CREDIT

• How do you build credit?

• Mr. Jones and Mrs. Smith make the same amount of money, but on loans, Mr. Jones pays more. Why?

• What may determine if you can buy a house or car?

• We only think of banks looking at this number, but who else may take a peak at it and why?

Credit Bureaus

• First things first• Credit Bureaus• They contain all the information on how YOU

handle your financial responsibilities

Credit Bureau

• Collect information from lenders about their experience with YOU.– You pay a VISA card on time/late, they find out– You pay Victory Motors on time/late, they find out– You pay your mortgage on time/late, they find out– Etc…

Credit Bureau

• They also find other personal and financial information on you…

• They know your employer• Your income• Savings• Debts

Credit Bureau

• How does a Credit Bureau make money?• Lenders buy your information from them – This allows them to see if you’re a good risk or a

bad risk– Credit bureaus get information from all your

lenders and put them into one credit report

Credit Report

• Credit Report: is a collection of information obtained from your creditors reflecting the extent of your credit and payment history.

• Lenders use this information to determine if they will loan you money and at what interest rate.

Example

• You apply for a credit card…• You give them all your information– Name, address, employer, other credit cards etc…

• The credit card company then contacts a Credit Reporting Agency (Credit bureau) and reviews your credit report

• If credit card company approves, then you have a credit card

• Once you start using the card, the company reports your payments history to the Credit bureau.

Credit Report

• The three major credit-reporting agencies are:• 1) Equifax (800-685-1111)• 2) Experian (888-397-3742)• 3) Trans Union (800-888-4213)• You can obtain a free annual credit report at

www.annualcreditreport.com• You should check your report at least once/twice

a year• Not all reports are the same…

How lenders Interpret your Report

• Some things on your report may seem ok to you, but to lenders, they may look at you as a risky borrower.

Lenders Interpret…

• 1) Inquiries (Act of asking for information)• Every time you apply for credit, or have someone run

your credit, it’s called a hard inquiry• THESE ARE BAD!!!• These may wrongly imply you…– Need a lot of credit or– Planning to take on large debt

• Make sure if you are car/home shopping, they don’t run your credit unless you are buying from them.

Other Inquiries

• Other types of inquiries-• Your own request to view your report,

employers requests, etc… don’t show up on your report

• These are called SOFT INQUIRIES• These aren’t bad

Lenders Interpret

• 2) Open Credit Accounts:• If you have too many open accounts, it could be

bad• 3-4 credit cards are ok• If you have more, and don’t use some, close

them• A lot of available credit can be good/bad• Account doesn’t close because you cut your

card up!!!

Lenders Interpret

• 3) Missed Payments• Always make at least the minimum payment• Missed payments will stay on your record for 7

years!!!

Lenders Interpret

• 4) Maxed-out Credit lines:• Maxing out credit line is a BIG red flag• Example: Your credit card will allow you to

charge $5,000, and you go and spend $5,000. That’s maxed out

Lenders Interpret

• 5) Debt to Income Ratio:• How much debt you have compared to how

much you make• Example…• Unsecured credit card debt that is more than

20% of annual income is SCARY TO LENDERS• What is unsecure credit?

Credit Score

• The most common scoring method is used from FICO.– Fair, Isaac and Company

• 3 major credit bureaus (Experian, Equifax, and Trans Union) worked with Fair Isaac and came up with the scoring method– Early 1980’s

Credit Score/Grade

• The score is just like a grade in school• I take scores from…• Tests• Attendance• Participation• Worksheets• I Combine scores, and you get grade

The normal number range is from…• 300 – 850 (Higher = better)• Approximate breakdown of how your score is

determined is the following…

Calculating Your Credit Score

• 1) 35% of the score is based on your….• PAYMENT HISTORY• Why do you think this is the number one

factor?• Lenders want to see if, and how promptly you

pay your bills

#1 Payment History

• The score is affected by…• How many bills paid late• How many were sent out for collection• Any bankruptcies you have declared• Does it matter when one of these have

happened?– Paid a bill late 10 years ago vs. 10 days ago

#1 Payment History

• YES• The sooner one of these has happened, the

bigger impact it will have on your score.• Why?• It says you’re unstable RIGHT NOW.

Calculating Your Credit Score

• 2) 30% of your score is based on…• OUTSTANDING DEBT• What does this mean?• It is how much you owe

#2 Outstanding Debt

• It looks to see if you have a…• Car loan• Student loans• Home loan• How many credit cards you have that are

maxed out, and their credit limits

#2 Outstanding Debt

• Credit Card/Credit Limit• The more cards you have at their limits, the

lower your score.• Why?• Rule of Thumb!!!!• Keep your card balances below 30% of their

limits• The BEST/OPTIMAL way to increase your score

is to keep them under 10% of their limits

#2 Outstanding Debt

• 30% or less of their limits• Example:• Have a credit card with $5,000 limit• $5,000 x 30% (.3) = $1,500• Do not borrow more than $1,500 on that

particular card

Calculating Your Credit Score

• 3) 15% is based on…• The length of time you have had credit• The longer you have had established credit,

the better it is for your overall credit score.• Why?• Because past payment history gives an

accurate prediction of your future actions.

#3 Length of Time

• Example:• Who would you trust more?• 30 year veteran cardiologist performing heart

surgery on you, or newbie right out of medical school?

• You want the one with the good track record!!• You don’t want too many cards, but don’t get

rid of your oldest card!!!

#4 Calculating Your Credit Score

• 4) 10% of your score is based on…• NEW CREDIT• Opening new credit will affect your score

negatively for a short period of time• Your score will go back up once you prove you

are capable of paying back the new credit

Calculating Your Credit Score

• 5) 10% of the score is based on the types of…• CREDIT MIX• What does this mean?• It will help your score if…• You have had experience with several different

kinds of credit accounts• Installment loans (Car, House), Revolving

Credit (Credit Card), Retail Credit etc…

#5 Different Credit Accounts

• Examples of different credit accounts• Revolving credit accounts and installment

loans.• What is an example of each?• Revolving credit = Using Credit Card• Installment Loan = Car, student, home loan– Set payment for a certain amount of time

Different Methods

• There are different methods some lenders use to figure your credit score

• Some look at…• Your income– Is this fair or not?

• How long you have been employed at the same job– What does this tell them?

What Your Score Affects

• Not being careful with credit = Paying for it later on

• Low score = harder to get loan for items you want

• EVEN IF YOU DO GET THE LOAN, A LOW SCORE WILL MAKE IT MORE EXPENSIVE

• Why?

What Your Score Affects

• Low score = higher you’ll pay…why?• LOWER SCORE means you are a HIGHER RISK• HIGHER RISK = HIGHER INTEREST• HIGHER INTEREST = HIGHER PAYMENTS• HIGHER PAYMENTS = YOU ARE WASTING YOUR

HARD-EARNED MONEY!!!!!!!!!!!!

What Your Score Affects

• On a brighter side, HIGHER SCORE = LOWER INTEREST RATE– Keep in mind, this is NOT the only thing that

affects your interest rate

Credit Score Bandwagon

• Besides banks and lenders, who else uses your credit score?

• Landlords• Insurance Companies– Is this fair?

• Employers– Is this fair?

REVIEW Improving your credit score