The National Economics The National Economics DepartmentDepartment

Financial Freedom CampaignFinancial Freedom CampaignNAACPNAACP

Agenda• What is Credit?• Pros & Cons• Types of Credit• Understanding Financial Institutions• Importance of Building Credit• Credit Building V.S. Non Credit Building• What is Predatory Lending• Understanding Credit Scores & Credit Reports

What is CREDIT?What is CREDIT?Credit: Money you

borrow and plan to repay.

It allows you to make a purchase without having to pay the entire price at once.

Interest: Is the cost of borrowing money.

Know the FACTSKnow the FACTSPros ConsCons

Types of CreditTypes of CreditRevolving Credit: Allows you to

borrow money at any time up to a set limit. The most common types are credit cards.

Installment Credit: A loan that must be repaid over a specific period of time. This type of credit is common for larger purchases such as a home, car, or education.

Non-installment or Service Credit: Allows you to pay for a used service at a later date usually without an interest charge. (i.e. A utility bill)

Types of Credit Types of Credit ContinuedContinued• Secured Credit: Requires you to provide

something of value to guarantee that you will repay your debt. It is usually used for installment loans. If you fail to repay, the lender takes your item as repayment

• Unsecured Credit: Does not require a guarantee (collateral)

Understanding Financial Understanding Financial InstitutionsInstitutions

• Financial Institutions: Establishments that provide services, such as investments, loans and deposits.

• Some offer Depository Services, which means that you are able to open a checking and savings account

• Federal Deposit Insurance Corporation (FDIC) & National Credit Union Share Insurance Fund (NCUSIF) = Government backed insurance for your funds

The Importance of Building Credit

Its hard TO GET TO GET credit if you HAVE NOT HAVE NOT ALREADY ESTABLISHED ALREADY ESTABLISHED a credit history.

Without a history, Lenders can’t tell if you are RESPONSIBLERESPONSIBLE with your money (by paying your bills on time, etc.) or not.

Building credit is NECCESSARYNECCESSARY to proving your creditworthiness.

Ways To Build Your Credit• Apply for a secured

credit card– Your credit card limit will

match the amount you have deposited into an account.

• Use a co-signer– The co-signer’s good

credit will serve somewhat like an insurance for your credit behavior

• Use retailer programs– (i.e. Gas Station Cards,

etc) They are generally easier to qualify for and can help you to establish a credit record.

• Get a credit card with a reputable credit building institution– An institution that will

protect and help you to grow your money.

Credit Building Lending

Credit Building Lending

Non- Credit Building Lending

What is Predatory Lending?

Predatory Lending Cont.Take the following steps to avoid predatory lenders• Turn away loan offers from anyone who calls you on

the telephone, comes to your door or send you emails without invitation.

• Be wary of high pressure sales pitches, such as claims that an offer is only good for a limited time

• Consult with a local nonprofit or consumer credit counseling agency whenever possible

• Avoid loans that include extras that you do not need• Try to read all document’s before signing• Investigate Interest

Ask yourself….Ask yourself….• IIs this purchase a needneed or a

wantwant?

• DDo I really need the item right now, or can I wait until I have the cash?

• HHow much do I have to pay to borrow this money?

• HHow will this credit payment affect my household budget each month?

• WWiill I still have this item when I finish paying for it?

• Should I go home and sleep on my decision before using my credit to make a purchase?

The Credit Score• A Credit Score: is used to predict how

likely an individual is to repay a new loan based on the financial institutions experience with consumers.– There are various computer models used. In

general the computer model assigns points to information on a credit report

• A FICO Score: The credit scores used by the credit bureaus are produced from a software developed by the Fair Isaac and Company.

U.S. Credit System

Public RecordsCreditors Collection Agencies

Credit Bureaus/Inquiries

Data Furnishers

TransUnion Equifax Experian

The FICO Score: The FICO Score: Factors that influence creditFactors that influence credit

• 35% 35% Payment History

• 30% 30% Amounts Owed

• 15% 15% Length of Credit History

• 10% 10% New Credit

• 10% 10% Type of Credit in Use

Racial Credit Score Disparities

Racial Disparities in Credit Scores• Fair Isaac: The percentage of

individuals from high minority areas with relatively low credit scores was twice as large as the share of individuals from other areas

• Federal Reserve: Fewer than 40% of consumers who lived in high-minority areas had credit scores over 701, while nearly 70% of consumers who lived in mostly white neighborhoods had scores over 701

• Harvard’s Joint Center for Housing: Median credit score for whites in 2001 was 738, but for Blacks it was 676 and Hispanics it was 670

• Freddie Mac: Blacks were three times as likely and Hispanics twice as likely to have FICO scores below 620 as whites

The Credit Report: Explored

• Credit Report: A record of how you have paid your credit card debt and other loans.

It reflects the following:– How much debt you have– If you’ve made your payments on time– Whether or not you’ve paid back your loans

The Credit Report: Explored Credit reports are

complied by national credit reporting agencies called credit bureaus

• There are three Credit Bureaus:– TransUnion– Equifax– Experian

Credit Report: ExploredNote:• There are multiple credit

scores available for you. • Different scoring models

are used with different institutions (Vantage Scoring System v. FICO Scoring system).

• The FICO score is the most commonly used one, as it is the one used by the three credit bureaus.

The Credit Report: Explored

Information typically included:

• Indentifying Information– Name, Address, Social

• Credit Information– Dates opened, credit limits

• Public Record Information– Bankruptcy, Foreclosures

• Inquiries– Others who looked at report

Common errors on the report

• Duplicate Information

• Uninvited Inquiries

• Items that should no longer be listed on your credit report

Want GOOD Credit???• Tip 1: Pay your bills on time

• Tip 2: Contact your lenders immediately if you foresee a payment problem

• Tip 3: Borrow at a minimum

• Tip 4: Do not overdraft accounts

• Tip 5: Understand loan terms/agreements before signing

Protecting Your Finances Keep the original copies

of your documents in a safe place.

Keep your important computer files safe.

Make copies of all of your important documents.

Keep a copy of your important papers in safe, or storage that is secure and outside of the home, in case of an emergency

Monitor your accounts regularly

Recognizing Credit Repair Scams

YOUR RIGHTSYOUR RIGHTS

• Each of the nationwide consumer reporting companies Each of the nationwide consumer reporting companies Equifax, Experian, and TransUnion — is required to Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once provide you with a free copy of your credit report once every 12 months, if you ask for it.every 12 months, if you ask for it.

• It doesn’t cost anything to dispute mistakes or outdated It doesn’t cost anything to dispute mistakes or outdated items on your credit report.items on your credit report.

• No one can legally remove accurate and timely No one can legally remove accurate and timely negative information from a credit reportnegative information from a credit report

Where To Get Help• Annual Credit Report: www.annualcreditreport.com

• Experian: www.experian.com

• Equifax: www.equifax.com

• TransUnion: www.transunion.com

• National Foundation For Credit Counseling: www.nfcc.org

• Federal Trade Commission: Choosing a Credit Counselor www.ftc.gov

• Department of Justice: List of Credit Counseling Agencies- http://1.usa.gov/2P1Bq4

• Better Business Bureau: See if there are any alerts on the organization you are considering www.bbb.org

• Association of Independent Consumer Credit Counseling Agencies: www.aiccca.org