GOING INTO DEBTGOING INTO DEBT

CHAPTER 4CHAPTER 4

SECTION 1SECTION 1

WHAT IS CREDIT?WHAT IS CREDIT?• CREDITCREDIT IS THE RECEIVING OF FUNDS EITHER DIRECTLY OR IS THE RECEIVING OF FUNDS EITHER DIRECTLY OR

INDIRECTLY TO BUY GOODS AND SERVICES TODAY WITH THE INDIRECTLY TO BUY GOODS AND SERVICES TODAY WITH THE

PROMISE TO PAY FOR THEM IN THE FUTURE.PROMISE TO PAY FOR THEM IN THE FUTURE.

THE COST OF USING CREDITTHE COST OF USING CREDIT• PRINCIPALPRINCIPAL IS THE AMOUNT ORIGINALLY BORROWED. IS THE AMOUNT ORIGINALLY BORROWED.

• INTERESTINTEREST IS THE AMOUNT THE BORROWER MUST PAY FOR IS THE AMOUNT THE BORROWER MUST PAY FOR

THE USE OF SOMEONE ELSE’S MONEY.THE USE OF SOMEONE ELSE’S MONEY.

COMMON TYPES OF CREDITCOMMON TYPES OF CREDIT

• CREDIT CARDCREDIT CARD::

• BANKS, CREDIT UNIONS, STORES, . . .BANKS, CREDIT UNIONS, STORES, . . .

• NO PAYOFF DEADLINENO PAYOFF DEADLINE

• MONTHLY MINIMUM PAYMENTS VARY, BASED ON BALANCEMONTHLY MINIMUM PAYMENTS VARY, BASED ON BALANCE

• USUALLY HAS HIGHEST RATEUSUALLY HAS HIGHEST RATE

COMMON TYPES OF CREDITCOMMON TYPES OF CREDIT

• INSTALLMENT LOANINSTALLMENT LOAN::

• BANKS, CREDIT UNIONS, AUTO DEALERS, . . .BANKS, CREDIT UNIONS, AUTO DEALERS, . . .

• INTEREST RATES ARE USUALLY LOWER THAN CREDIT INTEREST RATES ARE USUALLY LOWER THAN CREDIT

CARDS.CARDS.

• CONSUMERS REPAY THIS TYPE OF LOAN WITH EQUAL CONSUMERS REPAY THIS TYPE OF LOAN WITH EQUAL

PAYMENTS, OR INSTALLMENTS, OVER A PERIOD OF TIME.PAYMENTS, OR INSTALLMENTS, OVER A PERIOD OF TIME.

• NEED TO CONSIDER THE LENGTH OF THE LOAN.NEED TO CONSIDER THE LENGTH OF THE LOAN.

INSTALLMENT DEBTINSTALLMENT DEBT

• FOR EXAMPLE: AN AUTO LOANFOR EXAMPLE: AN AUTO LOAN• BORROW $10,000BORROW $10,000• 9% INTEREST RATE9% INTEREST RATE• 48 MONTHS48 MONTHS• YOUR MONTHLY PAYMENT IS $249YOUR MONTHLY PAYMENT IS $249

• AT THE END OF THE FOUR YEARS, YOU WILL HAVE PAID THE AT THE END OF THE FOUR YEARS, YOU WILL HAVE PAID THE LENDER ABOUT $11,950LENDER ABOUT $11,950

• BORROWING INCREASED THE COST OF THE CAR 20%.BORROWING INCREASED THE COST OF THE CAR 20%.

COMMON TYPES OF CREDITCOMMON TYPES OF CREDIT

• STUDENT LOANSTUDENT LOAN::

• BANKS, CREDIT UNIONS, AND FEDERAL GOVERNMENTBANKS, CREDIT UNIONS, AND FEDERAL GOVERNMENT

• USED FOR TUITION AND OTHER COLLEGE EXPENSESUSED FOR TUITION AND OTHER COLLEGE EXPENSES

• CAN DELAY PAYMENTS UNTIL AFTER GRADUATIONCAN DELAY PAYMENTS UNTIL AFTER GRADUATION

• USUALLY LOWER INTEREST RATE THAN INSTALLMENT LOANUSUALLY LOWER INTEREST RATE THAN INSTALLMENT LOAN

• INCOME TAX BREAKINCOME TAX BREAK

COMMON TYPES OF CREDITCOMMON TYPES OF CREDIT

• MORTGAGEMORTGAGE::

• BANKS AND CREDIT UNIONSBANKS AND CREDIT UNIONS

• SPECIFICALLY FOR A LOAN TO PURCHASE A HOMESPECIFICALLY FOR A LOAN TO PURCHASE A HOME

• MONTHLY PAYMENTS USUALLY SET FOR LIFE OF LOANMONTHLY PAYMENTS USUALLY SET FOR LIFE OF LOAN

• USUALLY LOWER INTEREST RATE THAN INSTALLMENT LOANUSUALLY LOWER INTEREST RATE THAN INSTALLMENT LOAN

• INCOME TAX BREAKINCOME TAX BREAK

THE COST OF USING CREDITTHE COST OF USING CREDIT

• ANNUAL PERCENTAGE RATES (APR)ANNUAL PERCENTAGE RATES (APR) • THE AMOUNT IT COSTS YOU A YEAR TO USE CREDIT, EXPRESSED AS THE AMOUNT IT COSTS YOU A YEAR TO USE CREDIT, EXPRESSED AS

A PERCENTAGE RATE. IT INCLUDES INTEREST, TRANSACTION FEES, A PERCENTAGE RATE. IT INCLUDES INTEREST, TRANSACTION FEES, AND SERVICE CHARGES.AND SERVICE CHARGES.

• ANNUAL FEEANNUAL FEE • A YEARLY CHARGE FOR THE PRIVILEGE OF USING A YEARLY CHARGE FOR THE PRIVILEGE OF USING

CREDIT. MOST OFTEN USED BY CREDIT CARD CREDIT. MOST OFTEN USED BY CREDIT CARD COMPANIES. COMPANIES.

• CREDIT LIMITCREDIT LIMIT• THE MAXIMUM AMOUNT OF CREDIT A LENDER WILL THE MAXIMUM AMOUNT OF CREDIT A LENDER WILL

EXTEND TO A CUSTOMEREXTEND TO A CUSTOMER

THE COST OF USING CREDITTHE COST OF USING CREDIT

• FINANCE CHARGEFINANCE CHARGE • IS THE ACTUAL DOLLAR COST OF USING CREDIT, WHICH IS IS THE ACTUAL DOLLAR COST OF USING CREDIT, WHICH IS

CALCULATED BY A LENDER.CALCULATED BY A LENDER.

• ORIGINATION FEEORIGINATION FEE• USUALLY ASSOCIATED WITH HOME LOANS, IS A CHARGE USUALLY ASSOCIATED WITH HOME LOANS, IS A CHARGE

FOR SETTING UP A LOAN.FOR SETTING UP A LOAN.

• LOAN TERMLOAN TERM• LENGTH OF TIME YOU HAVE TO PAY OFF THE LOAN.LENGTH OF TIME YOU HAVE TO PAY OFF THE LOAN.• LONGER THE TERM, LOWER THE MONTHLY PAYMENTLONGER THE TERM, LOWER THE MONTHLY PAYMENT

THE COST OF USING CREDITTHE COST OF USING CREDIT

• GRACE PERIODGRACE PERIOD• LENGTH OF TIME YOU HAVE BEFORE YOU START LENGTH OF TIME YOU HAVE BEFORE YOU START

ACCUMULATING INTEREST.ACCUMULATING INTEREST.

• OVER-THE-LIMIT FEEOVER-THE-LIMIT FEE• SPENDING MORE THAN YOUR CREDIT LIMITSPENDING MORE THAN YOUR CREDIT LIMIT

• LATE FEELATE FEE• PENALTY FOR MAKING A PAYMENT AFTER THE DUE DATEPENALTY FOR MAKING A PAYMENT AFTER THE DUE DATE

• UNIVERSAL DEFAULTUNIVERSAL DEFAULT• HIKE UP INTEREST RATE IF YOU MAKE A LATE PAYMENTHIKE UP INTEREST RATE IF YOU MAKE A LATE PAYMENT

ASSIGNMENTASSIGNMENT

LOAN LENGTHLOAN LENGTH• TWO IDENTICAL TWO IDENTICAL

ACCOUNTS WITH AN 8% ACCOUNTS WITH AN 8% INTEREST RATE AND THE INTEREST RATE AND THE SAME $1000.SAME $1000.

• THE ONLY DIFFERENCE IS THE ONLY DIFFERENCE IS THE YEARS.THE YEARS.

• IT WILL COST AN EXTRA $90 IT WILL COST AN EXTRA $90 FOR THOSE EXTRA 2 FOR THOSE EXTRA 2 YEARS.YEARS.

DOESN’T SOUND TOO BAD, RIGHT?DOESN’T SOUND TOO BAD, RIGHT?

• TRY DIFFERENT NUMBERS.TRY DIFFERENT NUMBERS.

• HOW ABOUT $100,000 LOANHOW ABOUT $100,000 LOAN

• 10% INTEREST RATE10% INTEREST RATE

• 30 YEAR LOAN TERM.30 YEAR LOAN TERM.

• WHEN YOU'VE PAID OFF THE LOAN, WHEN YOU'VE PAID OFF THE LOAN, YOU'VE ACTUALLY PAID FOR IT 3 YOU'VE ACTUALLY PAID FOR IT 3 TIMES!TIMES!

CHANGING THE INTEREST RATECHANGING THE INTEREST RATE

• TWO LOANS, BOTH FOR $1000TWO LOANS, BOTH FOR $1000

• BOTH FOR 5 YEARSBOTH FOR 5 YEARS

• ONE IS 9% AND THE OTHER IS ONE IS 9% AND THE OTHER IS 12% INTEREST RATE12% INTEREST RATE

• IT'S AN ADDITIONAL $88IT'S AN ADDITIONAL $88

CREDIT: THE GOOD . . .CREDIT: THE GOOD . . .

• CONVENIENCECONVENIENCE

• PROTECTIONPROTECTION

• EMERGENCIESEMERGENCIES

• OPPORTUNITY TO BUILD CREDITOPPORTUNITY TO BUILD CREDIT

• QUICKER GRATIFICATIONQUICKER GRATIFICATION

• SPECIAL OFFERSSPECIAL OFFERS

• BONUSESBONUSES

. . . AND THE BAD. . . AND THE BAD

• INTERESTINTEREST

• OVERSPENDINGOVERSPENDING

• DEBTDEBT

• IDENTITY THEFTIDENTITY THEFT

4-F4-F

WHEN YOU BUY “STUFF”WHEN YOU BUY “STUFF”

In fact, you bought $500 worth of “STUFF” with your credit card.In fact, you bought $500 worth of “STUFF” with your credit card.

You bought “STUFF” with your credit card.You bought “STUFF” with your credit card.

Your APR is 18%.Your APR is 18%.

You plan to pay $10 a month to pay it off.You plan to pay $10 a month to pay it off.

You will pay $431 in interestYou will pay $431 in interest

Final cost of your purchases = $931.40Final cost of your purchases = $931.40

And it will take SEVEN YEARS and NINE MONTHSAnd it will take SEVEN YEARS and NINE MONTHS

1

4-G4-G

HOW LONG WILL IT TAKE???HOW LONG WILL IT TAKE???

APR = 18%APR = 18%

Minimum Payment of 4% or $120Minimum Payment of 4% or $120

You owe $3,000.You owe $3,000.

Finance Charge $1,715.67Finance Charge $1,715.67

Total cost of original Total cost of original $3,000 loan = $4,715.67$3,000 loan = $4,715.67

After you’ve made the last payment, will what you purchased still be around???

And it will And it will take take

nearly nearly 11 YEARS 11 YEARS to pay off!to pay off!

1

4-H4-H

THE COST OF USING CREDITTHE COST OF USING CREDIT

APR = 24%APR = 24%

Minimum Payment of 4% or $12Minimum Payment of 4% or $12

$300 for a CD Player$300 for a CD Player

Finance Charge $149.99Finance Charge $149.99

Your CD player REALLY Your CD player REALLY cost $449.99cost $449.99

After you’ve made the last payment, will your CD player still be around???

And it will And it will take 3 years take 3 years

and and 8 months 8 months to pay off!to pay off!

1

CHARGE ACCOUNTSCHARGE ACCOUNTS

• REGULARREGULAR:: HAS A CREDIT LIMIT, SUCH AS $500, WHICH IS HAS A CREDIT LIMIT, SUCH AS $500, WHICH IS

THE MAXIMUM AMOUNT OF GOODS OR SERVICES A PERSON THE MAXIMUM AMOUNT OF GOODS OR SERVICES A PERSON

OR BUSINESS CAN BUY ON THE PROMISE TO PAY IN THE OR BUSINESS CAN BUY ON THE PROMISE TO PAY IN THE

FUTURE.FUTURE.

• REVOLVINGREVOLVING: ALLOWS YOU TO MAKE ADDITIONAL : ALLOWS YOU TO MAKE ADDITIONAL

PURCHASES FROM THE SAME STORE EVEN IF YOU HAVE NOT PURCHASES FROM THE SAME STORE EVEN IF YOU HAVE NOT

PAID THE PREVIOUS MONTH’S BILL IN FULL.PAID THE PREVIOUS MONTH’S BILL IN FULL.

SETTING LIMITS ON CREDITSETTING LIMITS ON CREDIT

• HOW MUCH IS TOO MUCH?HOW MUCH IS TOO MUCH?• A MAXIMUM OF 20% OF YOUR NET INCOMEA MAXIMUM OF 20% OF YOUR NET INCOME• INCLUDING MORTGAGE, CREDIT CARDS, CAR LOANINCLUDING MORTGAGE, CREDIT CARDS, CAR LOAN

• ALWAYS SHOP AROUND FOR BETTER LOANS OR CREDITALWAYS SHOP AROUND FOR BETTER LOANS OR CREDIT• APRAPR• LOAN TERMLOAN TERM• MAXIMUM AMOUNT OF LOANMAXIMUM AMOUNT OF LOAN• MINIMUM PAYMENT AMOUNTMINIMUM PAYMENT AMOUNT• ADDITIONAL, ANNUAL OR UP-FRONT FEES.ADDITIONAL, ANNUAL OR UP-FRONT FEES.• PREPAYMENT PENALTIESPREPAYMENT PENALTIES

CREDITWORTHINESSCREDITWORTHINESS

• WHEN YOU APPLY FOR CREDIT, YOU USUALLY WILL BE WHEN YOU APPLY FOR CREDIT, YOU USUALLY WILL BE

ASKED TO FILL OUT A CREDIT APPLICATION.ASKED TO FILL OUT A CREDIT APPLICATION.

• A CREDIT BUREAU WILL THEN BE HIRED TO DO A CREDIT A CREDIT BUREAU WILL THEN BE HIRED TO DO A CREDIT

CHECK.CHECK.

• THIS WILL REVEAL YOUR INCOME, ANY CURRENT DEBTS, THIS WILL REVEAL YOUR INCOME, ANY CURRENT DEBTS,

DETAILS ABOUT YOUR PERSONAL LIFE, AND HOW WELL YOU DETAILS ABOUT YOUR PERSONAL LIFE, AND HOW WELL YOU

HAVE REPAID DEBTS IN THE PAST.HAVE REPAID DEBTS IN THE PAST.

• USUALLY FOR THE PAST 7 – 10 YEARS.USUALLY FOR THE PAST 7 – 10 YEARS.

THE CREDIT RATINGTHE CREDIT RATING

• THIS IS A RATING OF THE RISK INVOLVED IN LENDING THIS IS A RATING OF THE RISK INVOLVED IN LENDING

FUNDS TO A SPECIFIC PERSON OR BUSINESS.FUNDS TO A SPECIFIC PERSON OR BUSINESS.

• CREDITOR ALSO LOOKS AT 4 OTHER FACTORS THAT A CREDITOR ALSO LOOKS AT 4 OTHER FACTORS THAT A

CREDIT CHECK REVEALS:CREDIT CHECK REVEALS:

• COLLATERAL, CAPITAL, CAPACITY, AND CHARACTERCOLLATERAL, CAPITAL, CAPACITY, AND CHARACTER

CREDIT RATINGCREDIT RATING• COLLATERAL:COLLATERAL:

• ASSET OF VALUE THAT CAN BE TAKEN AWAY.ASSET OF VALUE THAT CAN BE TAKEN AWAY.

• THE SIZE OF YOUR CAPITAL OR PERSONAL WEALTH.THE SIZE OF YOUR CAPITAL OR PERSONAL WEALTH.

• IMPORTANT BECAUSE IT INDICATES YOUR PAST ABILITY TO SAVE IMPORTANT BECAUSE IT INDICATES YOUR PAST ABILITY TO SAVE

AND ACCUMULATE.AND ACCUMULATE.

• INDICATES YOUR PRESENT ABILITY TO PAY INDICATES YOUR PRESENT ABILITY TO PAY

CONTINUED . . .CONTINUED . . .

• SECURED LOANSSECURED LOANS: A LOAN THAT IS BACKED UP WITH : A LOAN THAT IS BACKED UP WITH

COLLATERAL.COLLATERAL.

• UNSECURED LOANSUNSECURED LOANS: LOANS GIVEN BASED ON THE : LOANS GIVEN BASED ON THE

PERSON’S REPUTATION ALONE, OR IF THEY HAVE A PERSON’S REPUTATION ALONE, OR IF THEY HAVE A

COSIGNER – A PERSON WHO SIGNS ALONG WITH THE COSIGNER – A PERSON WHO SIGNS ALONG WITH THE

BORROWER AND PROMISES TO REPAY THE LOAN IF THE BORROWER AND PROMISES TO REPAY THE LOAN IF THE

BORROWER DOES NOT.BORROWER DOES NOT.

CREDIT RATINGCREDIT RATING• CAPITAL:CAPITAL:• PERSONAL ITEMS OF VALUEPERSONAL ITEMS OF VALUE• INVESTMENTSINVESTMENTS

• CAPACITY:CAPACITY:• ABILITY TO REPAY A LOANABILITY TO REPAY A LOAN• RELATED TO INCOME AND DEBTRELATED TO INCOME AND DEBT• IF EMPLOYMENT HAS BEEN SPOTTY – YOUR CAPACITY TO IF EMPLOYMENT HAS BEEN SPOTTY – YOUR CAPACITY TO

PAY WILL BE CONSIDERED QUESTIONABLE. PAY WILL BE CONSIDERED QUESTIONABLE. • THE AMOUNT OF DEBT THAT YOU ARE ALREADY THE AMOUNT OF DEBT THAT YOU ARE ALREADY

CARRYING IS ALSO A FACTOR.CARRYING IS ALSO A FACTOR.

• CHARACTER:CHARACTER:• REFERS TO A PERSON’S REPUTATION AS A RELIABLE AND REFERS TO A PERSON’S REPUTATION AS A RELIABLE AND

TRUSTWORTHY PERSON.TRUSTWORTHY PERSON.• CREDITOR MAY LOOK AT YOUR EDUCATIONAL CREDITOR MAY LOOK AT YOUR EDUCATIONAL

BACKGROUND, ANY PROBLEMS WITH THE LAW, ETC.BACKGROUND, ANY PROBLEMS WITH THE LAW, ETC.

HOW DO YOU BUILD A GOOD HOW DO YOU BUILD A GOOD CREDIT HISTORY?CREDIT HISTORY?

• DON’T BOUNCE CHECKSDON’T BOUNCE CHECKS

• MAKE ADDITIONAL DEPOSITS REGULARLY IN A SAVINGS MAKE ADDITIONAL DEPOSITS REGULARLY IN A SAVINGS

ACCOUNTACCOUNT

• ALWAYS PAY BILLS ON TIMEALWAYS PAY BILLS ON TIME

• HAVE A PARENT CO-SIGN ON A LOAN.HAVE A PARENT CO-SIGN ON A LOAN.

• BE CHOOSY ABOUT CREDIT CARDS AND LOANS. BE CHOOSY ABOUT CREDIT CARDS AND LOANS.

• ““ON AVERAGE, TODAY’S CONSUMER HAS A TOTAL OF 13 ON AVERAGE, TODAY’S CONSUMER HAS A TOTAL OF 13

CREDIT OBLIGATIONS ON RECORD AT A CREDIT CREDIT OBLIGATIONS ON RECORD AT A CREDIT

BUREAU.”BUREAU.”

CREDITCREDIT

• USE CREDIT ONLY FOR THINGS THAT HAVE A USEFUL LIFE USE CREDIT ONLY FOR THINGS THAT HAVE A USEFUL LIFE

BEYOND WHEN YOU FINISH PAYING FOR THEM.BEYOND WHEN YOU FINISH PAYING FOR THEM.

• NEVER PURCHASE SOMETHING WITH A CREDIT CARD NEVER PURCHASE SOMETHING WITH A CREDIT CARD

THAT YOU KNOW YOU CANNOT PAY BACK WITHIN 6 THAT YOU KNOW YOU CANNOT PAY BACK WITHIN 6

MONTHS TO 1 YEAR.MONTHS TO 1 YEAR.

CREDIT SCORINGCREDIT SCORING

• BASED ON THE 4 C’S OF CREDITBASED ON THE 4 C’S OF CREDIT

• SCORES RANGE BETWEEN 350 - 850SCORES RANGE BETWEEN 350 - 850

• THE MEDIUM SCORE IS 723THE MEDIUM SCORE IS 723

• 680 AND ABOVE IS CONSIDERED GOOD.680 AND ABOVE IS CONSIDERED GOOD.

• TRACKS YOUR SUCCESS IN MANAGING MONEY TRACKS YOUR SUCCESS IN MANAGING MONEY

RESPONSIBLYRESPONSIBLY

• RECORD OF YOUR PERSONAL FINANCIAL TRANSACTIONSRECORD OF YOUR PERSONAL FINANCIAL TRANSACTIONS

• CREDIT REPORT CARD FOR THE PAST 7-10 YEARSCREDIT REPORT CARD FOR THE PAST 7-10 YEARS

New Credit

Amounts owed

Types of Credit UsedLength of Credit

History

Payment History

10%

35%30%

10%15%

WHAT IS A CREDIT SCORE?WHAT IS A CREDIT SCORE?

350 450 550 650 750 850

Lowest Highest

VeryPoor

Poor Fair Good Excellent

HOW DO I COMPARE TO THE HOW DO I COMPARE TO THE REST OF THE POPULATION?REST OF THE POPULATION?

HOW DOES MY SCORE AFFECT HOW DOES MY SCORE AFFECT ME?ME?

Example: $250,000 mortgage loan for 30 years:

INFORMATION ON CREDIT INFORMATION ON CREDIT REPORTSREPORTS

• FOUR MAIN SECTIONS:FOUR MAIN SECTIONS:

• IDENTIFYING INFORMATIONIDENTIFYING INFORMATION

• CREDIT HISTORYCREDIT HISTORY

• PUBLIC RECORDSPUBLIC RECORDS

• INQUIRIESINQUIRIES

• ““80% OF ALL CREDIT REPORTS HAVE MISTAKES!”80% OF ALL CREDIT REPORTS HAVE MISTAKES!”

WHAT IS A CREDIT HISTORY?WHAT IS A CREDIT HISTORY?

• YOUR HISTORY OF PAYMENTS ON:YOUR HISTORY OF PAYMENTS ON:

• CREDIT CARDSCREDIT CARDS

• LOANSLOANS

• MORTGAGESMORTGAGES

• OTHER (MEDICAL BILLS, UTILITY BILLS, ETC)OTHER (MEDICAL BILLS, UTILITY BILLS, ETC)

• INCLUDES JUDGMENTS, BANKRUPTCIES, LIENS, AND ANY INCLUDES JUDGMENTS, BANKRUPTCIES, LIENS, AND ANY

OTHER PUBLIC RECORDS.OTHER PUBLIC RECORDS.

• YOUR CREDIT REPORT IS A WRITTEN SUMMARY OF YOUR YOUR CREDIT REPORT IS A WRITTEN SUMMARY OF YOUR

CREDIT HISTORY.CREDIT HISTORY.

CREDIT REPORTING CREDIT REPORTING AGENCIESAGENCIES

• EQUIFAX EQUIFAX WWW.EQUIFAX.COM

• EXPERIAN EXPERIAN WWW.EXPERIAN.COM

• TRANS UNION TRANS UNION WWW.TRANSUNION.COM

• YOU CAN ORDER A WRITTEN COPY OF YOUR CREDIT REPORT FOR YOU CAN ORDER A WRITTEN COPY OF YOUR CREDIT REPORT FOR AROUND $10.AROUND $10.

• YOU CAN ACCESS IT ON THE INTERNETYOU CAN ACCESS IT ON THE INTERNET

• THESE 3 COMPANIES ARE REQUIRED TO GIVE YOU A FREE THESE 3 COMPANIES ARE REQUIRED TO GIVE YOU A FREE REPORT ONCE A YEAR, AFTER THAT, YOU ARE CHARGED. REPORT ONCE A YEAR, AFTER THAT, YOU ARE CHARGED. WWW.ANUALCREDITREPORT.COM

INFORMATION ON CREDIT INFORMATION ON CREDIT REPORTSREPORTS

• YOUR CREDIT REPORT CONTAINS INFORMATION ABOUT:YOUR CREDIT REPORT CONTAINS INFORMATION ABOUT:• YOUR NAME, DATE OF BIRTH, SSN, ADDRESSESYOUR NAME, DATE OF BIRTH, SSN, ADDRESSES

• EMPLOYMENTEMPLOYMENT

• TOTAL CREDIT LIMITTOTAL CREDIT LIMIT

• OUTSTANDING BALANCEOUTSTANDING BALANCE

• NUMBER OF ACCOUNTS AND THEIR STATUSNUMBER OF ACCOUNTS AND THEIR STATUS

• PAYMENT HISTORYPAYMENT HISTORY

• CREDIT SCORECREDIT SCORE

• NUMBER OF INQUIRIESNUMBER OF INQUIRIES

HOW DO I IMPROVE MY HOW DO I IMPROVE MY CREDIT SCORE?CREDIT SCORE?

• PAY YOUR BILLS ON TIMEPAY YOUR BILLS ON TIME TO PROTECT YOUR TO PROTECT YOUR CREDIT AND TO AVOID LATE FEES. CREDIT AND TO AVOID LATE FEES.

o IF YOU CANNOT PAY ON TIME, CALL YOUR IF YOU CANNOT PAY ON TIME, CALL YOUR CREDITORS CREDITORS BEFOREBEFORE PAYMENT IS DUE TO PAYMENT IS DUE TO EXPLAIN THE SITUATION. EXPLAIN THE SITUATION.

• GET CURRENT AND STAY CURRENTGET CURRENT AND STAY CURRENT IF YOU IF YOU HAVE MISSED PAYMENTS. HAVE MISSED PAYMENTS.

o RECENT LATE PAYMENTS ARE MORE RECENT LATE PAYMENTS ARE MORE DAMAGING THAN A BANKRUPTCY DAMAGING THAN A BANKRUPTCY DISCHARGED A FEW YEARS AGO.DISCHARGED A FEW YEARS AGO.

o THE LONGER YOU PAY YOUR BILLS ON THE LONGER YOU PAY YOUR BILLS ON TIME, THE BETTER YOUR SCORE.TIME, THE BETTER YOUR SCORE.

HOW DO I IMPROVE MY HOW DO I IMPROVE MY CREDIT SCORE?CREDIT SCORE?

PAY OFF YOUR ENTIRE BILL EACH MONTHPAY OFF YOUR ENTIRE BILL EACH MONTH.. IF YOU DO, YOU PAY IF YOU DO, YOU PAY ZERO INTEREST ZERO INTEREST AND YOU AND YOU

BUILD YOUR CREDIT AT BUILD YOUR CREDIT AT NO EXTRA COSTNO EXTRA COST.. IF YOU IF YOU

CAN’T, TRY TO PAY CAN’T, TRY TO PAY MORE THAN THE MINIMUMMORE THAN THE MINIMUM

PAYMENT DUE.PAYMENT DUE.

Credit Card

Balance

Interest rate

Minimum payment

due

Monthly payments

How much you

pay in interest

Months to pay off

$800 18% $20 $20 $815.49 131

$800 18% $20 $50 $121.72 19

$800 18% $20 $80 $73.30 11

HOW DO I IMPROVE MY HOW DO I IMPROVE MY CREDIT SCORE?CREDIT SCORE?

• KEEP LOW BALANCESKEEP LOW BALANCES ON CREDIT CARDS ON CREDIT CARDS

(LESS THAN 15% OF YOUR LIMIT). (LESS THAN 15% OF YOUR LIMIT).

REMEMBER, 30% OF YOUR CREDIT SCORE REMEMBER, 30% OF YOUR CREDIT SCORE

IS DETERMINED BY HOW MUCH CREDIT YOU IS DETERMINED BY HOW MUCH CREDIT YOU

USE!USE!

• DON’T OPEN A LOT OF NEW ACCOUNTS TOO DON’T OPEN A LOT OF NEW ACCOUNTS TOO

QUICKLYQUICKLY, , ESPECIALLY IF YOU HAVE BEEN ESPECIALLY IF YOU HAVE BEEN

MANAGING CREDIT FOR A SHORT TIME. MANAGING CREDIT FOR A SHORT TIME.

HOW DO I START A HOW DO I START A CREDIT HISTORY?CREDIT HISTORY?

• OPEN A OPEN A SECURED CREDIT CARDSECURED CREDIT CARD. THESE ARE . THESE ARE CREDIT CARDS BACKED BY MONEY IN A CREDIT CARDS BACKED BY MONEY IN A SAVINGS ACCOUNT. USE THIS CARD EVERY SAVINGS ACCOUNT. USE THIS CARD EVERY MONTH AND PAY IT IN FULL TO ESTABLISH A MONTH AND PAY IT IN FULL TO ESTABLISH A GOOD PAYMENT RECORD.GOOD PAYMENT RECORD.

• APPLY FOR APPLY FOR CREDIT WITH A DEPARTMENT CREDIT WITH A DEPARTMENT STORE OR SPECIALTY STORESTORE OR SPECIALTY STORE..

• APPLY FOR AN APPLY FOR AN ACCION ACCION SMALL LOAN TO SMALL LOAN TO START YOUR CREDIT HISTORY AND MAKE ALL START YOUR CREDIT HISTORY AND MAKE ALL YOUR PAYMENTS ON TIME (WE REPORT TO YOUR PAYMENTS ON TIME (WE REPORT TO CREDIT BUREAUS).CREDIT BUREAUS).

HOW TO GET OUT FROM HOW TO GET OUT FROM UNDER EXCESSIVE DEBTUNDER EXCESSIVE DEBT

• SPEND LESS THAN YOU EARN!SPEND LESS THAN YOU EARN!

• USE A BUDGETUSE A BUDGET

• PAY OFF LOANS WITH HIGHEST INTEREST RATES FIRSTPAY OFF LOANS WITH HIGHEST INTEREST RATES FIRST

• APPLY THE MONEY TOWARDS THE NEXT HIGHEST APPLY THE MONEY TOWARDS THE NEXT HIGHEST

INTEREST RATE CARDINTEREST RATE CARD

• YOU MAY SEEK PROFESSIONAL HELPYOU MAY SEEK PROFESSIONAL HELP

WHO USES CREDIT SCORES?WHO USES CREDIT SCORES?

• MORTGAGE COMPANIESMORTGAGE COMPANIES

• AUTOMOBILE LENDERSAUTOMOBILE LENDERS

• UTILITY COMPANIESUTILITY COMPANIES

• LANDLORDSLANDLORDS

• EMPLOYERS—EMPLOYERS—

BACKGROUND CHECKSBACKGROUND CHECKS

• CELL PHONE COMPANIESCELL PHONE COMPANIES

• HOSPITALSHOSPITALS

• INSURANCE COMPANIESINSURANCE COMPANIES

• GRADUATE SCHOOLSGRADUATE SCHOOLS

• CREDITORSCREDITORS

DARK CLOUD OF DEBTDARK CLOUD OF DEBT

• 2 POPULAR METHODS TO TACKLE DEBT:2 POPULAR METHODS TO TACKLE DEBT:

• 1.1. TAKE ANY ADDITIONAL MONEY YOU HAVE AND TAKE ANY ADDITIONAL MONEY YOU HAVE AND

USE IT TO PAY OFF THE SMALLEST BALANCE FIRST.USE IT TO PAY OFF THE SMALLEST BALANCE FIRST.

• AFTER YOU REPAY THAT BALANCE, APPLY THE SAME PAYMENT AFTER YOU REPAY THAT BALANCE, APPLY THE SAME PAYMENT

AMOUNT TO THE CARD WITH THE NEXT SMALLEST BALANCEAMOUNT TO THE CARD WITH THE NEXT SMALLEST BALANCE

• 2.2. CONCENTRATE FIRST ON REPAYING THE DEBT WITH CONCENTRATE FIRST ON REPAYING THE DEBT WITH

THE HIGHEST INTEREST RATE.THE HIGHEST INTEREST RATE.

• WILL SAVE YOU MORE IN INTEREST CHARGES OVER TIME, BUT WILL SAVE YOU MORE IN INTEREST CHARGES OVER TIME, BUT

PROGRESS IS HARDER TO SEE.PROGRESS IS HARDER TO SEE.

BANKRUPTCYBANKRUPTCY• A LAST RESORT TO CONSIDER WHEN YOU A LAST RESORT TO CONSIDER WHEN YOU

HAVE EXCESSIVE DEBTHAVE EXCESSIVE DEBT

• BANKRUPTCY IS A LEGAL PROCESS THAT BANKRUPTCY IS A LEGAL PROCESS THAT ALLOWS SOMEONE DEEPLY IN DEBT TO ALLOWS SOMEONE DEEPLY IN DEBT TO CREATE A PLAN TO GET OUT OF IT.CREATE A PLAN TO GET OUT OF IT.

• PROVIDES A CLEAN SLATE.PROVIDES A CLEAN SLATE.

• WHEN A BANKRUPTCY IS APPROVED THROUGH WHEN A BANKRUPTCY IS APPROVED THROUGH A BANKRUPTCY COURT, DEBTORS MUST GIVE A BANKRUPTCY COURT, DEBTORS MUST GIVE UP MOST OF WHAT THEY OWN, WHICH IS UP MOST OF WHAT THEY OWN, WHICH IS THEN DISTRIBUTED TO THEIR CREDITORS.THEN DISTRIBUTED TO THEIR CREDITORS.

BANKRUPTCYBANKRUPTCY

• TWO KINDS OF BANKRUPTCY:TWO KINDS OF BANKRUPTCY:

• CHAPTER 7CHAPTER 7: :

• MUST BE UNEMPLOYED OR HAVE A LOW INCOME. THIS MUST BE UNEMPLOYED OR HAVE A LOW INCOME. THIS

ALLOWS YOU TO ERASE MOST OF YOUR DEBT.ALLOWS YOU TO ERASE MOST OF YOUR DEBT.

• FINANCIAL COUNSELINGFINANCIAL COUNSELING

• CHAPTER 13CHAPTER 13: :

• PAY BACK DEBT WITH MORE TIME. (ABOUT 5 YEARS)PAY BACK DEBT WITH MORE TIME. (ABOUT 5 YEARS)

• A COURT USUALLY OVERSEES THE REPAYMENT PLAN.A COURT USUALLY OVERSEES THE REPAYMENT PLAN.

BANKRUPTCY IS VERY BANKRUPTCY IS VERY COSTLY:COSTLY:

• LENDERS: LENDERS: • MUST ABSORB LOAN LOSSES THEY CAN’T RECOVER BY MUST ABSORB LOAN LOSSES THEY CAN’T RECOVER BY

RAISING RATES ON OTHER LOANS AND SERVICES.RAISING RATES ON OTHER LOANS AND SERVICES.

• RESPONSIBLE BORROWERS:RESPONSIBLE BORROWERS:• MUST PAY HIGHER RATES TO HELP LENDERS RECOVER LOSSES MUST PAY HIGHER RATES TO HELP LENDERS RECOVER LOSSES

ON BAD LOANS.ON BAD LOANS.

• PEOPLE WHO’VE DECLARED BANKRUPTCY:PEOPLE WHO’VE DECLARED BANKRUPTCY:• ACTIONS REMAIN ON THEIR CREDIT RECORDS FOR 10 YEARSACTIONS REMAIN ON THEIR CREDIT RECORDS FOR 10 YEARS• MIGHT FIND IT HARDER AND MORE EXPENSIVE TO BORROW MIGHT FIND IT HARDER AND MORE EXPENSIVE TO BORROW

FROM WARY LENDERS IN THE FUTURE.FROM WARY LENDERS IN THE FUTURE.

GOVERNMENT REGULATION GOVERNMENT REGULATION OF CREDITOF CREDIT

• SOME STATES HAVE SET A MAXIMUM ON THE INTEREST SOME STATES HAVE SET A MAXIMUM ON THE INTEREST

RATES CHARGED FOR CERTAIN TYPES OF CREDIT.RATES CHARGED FOR CERTAIN TYPES OF CREDIT.

• FEDERAL GOVERNMENT HAS ALSO PASSED LAWS FEDERAL GOVERNMENT HAS ALSO PASSED LAWS

DESIGNED TO INCREASE THE FLOW OF CREDIT DESIGNED TO INCREASE THE FLOW OF CREDIT

INFORMATION TO CONSUMERS.INFORMATION TO CONSUMERS.

TRUTH IN LENDING ACTTRUTH IN LENDING ACT

• ENSURES THAT CONSUMERS ARE FULLY INFORMED ENSURES THAT CONSUMERS ARE FULLY INFORMED

ABOUT THE COSTS AND CONDITIONS OF BORROWING.ABOUT THE COSTS AND CONDITIONS OF BORROWING.

• LENDERS MUST TELL YOU IN WRITING THE TRUE INTEREST LENDERS MUST TELL YOU IN WRITING THE TRUE INTEREST

RATE AND TOTAL FINANCE CHARGE BEFORE YOU SIGNRATE AND TOTAL FINANCE CHARGE BEFORE YOU SIGN

• TRUTHFUL AND NOT MISLEADING IN THEIR TRUTHFUL AND NOT MISLEADING IN THEIR

ADVERTISEMENTS.ADVERTISEMENTS.

EQUAL CREDIT OPPORTUNITY EQUAL CREDIT OPPORTUNITY ACTACT

• THOSE WHO PROVIDE CREDIT CANNOT DENY YOU SUCH THOSE WHO PROVIDE CREDIT CANNOT DENY YOU SUCH

CREDIT SOLELY ON THE BASIS OF YOUR RACE, RELIGION, CREDIT SOLELY ON THE BASIS OF YOUR RACE, RELIGION,

NATIONAL ORIGIN, GENDER, MARITAL STATUS, AGE, OR NATIONAL ORIGIN, GENDER, MARITAL STATUS, AGE, OR

RECEIPT OF PUBLIC ASSISTANCE.RECEIPT OF PUBLIC ASSISTANCE.

STATE USURY LAWSSTATE USURY LAWS

• RESTRICTS THE AMOUNT OF INTEREST THAT CAN BE RESTRICTS THE AMOUNT OF INTEREST THAT CAN BE

CHARGED FOR CREDIT.CHARGED FOR CREDIT.

• CONSUMER FINANCE AGENCIES ARE OFTEN ALLOWED TO CONSUMER FINANCE AGENCIES ARE OFTEN ALLOWED TO

CHARGE HIGHER RATES BECAUSE THEIR LOANS INVOLVE CHARGE HIGHER RATES BECAUSE THEIR LOANS INVOLVE

HIGHER RISKS.HIGHER RISKS.

TYPES OF FINANCIAL TYPES OF FINANCIAL INSTITUTIONSINSTITUTIONS

• COMMERCIAL BANKSCOMMERCIAL BANKS

• SAVINGS AND LOAN ASSOCIATIONSSAVINGS AND LOAN ASSOCIATIONS

• SAVINGS BANKSSAVINGS BANKS

• CREDIT UNIONSCREDIT UNIONS

• FINANCE COMPANIESFINANCE COMPANIES