1.4.2.g1 understanding credit. © family economics & financial education – revised april...
TRANSCRIPT
1.4.2.G1
Understanding Credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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The Credit ProcessCredit – when goods, services, and/or money are received in exchange for a promise to pay back a
definite sum of money at a future date.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 3 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Advantages
• Able to buy needed items now• Don’t have to carry cash• Creates a record of purchases• More convenient than writing
checks• Consolidates bills into one payment
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 4 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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• Interest (higher cost of items)• May require additional fees• Financial difficulties may arise if one
loses track of how much has been spenteach month
• Increased impulse buying may occur
Credit Disadvantages
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 5 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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What Lenders Look For—The 3 C’s
Character—will you repay the debt?From your credit history, does it look like you
possess the honesty and reliability to pay credit debts?
• Have you used credit before?• Do you pay your bills on time?• Do you have a good credit report?• Can you provide character references?• How long have you lived at your present
address?• How long have you been at your present job?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 6 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Capital/Collateral—what if you don’t repay the debt?
Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable?
• What property do you own that can secure the loan?
• Do you have a savings account?• Do you have investments to use as collateral?• Do you own your own home?
What Lenders Look For—The 3 C’s
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 7 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Capacity—can you repay the debt?Have you been working regularly in an
occupation that is likely to provide enough income to support your credit use?
• Do you have a steady job? What is your salary?
• How many other loan payments do you have?• What are your current living expenses? What
are your current debts?• How many dependents do you have?
What Lenders Look For—The 3 C’s
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 8 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Borrower Responsibilities• Borrow only what you can repay.• Read and understand the credit contract.• Pay debts promptly.• Notify creditor if you cannot meet
payments.• Report lost or stolen credit cards
promptly.• Never give your card number over the
phone unless you initiated the call or are certain of the caller’s identity.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 9 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Types/Sources of Credit
Single-PaymentItems and services are paid for in a
single payment, within a given time period, after the purchase. Interest is usually not charged.
• Utility companies, medical services• Retail businesses when buying on
account or running a tab
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 10 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Installment CreditMerchandise and services are paid for in two or
more regularly scheduled payments of a set amount. Interest is charged.
• Auto dealers• Appliance companiesMoney may also be loaned for a special purpose
from depository institutions such as:• Commercial banks• Consumer finance companies• Savings and loans• Credit unions
Types/Sources of Credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Revolving CreditMany items can be bought using this plan as
long as the total amount does not go over the credit user’s assigned dollar limit.
Repayment is made at regular time intervals for any amount at or above the minimum required amount.
Interest is charged on the remaining balance.• Retail store credit cards—JC Penney,
Carson’s• Credit cards from credit card companies—
Visa, Discover
Types/Sources of Credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 12 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Report Detectives
Meet Isabella, your new client: • About to graduate from college• In extreme debt• Concerned about finding a job• Doesn’t understand her credit
report
YOUR MISSION:Help Isabella understand her credit report, identify what she did to get into this situation, and decide what she can do to improve her credit report.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 13 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Isabella’s Story
• What is your analysis of her situation?• Does she need your help?• Why?
IN SMALL GROUPS:READ ISABELLA’S SCENARIO
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 14 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit History Reporting
What they do
Additional Informatio
n
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 15 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Reporting Agencies
• Acquire information from:
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 16 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Information can be divided into 4 categories:
• Personal Information• Accounts Summary• Public record items related to
credit• Credit Inquiries
Information in a Credit Report
Lenders may or may not report information to
all three credit reporting agencies.An individual’s information may be different in
each report.
Lenders may or may not report information to
all three credit reporting agencies.An individual’s information may be different in
each report.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 17 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Personal Information
Personal Information
• Name and aliases• Current and past
addresses• Social security
number• Date of birth• Employment history
Isabella’s Personal Information:
• Name – Isabella G. Langley
• Addresses – 101 Hopeful Ave. & 695 Parent Street
• Date of birth – 05/04/86• Telephone numbers –
555-354-2368 & 555-198-2358
• Employers – Lucky’s Restaurant & Jane’s Daycare
FIND ISABELLA’S PERSONAL INFORMATION
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 18 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Accounts Summary• Types of accounts• Date the account
was opened• Credit limit or loan
amount• Account balance• Payment history,
including missed or late payments
Isabella’s Accounts• Sam’s Electronic World• City of Anywhere• U.S. Department of
Education• Financial Institution
School Loan• Shop ‘Til You Drop Store
Credit Card• Love to Read Store Credit
Card• The Free Money Credit
Card
Accounts Summary
WHAT LENDERSDOES ISABELLAHAVE ACCOUNTS WITH?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 19 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Isabella’s Late or Missed Payments
• Sam’s Electronic World• Past due
• Store Credit Card• Occasional late
payments
Accounts Summary
DOES ISABELLAHAVE ANY LATE OR MISSED PAYMENTS ON ACCOUNTS ?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 20 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Public Record Items
• Accounts turned over to collection agencies
• Public records• Bankruptcy• Tax liens• Legal suits• Foreclosures
Isabella’s Public Record Items• City of Anywhere
• In Collection
Public record items related to credit
IDENTIFY PUBLIC RECORD ITEMSIN ISABELLA’S REPORT
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 21 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Inquiries
• Requests for an individual’s credit report
• Completed by:• Insurance agencies• Potential credit companies• Financial institutions• Landlords• Potential employers, etc.
WHAT INQUIRIES DOES ISABELLA HAVE ON HER REPORT?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 22 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit InquiriesNot all credit inquiries are the same!
Type of inquiry
Soft check Hard check
Do they impact your credit score?
Not usually Yes
Examples •Individuals checking their credit reports•Credit card companies pre-approving individuals•Pre-employment checks
Permission given by the individual when seeking credit•Credit card•Automobile loan•Insurance
Individuals should avoid too many hard credit checks at one time!
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 23 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Isabella’s ReportInquiries
Type of inquiry
Soft checks Hard checks
Examples •A Very Big Bank•Need More Credit•Keeping You Insured•The Dream Sales Job
•Shop ‘Til You Drop
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 24 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Medical Information
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 25 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Equal Credit Opportunity Act
• Prohibits credit discrimination on the basis of:• Race• Religion• Marital status• Nationality• Gender • Age
Creditors may ask for this information (except religion) in certain situations, but may not use it
to discriminate when deciding
whether to grant you credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 26 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit ScoresMathematical tool created to help a lender evaluate the risk associated with lending a consumer money
•Based upon information in the credit report
•At a particular point in time
•Numeric “grade” of a consumer’s financial reliability
•Used by lenders to determine a consumer’s risk of defaulting on a loan
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 27 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Scores
• Most common scoring system is FICO
• Credit scores range from 300-850, with 850 being the best score
WHAT ISISABELLA’S SCORE?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 28 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit Score ImpactTHIS IS BASED UPON A 30 YEAR FIXED
MORTGAGE RATE FOR A $300,000 LOANFICO Score
Interest Rate
Monthly Payment
30 Year Amount
760 5.9% $1,787 $643,320
650 7.2% $2,047 $736,920
590 9.3% $2,500 $900,000
$256,680 saved over the lifetime of this loan because of a good credit
score!
$256,680 saved over the lifetime of this loan because of a good credit
score!
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 29 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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How Credit Scores are Determined
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 30 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Payment History• The timely manner
in which a consumer did or did not repay debt
• Includes:• Several types of
credit accounts• Late or missed
payments• Public records and
collection items
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 31 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Payment History• Found in status
column• Payment history
• Sam’s Electronic World is past due
• City of Anywhere is in collection• Shop ‘Til You Drop has
occasional late payments• Love to Read was closed and
never late• The Free Money Credit Card is
paid on time
• Credit score impact• Negative• Too many late accounts
WHAT IS ISABELLA’S PAYMENT HISTORY?
WHAT IMPACTDOES THIS HAVE ON HER CREDIT SCORE?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 32 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Outstanding Debt• The total dollar
amount of debt currently held
• Includes balances on all reported accounts
• When a high percentage of debt is used, then it negatively impacts a score
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 33 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Outstanding Debt• Total debt
• Found in recent balance column
• $37,325
• Available credit• Found in credit limit
column• $37,546
• Impact• Negative• $37,546-$37,325 =
$221 she is using almost all her available credit
HOW MUCH TOTAL DEBT DOES ISABELLAHAVE?HOW MUCH AVAILABLE CREDIT ISISABELLA USING?WHAT IMPACT DOESTHIS HAVE ON HERCREDIT SCORE?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 34 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Length of Credit History• Length of time a
consumer has held credit accounts
• Includes how long ago credit accounts were established
• A longer credit history will generally increase a credit score
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 35 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Length of Credit History• Credit history
• Found in date opened column
• 08/05 U.S. Dept. of Education
• Free Money Credit Card• Score will improve
WHEN DID ISABELLAFIRST BEGIN HERCREDIT HISTORY?
IF ISABELLA KEEPS HERFREE MONEY CREDITCARD OPEN FOR ANOTHER 10 YEARS AND PAYSOFF THE BALANCE, WHAT WILL HAPPEN?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 36 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Pursuit of New Credit• Assesses how many
accounts have been opened recently and the type of account
• Includes the number of recently opened accounts as well as requests for new credit
• Opening too many types of accounts in a short period of time has a negative affect
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 37 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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New Credit• Additional credit
• Shop ‘Til You Drop in August 2008
• Impact of seeking additional credit• Credit score will
go down
HAS ISABELLA PURSUED ANY ADDITIONAL CREDITSINCE JANUARY 2008?IF ISABELLA ACQUIREDANOTHER CREDIT CARD AND SHOPPED FORAN AUTOMOBILE LOAN, WHAT WOULD HAPPEN TO HER SCORE?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 38 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Types of Credit in Use• Analyzes the types
of credit in use• Credit cards, retail
cards, mortgages, automobile loans, etc.
• Variety is generally good to have
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 39 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Credit in Use• Types
• Credit card (revolving)• School loan
(installment)• Private school loan
(installment)• Store cards (revolving)
• Additional forms• Mortgage• Automobile loan
WHAT TYPES OFCREDIT DOES ISABELLA HAVE?
WHAT ARE ADDITIONAL FORMSOF CREDIT SHE MAY SEEK?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 40 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Information not included in a FICO score
• FICO score is only based upon credit use• Information not included is:
• Personal information such as age, where you live, marital status, race, color, religion, national origin, gender
• Employment information• Interest rates charged on accounts• Overall wealth (assets an individual may
have)These variables may still be considered when a lender
reviews a loan application.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 41 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Positive vs. Negative Credit Impact
Positive• Informs the lender
a consumer is:• Financially
responsible• Less risk
• Benefits to the consumer• Lower interest rates• Access to additional
credit
Negative• Informs the lender a
consumer is:• Not financially
responsible• May be a higher risk
• Impact on the consumer• May pay higher interest
rates• May not be able to
qualify for credit• May limit employment
opportunities
IS ISABELLA A POSITIVEOR A NEGATIVE RISK?WHY?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 42 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity - What You Do Makes a Difference
1. Read the scenario2. Determine if the scenario will have a
positive or negative impact on an individual’s credit report
3. Move to the side of the room representing your selected answer
4. Be prepared to explain “why”
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 43 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeJoey owes the store the money which was agreed upon in the contractMay be responsible for additional feesHe may be referred to collections
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 44 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
PositiveAn excellent habit for building a positive report
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 45 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeFernando is responsible for the movie replacement
Could be reported to collections
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 46 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeCassie has probably already been referred to collectionsWill owe for the parking tickets and additional fees
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 47 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
PositiveDemonstrated the ability to responsibly use credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 48 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeAlthough Corey is paying his bill, he is doing so late!
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 49 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
PositiveAll payments were made in timeHaving automatic withdrawals with the money in the account is a good practice
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 50 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeThis is too many inquiries for new credit at one time from a variety of types of stores
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 51 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeA variety of types of credit may be good,however, Jessica’s balances are at the maximum level
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 52 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Activity
NegativeJon is delinquent on the account.If he contacts the loan company, they may be able to work with him
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 53 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Positive Credit Practices
PositivePractice good banking techniques, such as keeping a checkbook balanced, managing accounts online, and not bouncing any checks
Pay bills consistently and on time
Maintain reasonable amounts of unused credit
Apply for credit sparingly, thus keeping credit inquiries to a minimum
Check credit reports annually and search for errors
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 54 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Negative Credit Practices
NegativeHaving non-sufficient funds (NSF) when writing checks, also known as bouncing checks
Routinely paying late on credit cards, utility, and cell-phone bills
Maxing out limits on credit cards
Numerous credit applications in a short period of time
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 55 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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When Credit is not established
• Although the following are all positive financial habits, no credit is established when:• Credit is never used• Accounts are not in own name• Cash is paid for all major purchases• Phone and utility bills are paid on time
• It only negatively impacts a score if payments are late
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 56 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Building credit history• Important for consumers to build a
credit history to be able to purchase items on credit• For example – house, vehicle
• Having no credit history may be just as challenging to a consumer as having a negative history
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 57 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1Ways to Establish/Build Credit
• Pay all bills promptly. • Apply for a local store credit
card and make regular monthly payments.
• Acquire a secured credit card which requires a security deposit to ensure payment.
• Get a co-signer or use your savings account for collateral to get a loan and pay back the loan as agreed.
If someone is a co-
signer on a an
account, they are
equally as responsibl
e and their credit
report is impacted.
If someone is a co-
signer on a an
account, they are
equally as responsibl
e and their credit
report is impacted.
DOES ISABELLA HAVE ANY CO-SIGNERS?WHAT IMPACT DOES HER ACTIONS HAVE ON THEM?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 58 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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What is a Co-Signor?• Someone who has a good credit
history• They meet the 3 C’s requirement and
qualifies for the loan• Someone who agrees to pay the debt
if the borrower does not
What is a Co-Signor’s Responsibility?
• To pay the debt if the borrower does not
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 59 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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2009 CARD ActChanged how young adults
receive certain types of credit
To receive a credit card:• Generally must be 21 years of
age or olderUNLESS
• Show documentation of sufficient income
• Have a co-signer
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 60 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Requesting A Credit Report• One free credit report annually from each
of the three credit reporting agencies• Equifax• TransUnion• Experian• Credit scores are available for a small fee
Access the website: annualcreditreport.com
Calling toll free: 1-877-322-8228
Send a written request:Annual Credit Report Request Service
PO box 105281Atlanta, GA 30348-5281
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 61 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Annualcreditreport.com
annualcreditreport.com - Only government sponsored Web site
Other sites may be fraudulent or charge a fee
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 62 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Mistakes in Credit Reports
• Two common errors• Fraud (identity theft)• Mistaken identity
• When a lender reports a transaction on the wrong person’s credit report
• Important to check each credit report annually to correct mistakes
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 63 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Fair Credit Reporting Act
• Gives consumers the right to review and correct their report
• If a person is denied credit, they have the right to request their credit report from the credit reporting agency• If within 60 days it is free of charge
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 64 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
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Correcting Errors on Credit Reports
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 65 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Correcting Errors on Credit Reports
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 66 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Repair Agencies
• Offer to help a consumer “fix” his/her negative credit report
• According to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC):• Consumers can do just as good of a job repairing
their credit report errors as a fee based debt repair agency
• Be cautious of debt repair agencies promising instant help because there is no immediate fix for negative credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 67 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Advice Isabella was given
From Angie• Credit ratings improve
as people get older and income increases
• Isabella’s credit score will improve when she:• Moves to a better side of
town• Gets a better interest
rate on loans• Is promoted
From George• Shopping around too
much for credit is not good because it increases inquiries
• Opening new accounts, even if not used, provides evidence of credit worthiness
• Close old accounts, including those with loans not paid on time to wipe the slate cleanWAS THE ADVICE GOOD? WHY OR WHY
NOT?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 68 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
• Will Isabella receive her dream job? • What advice would you give Isabella
to improve her credit report and score?• What should she do immediately?• What recommendations would you
suggest she employ in the near future?
CREDIT REPORT DETECTIVES ADVICE
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 69 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
How Much Credit Can You Afford? (20-10 Rule)
Never borrow more than 20% of your yearly net income
• If you earn $400 a month after taxes, then your net income in one year is:
12 x $400 = $4,800• Calculate 20% of your annual net income to find your
safe debt load.$4,800 x 20% = $960
• So, you should never have more than $960 of debt outstanding.
• Note: Housing debt (mortgage payments/rent) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 70 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Monthly payments shouldn’t exceed 10% of your monthly net income
• If your take-home pay is $400 a month:$400 x 10% = $40
• Your total monthly debt payments shouldn’t total more than $40 per month.
• Note: Housing payments (mortgage payments/rent) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.
How Much Credit Can You Afford? (20-10 Rule)
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 71 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
QUESTIONS?