Credit ~ The Basics

Homework

(Passport Page 32)

Welcome!

• Define credit and loan• Understand credit reports and credit scores• Distinguish between secured and unsecured loans• Identify the costs associated with getting a loan• Identify the factors lenders use to make loan

decisions

How’sIt Going?

What Do You Know?

(Pre-Test on page 4)

Let’s Talk About

You

What is Credit & Why is it Important?

Credit is the ability to borrow money. When you borrow money on credit, you get a loan.

Credit is important because it:• Can be useful in times of emergencies• Is more convenient than carrying large amounts of cash• Allows you to make a large purchase, such as a car or

house, and pay for it over time• Can affect your ability to obtain employment, housing, and

insurance based on how you manage it

What’s the Risk?

Guarantee

Unsecured Loan

Collateral

Secured Loan

Collateral

Secured Loan

Collateral

Secured Loan

Asset

Guarantee

Unsecured LoanSecured Loan

Asset

Unsecured Loan

Types of LoansInstallment Loans

Credit Cards

Home Loans • Home purchase, Home refinancing, cash out refinance loan• Home equity

Value of Home $250,000Minus debt -200,000Equity $50,000

Remember: Any type of home loan you obtain is secured by your house. If any home loan is not repaid, you could lose

your house.

The Cost of Credit

Fees

Truth in Lending Disclosures

InterestFees

Truth in Lending Disclosures

Interest

The Four C’s

Capacity: your present and future ability to meet your

payment obligations

Capital: the value of your assets and your net worth

Character: how you have paid bills or debts in the past

Collateral: property or assets offered to secure the

loan

Credit Reports

• Who you are

• How much debt you have

• Whether you have made payments on time

• Whether there is negative information about you in public records

Credit Reporting Agencies

Equifax

TransUnion

ExperianEquifax

TransUnion

Experian

Credit Score

Equifax300-850

TransUnion150-934

Experian330-830

Tale of Two Scores$20,000 loan

Car loan rates36 mos = 9.94%

48 mos = 10.94%60 mos = 11.19%

Payment = $437Total Interest = $6,213Total Paid: $26,213

Car loan rates36 mos = 3.94%48 mos = 4.94%60 mos = 5.19%

Payment = $379Total Interest = $2,754Total Paid: $22,754

$3,459 difference

680 Score590 Score

Your Credit Score

Past Payment History

Capacity

Length of

Credit History

New Credit

Credit Mix

Payment History ~ 35%

700

630

One late

payment

Two late payment

s

600

It could take a full year of perfect

payments to get your score back up

to a 700!

Capacity ~ 30%

Credit Card #1$10,000 limit

$5,000 balance

Credit Card #2$10,000 limit

$5,000 balance

Credit Card #3$10,000 limit

$5,000 balance

Credit Card #4$10,000 limit

$5,000 balance

$20,000 in debtand

$20,000 “open to buy”

Credit Card #3$10,000 limit

$10,000 balance

Credit Card #4$10,000 limit

$10,000 balance

$20,000 in debtand

Nothing “open to buy”

The Other 35%

Length of Credit History ~ 15%

New Credit ~ 10%

Credit Mix ~ 10%

What Doesn’t Affect Your Score

• Race, religion, age, national origin, sex and marital status

• Interest rate being charged on your loans• Credit counseling or financial counseling

programs• Debt to income ratio• Where you live• Your salary• Occupation and title• Employer• Date employed• Employment history

BUT…• Negative reporting only• Checking history• Payday Lenders, Title Loans

These factors will be considered by lenders and factor heavily in whether or not you get a loan!

What Can Affect Your Score

• Tax debt/liens

• Unpaid child support

• Co-signing

• Bankruptcy

• Dismissals

How to Improve Your Score

• Ensure your credit report is correct and dispute any legitimate errors.

• Focus on bringing delinquent loans current. Pay off and close second-tier finance companies, payday lenders and title loans.

• Pay down credit cards that are near their limits first, assuming the interest rates are similar.

• Pay down total revolving balances but do not close the accounts (capacity is king!).

• Move revolving balances to installment debt.

• Minimize new accounts.

What Have You Learned?

(Post-Test page 26)

Homework

(Passport page 38)

Questions?