Credit - The Good, The Bad and the Non-ExistentWhat is a credit score – and why should you care? Your credit score is generated by a mathematical algorithm using information in your credit report, ranging from 300 to 850. It’s designed to predict risk and how likely you are to become delinquent on a loan or credit obligation in the 24 months after scoring.

The most common credit scoring system is FICO. The higher your FICO score, the lower your risk of delinquency. You have three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Lenders may look at your score from all three or only one bureau, and depending on what is reported to each bureau, your score can vary across each bureau.

LESSON FOUR: CREDIT

WHY YOU NEED GOOD CREDITLesson 4: CreditWHY YOU NEED GOOD CREDIT• Students will learn about loans – the advantages and dangers

• We will talk about credit scores, their effect on finances, and when to get a credit card

How is Your Credit Score is Generated?:Data from your credit report goes into five major categories that make up a FICO score. The scoring model weighs some factors more heavily, such as payment history and debt owed. Here is the breakdown:

Payment history: (35%) Your account payment information, including any delinquencies and public records.

Amounts owed: (30%) How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted.

Length of credit history: (15%) How long ago you opened accounts and time since account activity.

Types of credit used: (10%) The mix of accounts you have, such as revolving and installment.

New credit: (10%) Your pursuit of new credit, including credit inquiries and number of recently opened accounts.

Personal or demographic information such as age, race, address, marital status, income and employment don’t affect the score.

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How Does Your Credit Score Affect Your Finances?: Your credit score affects what sort of credit card you can get or if you can take out a loan, because those are credit products. But your credit history can play a role in all sorts of life events and necessities, like finding a job, searching for a place to live and getting a car loan.

Landlords, property managers and rental agencies typically review potential tenants’ credit reports. They are usually looking for a pattern of missed payments or other negative information on your credit reports that indicate you may not pay your rent.

Your credit scores also influence your interest rate for loans – personal, auto, and mortgages. If you have an excellent credit score (750 or higher on a 300 to 850 scale), you are likely to qualify for the best loan terms available. If you have poor credit, you may be denied a loan or be subjected to high interest rates which will cost you more money in the long run.

Even if you pay your bills on time, creditors will look at your debt-to-income relationship (too much debt and not enough income will lower your score) and recently opened accounts (too many new accounts can lower your score).

When Should You Get a Credit Card: A credit card is a big responsibility, and it’s very easy to get in over your head. Typically, you need to be 18 to secure your own credit card. Look for a credit card that has a low Annual Percentage Rate (APR), no annual fees, and offers you rewards for using the card – like airline miles or cash back. DON’T just sign up for the first card you receive. Look at the fine print, and compare it to other available offers.

A good rule of thumb is to only use the card for items that you would typically purchase, like gas or groceries, and pay it off each month. A credit card is also useful when it comes to traveling abroad or doing online shopping. If your card is compromised or stolen, it’s much easier to get the fraudulent charges reversed than if you used a debit card and the money is taken directly from your checking account.

Just remember, that all your payment and balance activity is reported to the credit bureaus and will affect your credit score for years to come. A credit card is considered revolving credit, since there are no specific payments due each month aside from the minimum amount due.

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How Does a Loan Work, and Do I Need One?: Loans are a great way to finance a car, your education, or a home. They allow you to purchase items that you don’t have the money for up front, with the agreement that you will pay the money back, over time, with interest. There is typically a set monthly payment comprised of the principal (the money borrowed) and interest.

Your credit score is important in helping you qualify. Good credit means you’re more likely to get a loan at a reasonable rate. You may also need to show that you have enough income to repay the loan. Auto and home loans are considered secured loans, because there is collateral - the car or home you bought - that the bank can take and sell in the event that you default on the loan. A personal loan is an unsecured loan, meaning there is no collateral attached, so interest rates are typically higher on these.

If you aren’t comfortable with the monthly payments or have a secure source of income for repayment, then it may not be the right time to get a loan. Defaulting on a loan can affect your credit score dramatically and affect your ability to get credit in the future.

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1. You want to purchase your first vehicle and you have your heart set on a brand new Honda Civic. You are approved for a loan, and drive off the lot. Four months later, you get sick and are out of work for a few weeks, and you fall behind on your bills. This causes you to be late on your loan payments.

Does your credit score go up or down?

Why does it go up or down?

2. You finally have your own credit card. You use it to pay for gas and a few other small essentials each month. At the end of each month, you pay the credit card bill in full.

Does your credit score go up or down?

Why does it go up or down?

3. It’s your first semester in college and you have to furnish your dorm. You also just received your first credit card with a $4,000 limit. You use the credit card to pay for everything from a new TV to new sheets, maxing out the whole $4,000 credit limit.

Does your credit score go up or down?

Why does it go up or down?

4. You’re planning a trip to Myrtle Beach with your friends over summer vacation. You get a credit card offer in the mail that lets you earn airline miles for every $1 you spend, plus bonus miles for opening a new account. You recently opened three other credit card accounts, but they all have a zero balance. Since you haven’t booked your flight yet, you decide to sign up for the new credit card ASAP.

Does your credit score go up or down?

Why does it go up or down?

SAVINGS ACTIVITY

Consider each of the following scenarios and determine the effect on your credit:

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