MAKING MONEY SENSETIPS AND IDEAS TO HELP YOUR FAMILY PROSPER

Understanding Credit

“A person’s credit report is one of the most important tools consumers can use to maintain their financial security and credit rating, but for so long many did not know how to obtain one, or what to do with the information it provided.”

-Ruben Hinojosa

WHAT IS CREDIT? Money you borrow and plan to repay.

In most cases, there is a charge for borrowing the money (fees or interest).

Questions to ask before you use credit for a purchase

Why am I buying? Is it a need or a want? How am I going to pay for it? Rate affordability, how much is it really going to cost? Monthly payments, will it fit into my budget? Could I pay in cash or with other resources? How long is it going to take to pay back? What is the plan to pay the credit card bill?

Source: www.practicalmoneyskills.com

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ADVANTAGES AND DISADVANTAGES OF CREDIT

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Advantages• Borrow now & take time to pay• Interest may be tax deductable• Rewards• Can be a budgeting tool if used correctly• Helps build good credit

Disadvantages• Cost more in the long run• Easy to abuse and end up in debt• Identity theft• Damages credit score if used incorrectly

MOST COMMON TYPES OF CREDIT

Revolving: allows you to borrow money at any time up to a set limit. (Credit Card & Home Equity Line of Credit)

Installment: allows you to borrow a specific amount of money at one time for a defined purpose. (Car, Boat, Motorcycle, Student, or Personal loan)

Non-Installment or service: allows you to pay for a used service at a later date. (Furniture stores, Utility companies, & Doctor bills) 3

YOUR RESPONSIBILITIES AND RIGHTS

What is your responsibility when it comes to using credit? Pay it back Not to run up more debt than what you can

comfortably pay back Understand your credit card termsYour Rights: Truth in Lending Act Fair Credit Reporting Act Equal Opportunity Act Fair Credit Billing Act Fair Debt Collection Practices Act 4

YOUR RIGHTS…..CONTINUED

• Ensures consumers are fully informed about cost and conditions of borrowing.

Truth in Lending Act (1968)

• Protects the privacy and accuracy of information in a credit check.

Fair Credit Reporting Act (1970)

• Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, martial status, age, or receipt of public assistance.

Equal Opportunity Act (1974)

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YOUR RIGHTS…….CONTINUED

• Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts.

Fair Credit Billing Act (1974)

• Prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses collecting their own accounts.

Fair Debt Collection Practices Act (1977)

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HOW MUCH CAN YOU AFFORD

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Never borrow more than 20% of your yearly net income

Monthly payments should not exceed 10% of your monthly net

income

Housing payments (mortgage payments) should not be included as

part of the 20% or 10%, but other debt should be included, such as car loans, student loans and credit cards

20-10 Rule

CREDIT SCORES OFTEN MISUNDERSTOOD

66.5% of Americans don’t know or responded incorrectly when asked to define a good credit score, which is correctly defined as a score of 700 or higher.

54% incorrectly believed that age is a factor in determining credit scores.

52% do not regularly review their credit report.

23% have never done so.

Source: www.thriventffc.com

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UNDERSTANDING YOUR CREDIT REPORT

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What is a Credit Report A document containing detailed information on a person’s credit history,

including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her credit worthiness.

Credit Reports include four types of information: Identifying Information

Social Security Number Date of Birth Phone Number Current and Previous Addresses

Credit Information Who they owe What they owe, installment, revolving payments

Public Record Information Judgments Bankruptcies (10 years) Medical Collections Libraries

Inquires Promotional or uninvited inquires

Pre-Approval from company promotions Credit Inquires

Source: http://www.investorwords.com/5490/credit_report.html

WHAT MAKES UP A CREDIT SCORE

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Amounts you owe30%

Types of credit in use

10%

New credit10%

Length of credit history

15%

Payment his-tory35%

Parts of Credit Score

HOW CAN I GET MY CREDIT REPORT/SCORE

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www.annualcreditreport.com (One free per year)

Three Credit Bureaus: Equifax (www.equifax.com)P.O. Box 105873Atlanta, GA 30348

Trans Union Corporation (www.transunion.com) P.O. Box 390, Springfield, PA 19064-03901

Experian (www.experian.com) P.O. Box 2350, Chatsworth, CA 91313-2350

WHY YOUR CREDIT SCORE MIGHT BE LOW & HOW TO IMPROVE IT

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Reasons for a low credit score:• Late Payments- Collections• Judgments • Bankruptcies • Not enough credit• Too much credit• New credit• Fraud• Parking Tickets• Lots of revolving credit• Inquire about credit a lot

How to improve a credit score:• Pay off debt• Pay on time• No new debt• Dispute any errors• Have different types of credit• Mortgage is key

STEPS TO CORRECT CREDIT REPORT ERRORS

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Copy your report

Highlight the error

Write a letter of dispute with

explanation of error

Locate and copy information to prove the item is an error

Send a copy of report, your letter of dispute and a copy of additional info to the

credit bureau

Get a copy of your credit

report!Go to

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm

for a sample dispute letter.

TYPES OF CREDIT CARDS

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Retailers: Rate determined by

company not credit. (Higher interest, but

receive coupons, discounts & rewards)

Credit Union: Lower interest rate, lower

payments, lower fees, better service, must

be a member.

Banks: Rewards, points, easier to

qualify, less on ability to pay and more on

ability to spend.

Travel and Entertainment Cards: Must pay balance off each

month, annual fees, not every place

accepts.

POINTS TO CONSIDER WHEN SHOPPING FOR A CREDIT CARD

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1. Interest Rate – locked, variable, introductory 2. Annual Fees3. Grace Period4. Late Fees5. Percent of payment you owe – minimum payment6. How do you plan to use card7. Rewards8. Service 9. Payments locally or online10.Where is it accepted11.Foreign transaction rate12.Cash advance features13.Balance transfers14.Credit limit

REDUCING CREDIT CARD DEBT-POWER PAY

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“How can I get rid of my credit card debt?”oStop making new charges.oGather all your credit card bills together.oWrite down the total balance, the minimum payment required and the interest rate.

Log on to: https://powerpay.org/index.php•Select the state of Wisconsin•Click on New? Sign up now•Click on PowerPay tab•Click on Payment calendar•Prioritize repayments – do you want to pay:• Highest interest first (greatest savings method)• Lowest balance first• Shortest term first

HELPFUL WEBSITES

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owww.optoutprescree.com – removes your name from the pre-screening lists at the three major credit bureaus for five years.

ohttps://powerpay.org/index.php - computer program that calculates how to save the most interest and time to pay off debt.

ohttp://www.bankrate.com/brm/calc/MinPayment.asp - true cost of paying only the minimum payment.

ohttp://www.bankrate.com/brm/calc/creditcardpay.asp?protype-cc

– calculates how long it will take you to pay off your credit card with a certain payment amount each month or number of months until you want to have it paid off.

owww.cardtrak.com – search different card options, featured cards and look through a credit card dictionary.

FOR MORE INFORMATION:920.882.4800

www.myprospera.com

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