4 Establishing Credit Credit is the opportunity to borrow money to use now and then repay over time at an agreed upon cost. It s a convenience and an important financial tool if used wisely. Smart investing@your library Series This initiative is administered jointly by the Reference and User Services Association - a division of the American Library Association - and the FINRA Investor Education Foundation. The program funds library efforts to provide patrons with effective, unbiased financial education resources. Martin County Cooperative Establishing Credit Smart investing@your library Extension 1 Service
18% Minimum Payment 87 7 $1,516 What do you find most useful about having a credit card? Payments Credit Cards Buy now, pay later. Debit Cards Buy now, pay now. Good for emergencies Pay for big-ticket items and stretch out the payments over time Establish a credit history Insurance or replacement for purchases Safer than carrying large amounts of cash Airline miles or other rewards Protection from fraud Not managing your credit wisely can lead to: Increased annual percentage rates (APRs) Unnecessary fees A decline in your credit score Denials of future credit, employment or insurance Interest Charges Other Potential Benefits Other Potential Concerns Yes, if you carry a balance or your card offers no grace period. Freebies, such as cash rebates and bonus points good for travel deals. Some purchase protections. Fees and penalties. Also not all cards offer grace periods (time to repay without incurring interest). Over-spending can cause debt problems. No. Easier and faster than writing a check. Avoid debt problems. More cards now offering freebies. Some purchase protections. Fees on certain transactions. You may overdraw your account if you don t record debit card transactions into your check register and balance your checkbook. Benefits of Making More Than The Minimum Payment 18% Minimum Payment (MP) 123 10 $3,915 18% MP + $25 50 4 $3,258 18% MP + $50 33 3 $2,839 This chart assumes you are not making additional purchases, and you are making your payments on time. The minimum payment rate is 4 percent. Of course, the best way to save money and avoid paying interest charges is to pay off your balance in full when you first get your bill. Establishing Credit Smart investing@your library 2
Sample Truth in Lending Disclosure Statement Look at the other fees that may be involved (here s an example): $20.00 Late payment fee (if you forgot to mail your check before the due date on the statement) $20.00 Over-the-limit fee (Example: Your credit card limit for spending is $1,000.00 and you spent $1,000.01 or more.) $20.00 Returned check fee $ 2.00 ATM transaction fee (this is also a cash advance) The grace period does not apply to cash advances. (grace period = 25 days to mail your payment to the credit card company to pay this month s bill before it is late) The annual percentage rate for cash advances (like getting cash at the local ATM) is 24%. (The 19.4% rate listed above, would be for purchases.) Credit Cards Comparison Chart Credit Card 1 Credit Card 2 Credit Card 3 Name of credit card issuer/card What is the annual percentage rate (APR)? Introductory APR? Penalty APR? What is the finance charge? What is the annual fee? What are other fees (late fees, over-the-limit fees, closing fees, etc.)? Is there a grace period? What are other benefits (points earned, etc.)? What is my credit limit? Other? (for example, customer service hours; online access; can you talk to a real person?) Establishing Credit Smart investing@your library 3
Types of Credit Check off the types of credit you have: Revolving credit the type of credit agreement used by most credit cards. It allows consumers to pay all or part of the outstanding balance in each billing cycle. As credit is paid off, it becomes available again to use for another purchase or cash advance. Charge cards cards that are not subject to interest, but you cannot carry a balance you must pay your bill in full each month. Charge cards often have annual fees. There is no set credit limit because cardholders agree to pay the full amount they owe every month. Secured credit cards obtained only after you have deposited money in a savings account to guarantee that you will pay for your credit card charges. Secured cards look like and are used just like unsecured cards. Secured credit cards are an option for people who have no credit history or have a poor one. Subprime cards are marketed to people with poor or damaged credit. Subprime credit is high-interest credit offered to borrowers who may not qualify for any other credit. Stored value cards cards that look like credit cards and use the same magnetic stripe to retain account information. Payroll cards, electronic benefits transfer cards, travel funds cards and store gift cards are examples of stored value cards. Retail (store) credit cards cards issued by department stores, national chain retailers and gasoline companies as a convenience for their customers. These cards are more limited in their use as compared to general purpose credit cards issued by banks and financial services companies (bank cards). Store cards cannot be used to purchase goods and services from other merchants or service providers. Tips on how to use your credit card responsibly Check off things you do: Protect your credit card and account numbers to prevent unauthorized use. Draw a line through blank spaces on charge slips so the amount cannot be changed. Tear up carbon copies of your receipts. Keep a record of your account numbers, expiration dates, and the phone numbers of each credit card issuer in a safe place, separate from your credit card, to quickly report a loss. Carry only the credit cards you think you will use. Pay off your total balance each month. If you cannot pay the total balance, try to pay more than the minimum amount. Read the fine print. Low advertised interest rates might not last as long as you think. You might not have a grace period with balances you have transferred from other credit cards. After you have established a good credit history, ask the credit card issuer to waive the fee or lower the interest rate. Do not keep more than two or three credit cards. Too many cards make overspending tempting. There are, however, good reasons to have more than one card, especially if your credit limit is not high enough on one card to cover an emergency. Many financially responsible people can become overwhelmed by expenses or reduced income triggered by a serious illness, a job loss, or some other unexpected event. To seek help call toll free 800.251.2227 http://www.credability.org Establishing Credit Smart investing@your library 4
How to get a free copy of your credit report once a year from each of 3 reporting agencies To order your free annual report from one or all of the credit reporting agencies, do not contact the three nationwide consumer reporting companies individually. You can obtain FREE annual credit reports by doing ONE of the following: Submit a request online at http://www.annualcreditreport.com Call toll-free: 877-322-8228 Complete the Annual Credit Report Request Form in this booklet on page 7 and mail it to: Annual Credit Report Request Service P. O. Box 105281 Atlanta, GA 30348-5281 You can print a copy of the Annual Credit Report Request Form (same as on page 7) from http://www.annualcreditreport.com or http://www.ftc.gov/credit You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last 2 years, you may have to provide your previous address. To maintain the security of your file, each credit reporting agency may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources. Remember, you may also be able to obtain a free credit report if: Your application for credit, insurance, or employment is denied based on information in your credit report. You are unemployed and plan to look for a job within 60 days. You are receiving public assistance. Your report is inaccurate because of fraud, including identity theft. If you are not eligible for a free annual credit report, a credit reporting agency may charge you up to $10.00 for each copy. To buy a copy of your report, contact one of the following credit reporting agencies: Equifax: 800-685-1111 or http://www.equifax.com Experian: 888-EXPERIAN (888-397-3742) or http://www.experian.com TransUnion: 800-916-8800 or http://www.transunion.com Every 4 months, try getting your free credit report from a different credit reporting agency (Equifax, Experion or Trans Union), to keep track of how you are doing througout the year. Establishing Credit Smart investing@your library 5
Penny Parker http://www.mycreditgroup.com/images/large-credit-report.jpg Establishing Credit Smart investing@your library 6
Establishing Credit Smart investing@your library 7
6 ways to kill your Credit Score Lenders, insurers, landlords and others will charge you more or flat-out reject you if you show up with a low FICO score. Here s how you may be doing yourself harm. By Jeanne Sahadi, CNNMoney.com senior writer Find out your credit score Know how lenders see you. Take seven minutes to download a free credit report at annualcreditreport. com or calling 877-322-8228. For year-round monitoring, get a report from one of the three major credit bureaus every four months. If you spot an error, notify the bureau (online, by phone or by mail) and the creditor (call and also send a letter). You won t find your credit score here, so when you request a report from Equifax, pay $7.95 for your FICO score, the most commonly used score. The range is 300 to 850, with 700 and above being good. 30 percent of your credit limit. It s always good to pay off your balances every month. But creditors may take a few weeks or even a couple of months to report your payment to the credit bureaus. To boost your score: Don t charge anything for at least 60 days before applying for a loan. That way it s likely that all the payments you ve made to date will be reflected in your credit score by the time a lender requests it. If you can t pay off your total balance in full, at least keep it under 30 percent of your total credit limit. 2 - Be a payment-slacker Sending in your loan or credit card payments late can really hurt. When you re 30 days past due and your balance is still unpaid, your score could take a 60-point hit. That kind of drop could mean a much higher interest rate on loans you take out. Late payments from your past that you have since paid off will have less and less of a negative effect on your score as time goes on. On average, past delinquencies that have since been resolved, might cost you 15 to 20 points. To boost your score: Pay your bill in full and mail it as soon as it arrives, or at the very least the minimum due. Set up automatic online bill payments so you ll never be late. Or, if you are late one month, be sure to pay off what you owe as soon as possible. 3 - Be too thin When it comes to your credit record, fat is good, emaciated bad. Even if you re the most responsible, on-time, in-full bill payer on the planet, your credit score won t be as high as it could be if you have just one credit account. The reason: Your credit profile is too thin and lenders ideally like to see a potential borrower responsibly managing a mix of revolving debt (such as credit cards, where you can reuse the credit after paying it back) and installment debt (such as a car loan or most mortgages, where you pay the same amount every month for a certain period). 1 - Big spender at the wrong time The bigger your total balance as a percent of your total credit limit across all your credit cards, the lower your score will be. You lose 1 point for every percent of your credit limit that you use. So if you have a total credit limit of $10,000 and have an outstanding balance of $4,000 (40%), your score would be 40 points lower than if you had a $0 balance. Ideally, credit experts say, your never want your balance to exceed Establishing Credit Smart investing@your library 8
To boost your score: Consider opening another credit-card account or two, or taking out a car loan or small bank loan. 4 - Be too young and eager Old credit accounts count more than young ones in your credit score. Lenders prefer borrowers who have responsibly managed the same accounts for years. That s a more reliable indicator of creditworthiness than a few months of exemplary behavior on a new account. Accounts open less than six months will hurt your score somewhat. Those open six months or more won t, while those open at least two years will help your score. Lenders also don t like to see a borrower who s gone on a credit binge, applying for a lot of new accounts or loans in a short period. Every time you apply for new credit, your score may be dinged by 5 points. That s not the case, though, if a broker shops around for the best loans on your behalf. In that case, if they approach multiple lenders who all pull your credit report, that will only count as one inquiry so long as they all do so within a two-week window. To boost your score: Avoid applying on your own for a lot of loans and credit cards, particularly in a short period. And avoid excessive card-hopping. 5 - Be too tidy The bigger your balance relative to your credit limit, the lower your score. But while it may be tempting to close out a credit card account when you transfer the balance to a lower-rate card, you may inadvertently hurt your score. That s because your total balance stays the same but your credit limit goes down when you close an account. Say you have three credit cards with a combined credit limit of $24,000 ($8,000 each) and you owe $6,000 total. Your balance represents 25% of your credit limit. If you then close out one of your accounts, your credit limit goes down to $16,000 but your debt is still $6,000, which now represents 37.5% of your credit limit. To boost your score: Don t close unused accounts when you transfer debt. 6 - Be too nonchalant You may be a great credit risk, but your score won t reflect that if there are errors in your credit report. The last thing you need is to have someone else s delinquencies wrongly assigned to you. Or you may think you ve got great credit, but don t realize that your spouse has been hiding debt from you, and killing your score in the meanwhile. Unless you make yourself aware of what s in your credit report a few months before applying for a loan, you ll have no idea how a lender will perceive you, rightly or wrongly. And you won t give yourself the opportunity to improve your score. To boost your score: Order a free credit report once a year from each of the three major credit bureaus, and make sure they re accurate. Order one every four months by going to annualcreditreport.com or calling 877-322-8228. Two annoying but true facts: Credit scores aren t free, and the credit bureaus don t share information on you, so your credit reports and the scores based on them may vary. So if you re planning on applying for a mortgage or other big loan, you might do well to order a the 3-in-1 deluxe package from myfico.com for $47.85. That will include your credit reports from all three credit bureaus as well as the FICO scores based on those reports. Raise your credit score in 8 minutes Both will lower the size of your outstanding debt as a percentage of your total borrowing power. 1. Pay down a balance. 2. Call your issuer and ask for a higher credit limit. And don t spend it. Establishing Credit Smart investing@your library 9
By paying your credit card bill late not only will you face a late payment charge (which could be higher than your minimum payment), your tardiness will show up on your credit report, damage your FICO score and make it harder to get better terms for future loans and accounts. Make sure you send your check in plenty of time, or set up an automatic payment via your bank at least a week before the due date. Martin County s Smart investing@your library Series: 1 - Your Financial Fitness 2 - Designing Your Budget 3 - Banking Basics 4 - Establishing Credit 5 - Credit & Identity Theft 6 - Controlling Debt 7 - Tips for Daily Savings 8 - Saving for the Future Credits: This booklet was designed by Chris Kilbride, University of Florida - Martin County Cooperative Extension Service for the Martin County Library System s Smart investing@your library Series. For details about Smart investing@your library, visit http://www.smartinvesting.ala.org To learn more about the Martin County Library System, visit http://www.library.martin.fl.us We would like to acknowledge the original educational outreach material: Credit Cards: What You Need to Know - an educational partnership between Consumer Action and American Express. Charge It Right FDIC Money Smart and To Your Credit FDIC Money Smart Financial Education Curriculum Participant Guide The mission of the FINRA Investor Education Foundation, a nonprofit organization, is to provide underserved Americans with the knowledge, skills and tools necessary for financial success throughout life. The FINRA Foundation envisions a society characterized by universal financial literacy. For more information and financial literacy resources, visit: http://www.finrafoundation.org Establishing Credit Smart investing@your library 10