Post on 27-Dec-2015
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?