Title: Credit
1Credit
2What is Credit?
3What is Credit
- Credit can be a useful tool that helps you to
make major purchases, like a car or a house, by
letting you pay for them over time. - It's convenient, it can help in emergencies, and
its safer than carrying cash.
4What is Credit, cont
- Credit can also be dangerous if not used in the
right way. Its tempting to buy something using
a credit card, even though you dont have the
cash to pay it back. If used too much, credit
payments can add up quickly, leaving less money
for your basic necessities.
5Look Before You Leap!
- Before buying something on credit, ask yourself
- What is the cost of this credit?
- What is the risk of this credit?
- What is the obligation of this credit?
6Managing Your Credit
- Every time you pay a bill (or dont) it
contributes to your credit history - Paying slow or not at all is seen as a warning
to other lenders - Signs of Risky behavior
- May result in
- Higher interest rates and fees
- More rejections of loans
- Smaller loan amounts
7Types of Credit
- An open-end credit account is one under which
you can make repeated purchases. You can either
pay the balance in full or in installments. - Examples of open-end credit include credit cards
like Master Card and Visa, gas cards, and
department store cards
8Types of Credit, cont.
- Is the credit youre borrowing secured or
unsecured? - When a debt is unsecured, there is no collateral
attached to the money being borrowed. - Secured credit means there is some kind of
collateral attached to the money youre
borrowing. - Collateral is defined as property that a borrower
puts up to secure a loan.
9Controlling Your Use of Debt
- 28/36 Rule
- A good credit risk when mortgage payments are
below 28 of gross monthly income, and total debt
payments are below 36.
10What is Credit Management?
11Credit Reporting Agencies
- Equifax
- Experian
- TransUnion
12The Credit Bureau andYour Rights
- Congress passed the FACT Act in 2003.
- Allowing individuals a free credit report
annually. - Contact the bureaus regarding incomplete or
inaccurate information in your report.
13Getting your FREE Credit Report
- Consumers are entitled to receive one free credit
file disclosure every 12 months from each of the
nationwide consumer credit reporting companies
Equifax, Experian and TransUnion (one from each
per year 3 total) - Many imposter websites and 800s try and sell
you a credit report or score - Totally Needless. Many capture credit score and
charge monthly fee. - You can do it yourself for free
14FREE Credit Report
- www.annualcreditreport.com
- 1-877-322-8228
- Annual Credit Report Request Service
- PO Box 105281
- Atlanta GA 30348-5281
15A credit report tells
- How youve paid your debts
- How much debt you have
- Whether youve made payments on time
16Credit Report Sections
- Person requesting report
- Potentially negative items
- Accounts in good standing
- Requests for your credit history
- Personal information
17Who cares about your credit report?
- Creditors / Lenders
- Insurance Companies
- Landlords
- Employers
- Utility Companies
- Government Agencies
- YOU!
18How to read your credit report
- Make sure you name, social security number, and
current/past addresses are correct. - Public Records Verify any information appearing
here from local courthouses regarding defaults
and legal judgments - Account History Check that balances make sense,
payment history is accurate, and the account
listed is in fact yours. - Look for anything suspicious in the section that
lists who has received copies. - Make sure no inquiries have been made about loans
or leases you didnt apply for. - Mark or highlight items you feel are not
accurately reported - If incorrect information, contact the creditor
and the Credit Bureau. Follow up with a letter.
Report the problem quickly and in writing.
19What if theres a mistake on my credit report?
- You can dispute mistakes or outdated items for
free. Ask the credit-reporting agency for a
dispute form or submit your dispute in writing,
along with any supporting documentation. Do not
send them original documents. - If the reinvestigation does not resolve your
dispute, have the credit bureau include your
version of the dispute in your file and in future
reports.
202. Understanding Credit Scores
21Determining Creditworthiness
- Your credit information translates into a three
digit number your credit score which measures
your creditworthiness. - Involves the numerical evaluation or scoring of
applicants. - Reduces the lenders uncertainty, enabling the
lender to make credit available to good risk
customers at lower interest rates.
22How Your Credit Score is Computed
- A credit score is referred to as a FICO score.
- Based on models developed by Fair Isaac
Corporation. - The models begin with information on your report,
using it to calculate your score. - Scores range from 300-850.
- The majority are between 600 and 800.
- They vary from one credit bureau to another.
- Visit www.myfico.com/ScoreEstimator.html to get
an estimate of your score.
23How Your Credit Score is Computed
- What is a good score?
- The national average is 678.
- This is often the minimum for receiving credit.
- A good credit score doesnt just mean that youll
get a loan, it also means youll pay less for
it. - A low FICO score may result in a credit card rate
twice that of a high FICO score.
24Credit Scores
- FICO Score most widely used
- Vantage Score 3 Bureaus
- Many other score brands
25Your Credit Score
- A credit bureau is a private organization that
maintains credit information on individuals,
which it allows subscribers to access for a fee. - Experian, Trans Union, and Equifax are examples.
- They compile a credit report on you and assign a
credit score. - Your credit information not only impacts whether
you get a loan, it affects your interest rate.
26Impacts of Types of Credit
- Credit cards Revolving credit accounts
- Very common due monthly huge variations
- Store credit cards
- Store specific limited use and amounts
- Credit accounts for store or service
- Due periodically mostly convenience
- Payday Loans
- Short-term high cost loans
- Rent to Own
- Rental is disguised as loan
- Reported?
- Yes
- Yes
- Sometimes
- No (rarely)
- No (rarely)
27FICO Score
Source Fair Isaac Corporation
28Factors That Determine Your Score
- Your Payment History
- Lenders want to know how you have handled credit
payments in the past.
- Amount You Owe and Your Available Credit
- Shows the amount you owe on your mortgage, car
loan, and all other outstanding debt, along with
your total available credit.
29Factors That Determine Your Score
- Length of Credit History
- The longer the credit accounts have been opened,
and the longer you have had accounts with the
same creditor, the higher your credit score.
- Types of Credit Used
- The wider the variety of credit, the higher the
score. - Using different types of credit indicates you
know how to handle your money.
30Factors That Determine Your Score
- New Credit
- New applications for credit will lower your
score. - Those moving towards bankruptcy take all
available credit to stay afloat.
313. Dealing with Debt Overload
32Credit Danger Signs
- Paying only the minimum monthly payment on credit
accounts - Being charged fees for late payments, partial
payments or over the limit - Inability to make all monthly credit payments
- Using savings to cover everyday items
- Using credit on items you formerly paid cash
33Credit Repair Agencies
- Disreputable agencies often make claims like
- "Credit problems? No problem!"
- "We can erase your bad credit-100 guaranteed."
- "We can remove bankruptcies, judgments, liens,
and bad loans from your credit file forever!"
34Credit Repair Agencies, cont.
- For a fee, they promise to clean up your credit
report so you can get a car loan, a home
mortgage, insurance, or even a job. The truth is,
they can't deliver. Only time, a conscious
effort, and a personal debt repayment plan will
improve your credit report.
35Steps to repair your credit
- Stop creating debt.
- Determine how much money you have each month to
put toward debt repayment. - Organize your debt information to develop a
repayment plan - Use debt management plans (DMPs)
- Restructure your debt
36Restructuring your debt
- Consolidation loans
- Refinancing your home
- Transferring balances
- Use a credit counselor to negotiate debt
- Discharge debt (file bankruptcy)
37Rebuilding Your Credit
- Pay your bills on time
- Pay off outstanding collections and judgments
- Dont max out credit cards
- Pay off re-affirmed credit cards and loans with
high interest rates - Re-establish credit by opening a secured credit
card (caution!!)
38What To Do If You CantPay Your Bills
- Go to creditors to get help resolving your
situation or see a credit counselor. - Consider using savings to pay off debt.
- Use a debt consolidation loan to lower monthly
payment and restructure debt. - Final alternative is personal bankruptcy.
394. Seeking Help
- Caution!
- Unscrupulous providers charge upfront fees
- May make situation worse
- www.debtadvice.org or (800) 388-2227
- National Foundation for Consumer Credit (NFCC)
- Nonprofit certified organizations
- Local agencies CCCS of ______ (Consumer Credit
Counseling Service) - Provide budgeting and other advice to people in
trouble
40DMPs
- Debt Management Plans
- Voluntary Agreements between borrower and lenders
- Designed to help organize debts
- Counselor Can re-negotiate bills due
- See Fiscal Fitness Choosing a Credit Counselor
and Knee Deep in Debt. - See http//www.ftc.gov/bcp/edu/pubs/consumer/credi
t/cre19.shtm - See also http//www.ftc.gov/bcp/edu/pubs/consumer/
credit/cre38.shtm
41Bankruptcy
42Bankruptcy
- Personal bankruptcy doesnt wipe out all
obligations. - Chapter 7 Straight bankruptcy
- Chapter 11 For businesses or those exceeding
debt limitations or lack regular income. - Chapter 12 Available to family farmers.
- Chapter 13 The wage earner plan
- personal bankruptcy doesnt wipe out all
obligations
43Chapter 7 Straight Bankruptcy
- Allows individuals who dont have any chance of
repaying debts to eliminate them and begin again.
- While you will not lose everything, courts
confiscate and sell most assets to pay off debts. - Some debts remain including child support,
alimony, student loans, and taxes.
44Chapter 7 Straight Bankruptcy
- To qualify, you must pass a means test and
cannot file Chapter 7 bankruptcy if - Income is higher than median in your state.
- Have more than 100 in monthly disposable income.
- Have sufficient disposable income to repay at
least 25 of your debt over 5 years.
45Chapter 13 The Wage Earner Plan
- To file for Chapter 13, you must have
- Regular income
- Secured debts under 922,975
- Unsecured debts under 307,675
- Repayment schedule is designed to cover your
normal expenses while meeting repayment
obligations. - For creditors, it means controlled repayment with
court supervision.
46Chapter 128 Receivership a bankruptcy
alternative
- An alternative to bankruptcy for individuals or
businesses in a difficult financial situation. - Helps consumers catch up on unsecured debt
payments for up to three years. - Unlike a bankruptcy, the consumer can choose
which debts to include in the plan. - While a bankruptcy will eliminate the debt (and
stay on your credit history for ten years), a
receivership will simply stop additional interest
from being added
47Rebuilding and improving your credit following
bankruptcy
- Pay your bills on timeĀ
- Pay off outstanding collections and judgments
- Dont max out your credit cards
- Pay off re-affirmed credit cards and loans with
high interest rates - Re-establish credit by opening a secured credit
card.