureaus) to review your credit when you apply for a mortgage. Equifax Experian TransUnion PO Box Atlanta, GA PO Box 2104 Allen, TX PO Box 1000 Chester, PA In addition, if you are turned down for credit, you can obtain a free copy of your credit report within 60 days of being declined. Why check your credit report? Human Error No one is perfect, but your credit report must be. Twenty-five percent (25%) of credit reports contain serious errors. Common mistakes include: identity mix-up and incorrect or outdated information on the part of the company reporting the information or the bureau itself. If you detect a human error, it is important to contact your credit reporting agency immediately, so they can begin an investigation. Fraud If you have had any unauthorized charges to credit cards, it is important to check your credit report to see if any other illegal activity has taken place. If fraud occurs, inform your credit card companies and credit reporting agency and file a report with the police. To prevent identity theft, check your credit card statements monthly, do not give out your Social Security number, keep your passwords private, secure your and shred regular mail. Fraud occurs more frequently than one would think. Upon checking your credit report, contact the credit agency as soon as possible if you detect a mistake or fraud. Under the Fair Credit Reporting Act, they have 30 days to investigate and solve any issues. 8

9 Credit-Worthy vs. Credit-Ready Credit-ready applicants are generally those with no established credit history or a limited credit history. Credit-worthy applicants are generally those with satisfactory established credit. The Truth about Credit Cards Zero percent or low introductory rates expire and then increase after a couple of months to a year. If you miss one payment during that time period, your rate can increase to over twenty percent (20%) and you will be charged with a late fee. If the interest rate is variable, it fluctuates with the prime and can therefore increase without notice. Certain credit cards award you points for the amount of money your charge on it, escalating your spending habits. Sometimes looks are deceiving. Just because you qualify for a $3,000 credit line does not mean you can afford to spend $3,000 and max out your credit limit. If you do not limit yourself now, a compulsive shopping habit can follow you into the future. Credit Card payment example: Suzy has racked up a credit card balance of $3,000 while in college that charges a 15% interest rate. She makes a minimum payment of $60 each month. How long will it take Suzy to pay off her balance and how much interest will she accrue over the life of the loan? Minimum payment $60 Total interest payment $1,737 Number of payments 79 Number of years to pay off 6 Moral of the story? Always make over your minimum payment. If Suzy simply doubled her payments to $120/month, she would cut her total interest payments to $620, her number of payments to 31, and the number of years she has to payoff her balance to 2 years. 9

10 Are you Drowning in Debt? If you feel like you are on the road to debt doomsday, there is a way to help you gain back your financial footing. Check out the following websites for help and information. National Foundation for Credit Counseling Federal Trade Commission Federal Citizen Information Center Bankruptcy Blues Declaring Bankruptcy is like declaring war on yourself. Contrary to popular belief, bankruptcy is not a way of dodging your debt or erasing your credit history. If you do file for bankruptcy, your student loans will not be forgiven. Bankruptcy is a last resort for those who have tried all other outside sources, including credit counseling. Why you should think twice about bankruptcy Stays on your credit report for up to 10 years. Hinders your ability to get a car loan or mortgage. New credit cards will carry high interest rates or require you to secure a credit line with a down payment deposit. Can prevent you from being hired for a job or obtaining a lease on an apartment. Doesn t forgive all of you debts such as: child support /alimony, student loans, income taxes, fines, penalties, criminal resolution. It s more difficult to file a Chapter 7. Your income must be less than the median in the state you reside in. Others will be required to file a Chapter 13 or have $100 or more of discretionary income to pay towards debt. So think twice before filing away your freedom. Consider and exhaust all other alternatives to clearing your debt before you choose bankruptcy. Congratulations on taking the initiative to become a credit-conscious borrower. After reading this booklet, you should have a better grasp of what credit means and how to maintain healthy credit today and in the future. 10