Understanding Credit and Borrowing

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Presentation transcript:

Understanding Credit and Borrowing Jade Beckman Vice President Consumer Loans Mountain America Credit Union

How a Lender Makes Decisions Is it random? What is it based on? What do they look at? Is my credit score all that matters? Does my relationship matter? What rate will I get? Can I afford it?

The 3 C’s Category Measure What is Tells Us Credit Score Willingness to Pay Collateral LTV Secondary payment Capacity Debt Ratio Ability to Pay

Credit Scores (not one score) Who uses credit scores? FICO Score Vantage Score Others (Bankruptcy scores, etc) All scores are not the same thing Who uses credit scores? Lenders Landlords Employers Insurance companies

Credit What is a good score? What does a score tell a user? FICO works on a scale of 350 – 850 Vantage works on a scale of 1000 Both scores higher is better What does a score tell a user? Predictor of default Statistically modeled to predict 24 months in future RISK Rate charged is commensurate with risk

Credit What goes into a score? Payment history Capacity of revolving credit (i.e. balance-to-limit ratio) Length of credit history Number of trade lines Types of trade lines Presence of derogatory items Inquiries of other creditors

Credit Where does the information come from? The three main credit bureaus Experian, Equifax and TransUnion Creditors report history to one or all Collection records Public records Judgments Bankruptcy

Credit How can I obtain a copy of my report? www.annualcreditreport.com 1 free copy per year Upon receipt of a loan denial Various “free” sources Various subscriptions with cost Scores are not free (with some exceptions)

Credit What if my credit is not good? First, know what your credit looks like Dispute inaccuracies Be judicious about use of credit, especially credit cards PAY ON TIME Beware of “credit repair”

Collateral The lender’s last resort Something to lose Measured by Loan-to-Value (LTV) Loan amount divided by valuation of collateral Lower is better Shows degree of risk Autos depreciate in value Homes?

Collateral Tools to be a smart consumer Difference in rates Know the value of what you are buying Know about your collateral’s future value NADA, Kelly Blue Book for autos Appraisals and automated valuations for real estate Difference in rates Secured is less risky Therefore, lower rates on secured, higher unsecured High LTVs (negative equity) can result in higher rates

Capacity Ability to repay Debt ratio What can I afford? Monthly debt payments divided by gross monthly income Payment-to-income Overall debt-to-income What can I afford? Know your debt situation Debt ratio does not equal affordability Fit within your budget Targets for ratios

Shopping for Credit How to compare Is rate all that matters? Read credit card terms closely Look for default APRs Read intro offers carefully CARD Act has helped some (also some unintended consequences) Mortgage products Good Faith Estimates Compare costs as well as rates

Summary Be an informed consumer Know your credit situation, monitor Make sure your report is accurate Know your own budget situation Know what you are purchasing and compare Be aware of what creditors are looking for Know the rules of the game before you play