Fixing Your CreditSomeday (maybe even today) you will want a car. Like almost everyone else, you will need a loan to pay for it,and you will need insurance to protect the car in case of an accident. Did you know that the interest rate of yourloan, and even the amount you pay for insurance, will depend on your credit history? How are you supposed tohave a credit history if you can’t even get a credit card until you are 18 years old?

Here’s how you can build up a good credit history.

Social Security number: If you do not already have one, apply right away. Contact the Social SecurityAdministration online at www.ssa.gov.Savings account: Do you have a savings account with your local bank? Open one, and be sure to use your SocialSecurity number.Paycheck: Whether it’s a newspaper route or a part-time job at a dog grooming business, a regular paycheck canestablish that you are a good credit risk.

All of this information is typed into computers, saved, filed, shared, and finally combined into your credit report.

What Is a Credit Report?A credit report is a summary of your financial history, from savings accounts to loans to credit card payments. Ifyou’re like most teens, your credit report is almost empty. Maybe you have a savings account, but you probably haveno history of borrowing money or using a credit card.

Even so, it is a good idea to order your credit report once a year. The three credit reporting companies, Experian,Equifax, and TransUnion, will each provide you with one free credit report each year that you should order and reviewto protect yourself from identity theft. Meanwhile, what does a credit report look like?

!! Is it okay that this is a European car,with the driver on the right?

In the computer exercise at the end of this chapter, you will begin with two bills that are in collection. Items that havebeen sent to a collection agency are usually more than 30 days past their due date. Late payments can stay visible onyour credit report for years.

Angel P. Teen is a typical young adult, but to spice things up we gave him an installment loan last year that he paid offon time. That’s what an installment loan is—a loan that has equal payments to be paid off over a short period of time,like a year. Angel doesn’t have a savings account.

You can see that Angel’s report shows an uncollected debt. This debt is not his debt, but we added it to his report toshow how to get incorrect information off your credit report. Here’s how Angel got the debt (that was not his) removedfrom his report:

Getting a Free Credit ReportThe best place to go for your free credit report is the Web site annualcreditreport.com. Here you can apply online foryour report from each of the credit reporting companies, Equifax, Experian, and TransUnion. This lets you know whatcredit companies see when they decide whether to loan money to you.

Your Credit Score (FICO Score)A FICO score (named after Fair Isaac Corporation, which came up with the system) is a number from 300 to 850 thattells creditors how much of a risk you are. Someone with a FICO score of 725 has a 5% chance of being more than 90days late on a payment over the next 3 years. Someone with a FICO score of 550 has a 70% chance of getting 90days behind on payments. Who would you rather loan your money to?

When you apply for your auto loan, it is handy to know your credit score before you sit across the desk from the carloan officer. When you know you’re going to apply for a car loan soon, order the score (for a fee) from myFICO.com.

Why Is Having a Good Credit Score Important?Test scores in school are important to you, your parents, and maybe to a college or a potential employer. But whyshould you care about your FICO score? Your credit score will show companies how risky it is to lend you money andhow much to charge you in interest. From our earlier example, the person with the FICO score of 725 applies for anauto loan and gets an interest rate of 5.518%, while the person with the score of 550 gets a rate of 16.939%. Thatcan amount to paying more than $500 extra over the life of the loan.

How do I build up a better credit score?

Get a savings account at your local bank. Keep a steady or increasing amount of money.

Get a debit card at the same bank. Even if a parent has to cosign (be financially responsible in case you mess up) itstill helps you build up credit. Always keep a safe cushion of money, at least $200, in the account.

If you are over 18, talk to your local bank about getting a credit card. Your local bank knows you and your family,and they will take that information into consideration even if you do not have enough history to have a credit scoreyet.

SummaryA credit history is an essential item in today’s world. A credit history can be created by having a Social Securitynumber, bank accounts, and a paycheck. Credit reports tell the history of your financial savings, borrowing, andrepayment of debts. FICO scores are used to determine your creditworthiness. People with higher FICO scores aremore likely to get loans and better interest rates. FICO scores can be raised by having a history of timely payments onexisting accounts, opening new credit accounts within your personal financial means and paying them off regularly,and only opening credit accounts that you will use.

Key Termscredit history: A summary of a person’s borrowing and repayment history.

credit report: A report on a person’s creditworthiness that includes identifying information, credit cards, latepayments, and bankruptcies.

credit risk: How likely or unlikely you are to pay back money loaned to you.

debt: Money you owe.

FICO score: Credit score from 300 to 850 that rates how likely a person is to fall 90 days behind in a payment.

identity theft: When someone steals your private information, like your date of birth and Social Security number, anduses it to make unauthorized purchases.

installment loan: Loan with equal number of payments of the same amount over a fixed period of time.

interest rate: The percentage of a loan amount you pay in order to borrow the money.

Math ExamplesThe math problems in this curriculum are intended as practice in applying math concepts to the real world. Theconcepts included are generally those covered through Algebra I.

While this curriculum is not intended as a substitute for standard math courses, several review tools are included.

Below you will find example questions very similar to those on the math quiz for this lesson. A complete solution isgiven for each example.On your course homepage, a Math Concepts Reference link is included beneath the Tutorial. This reviews key mathconcepts as well as business and financial formulas.

Example Questions1. A bank tells you that if you increase your credit score by 50 points, it will reduce your interest rate on your $15,000

car loan by 1.5 percent. How much will this save you in the first year?SOLUTION:

$15,000 (Car loan amount) x .015 (Interest rate) = $225 (Car loan savings for the first year)

2. You are told that your credit score of 650 is better than 40% of the population. Your neighbor has a credit score of600. Can his score be better than 50% of the population?

SOLUTION:No, if his score is worse than yours, then he has a higher score than less than 40% of the population.