Part of BestPrep’s Financial Matters Program Credit Matters Title Slide: Credit Matters   Introduce yourself Give the name of the company you work for Discuss your educational background Talk about the jobs you had before your current career Summarize what someone in your position does (relate it to today’s presentation) Part of BestPrep’s Financial Matters Program

Why does credit matter? Slide 2: Why does credit matter?   The objective of this slide is to get the students to brainstorm about credit. Why does credit matter? Why is it important? How is this presentation relevant to them?

Let’s take a quiz! Slide 3: Credit Quiz   The next 5 slides address common questions about credit.

Question 1 of 5 How many credit cards does the average U.S. household have? 1 5 3 10 Slide 4: Question 1   Answer: 5 SOURCE: Credit Card Statistics, Industry Facts, Debt Statistics | CreditCards.com

Question 2 of 5 How much credit card debt does the average U.S. household have? < $1,000 $5,000 - $10,000 $1,000 - $5,000 > $10,000 Slide 5: Question 2   Answer: $15,799 Over 40% of American families spend more than what they earn. SOURCE: Americans are Swamped in Credit Card Debt- Consolidation May be the Answer| MyWayBusiness.com

Question 3 of 5 According to an Experian Consumer Research study, what percent of income does the average family use for monthly credit card payments? 10-15% 20-25% 15-20% 25-30% Slide 6: Question 3   Answer: 21% SOURCE: Credit Card Statistics, Industry Facts, Debt Statistics | CreditCards.com

Question 4 of 5 What percent of families only pay the minimum monthly payment of their credit cards? 10-20% 30-40% 20-30% 40-50% Slide 7: Question 4   Answer: 17% Roughly 1 in 6 people are only paying the minimum monthly payment on their credit card. Of these people, most will never pay their credit cards in full. SOURCE: Credit Card Statistics, Industry Facts, Debt Statistics | CreditCards.com

Question 5 of 5 What is the APR (annual percentage rate) on the average credit card? 4% 24% 14% 34% Slide 8: Question 5   Answer: 14% SOURCE: Weekly Credit Card Rate Report| CreditCards.com

Definition of Credit Receive money today with a promise to repay in the future. Slide 9: Definition of Credit   Receive money today with a promise to repay in the future.

The “Three C’s” of Credit Character Capacity Collateral Your reputation, credit history and job stability. Are you able to repay the debt based on your income? The property used to secure the loan. Slide 10: The Three C’s of Credit   Lenders make decisions about whether to loan money based on the three Cs of credit. Character tells a lender if you are willing to repay a loan. Capacity tells a lender if you are able to repay a loan. Collateral provides a lender with comfort that the loan will be repaid even if the borrower encounters unforeseen difficulties.

Types of Credit Home loans Car loans Business loans Student loans Credit cards Slide 11: Types of Credit   Home loans and car loans are usually given to purchase these items. Business loans can be used for a number of things like buying inventory to sell, buying equipment that will last longer than a year, buying real estate or financing growth. Business loans are given to successful businesses with a track record of profitability. Business loans are usually not given to firms just getting started or to firms that are not profitable. Student loans are given with beneficial interest rates (low rates) and long terms to encourage education. Credit cards are revolving lines of credit (if you borrow money and pay it back, it is available to borrow again). Most other loans are applied for and paid back—once you pay them back, you have to apply for the money again.

Paying Off Credit George buys an iPad for $499.00 with his Visa card. The minimum monthly payment is $10.00. The interest rate is 20%. If George only pays the monthly minimum, and is never late, how long will it take George to pay off his iPad? How much will he pay in interest? Slide 12: Paying off credit   Just meeting the minimum repayment terms is sufficient to keep the lender happy, however, this leaves you paying significantly more in interest. 108 months (9 yrs) $578.97 (total payment = $1077.97)

Credit Cards Rates Fees Benefits The details for each credit card can be researched online. Slide 13: Credit Cards   You can compare credit card offers by considering these three features of the cards: Rates are interest rates. The rate charged to you for borrowing money when you have used the credit card. Fees could be for any number of things: an annual fee, an over limit fee (borrowing more that the limit the company established for your card), late fees for payments that are late, etc. Other benefits could include points or cash back programs, discounts from retailers or other programs that you find valuable. Ex/ airline miles, points redeemable for merchandise

Having a Credit Card Benefits: Convenient Can help in emergencies Can offer protection against theft Offers payment almost anywhere in the world (including the Internet) Builds your credit history Slide 14: Having a Credit Card: Benefits

Having a Credit Card Drawbacks: Can make purchases more expensive Can encourage overspending Can cause credit damage Requires careful monitoring and record keeping Slide 15: Having a Credit Card: Drawbacks   Those advantages come with potential drawbacks. Some people will not experience any of these drawbacks, others will experience all of them. As a consumer, you want to minimize the drawbacks. You may be able to do that by limiting the number of cards you own or by limiting the number of cards you carry. You may find your own ways to limit the drawbacks.

Let’s Review What are the Top Four Criteria When Deciding on a Credit Offer? What is the interest rate? What is the payment amount? How long will I be in debt? What will the total cost be? Slide 16: Let’s Review   When choosing a card, be sure students are mindful of these four questions (listed on slide). Note that these criteria apply to ALL types of credit (not just credit cards).

What is a Credit Report? It reflects the history of your borrowing and payment practices for a 7-10 year period Slide 17: What is a credit report?   Call on students to answer this question. Bring an example of a credit report printed off the internet to show the students as a handout.

Credit Report Identifying Information Credit History Public Records Inquiries Slide 18: Credit Report   Identifying Information (name, addresses, date of birth, phone numbers, employers) Credit History (all current and past accounts) Public Records Financial data (bankruptcies, collections) Inquiries Try to give detailed, relevant examples of the above (i.e. inquiries, meaning any time you open a new credit card, an inquiry occurs and it effects your credit score)

Applicant Information Name: Jane Doe SSN: 392-72-8573 Current Address: 309 Cedar Street Santa Cruz, CA 95060 Former Address: 309 Cedar Street Report Number: YYYYYYYY Report Date: September 1, 2012 Date of Birth: 1950 Phone Numbers: (831) 888-8888 Spouse: John Employer(s): Town Financial Address: CA Report Date: 09/2012 Designation: Personal Assistant Credit Items ABC Companies Inc Address: 1100 Main Street, Buffalo Account Number: 14545872 Account Status: Past Due 180 days Account Type: Installment Terms: 14 months Original Amount: $658 Account Opening Date: 5/2002 Reported Since: 6/2002 Recent Balance: $600 Last Payment: $45 Date of Status: 08/2012 Central Valley Commercial Corp Address: PO Box 469, Prather CA Accounts in Good Standing United Auto Credit Corporation Address: 18191 Von Karman Avenue Irvine, CA 92612-7102 Account Number: 564789854 Account Type: Installment Date Opened: 1/2011 Date Closed: 12/2011 Date Paid: 12/2011 Account Status: Paid in Full Original Amount: $15,459 Last Payment: $0 Recent Balance: $1,150 Terms: 22 months High Balance: N.A Monthly Payment: $175 Slide 19: Sample Credit Report   Keep this slide high-level. Point out the sections of the report and what you would expect to see in each section. Stress the important of reviewing annually for accuracy. Inquires for Your Credit Union Bank of California Address: 445 S. Figueroa St. Plaza Level Los Angeles, CA 90071 Date of Request 08/15/2004 Purpose - Financial Transaction Inquiry Type - Individual

Remember: All information remains on your credit report for 7 years (good and bad) Bankruptcies remain on your report for 10 years Check your report for errors Slide 20: Remember   Highlight that fact that your credit report is similar to a financial report card. It records all of the positive and negative financial decisions you have made in the last 7 years. Your credit report IS your financial house.

750 679 800 YOUR CREDIT SCORE 540 650 Slide 21: Your Credit Score 700

What is your credit score? A number that represents your 3 “C”s A score that ranges from 501-990 Super Prime (901-990) Prime (800-899) Near Prime (700-799) Subprime (600-699) Deep Subprime (501-599) Slide 22: What is your credit score   Please note: without a previous credit record everyone starts building their score at age 18 Your score represents your three Cs: Character, Capacity and Collateral Explain that employers, landlords, car dealers and other financial lenders will request your credit score from the credit bureau and use your score to assess your financial responsibility. Higher score = better interest rates Source: Experian Vantage Score, 2012

What is a good score? Slide 23: What is a good score?   Have all the students stand up. Instruct them to sit down if they think the average credit score in the U.S is under 600? Sit down if you think it is under 650. Under 700? Under 750? Under 800? Under 850? Advance to the next slide. The national credit score is 736

The national average credit score is: 736 Slide 24: National Average Credit Score   Idea: Ask the students who sat down for under 750. If you’ve brought candy, consider handing some out to the winners. Explain that when you first start out (i.e. late teens, early 20s); lenders know that you haven’t yet built your credit history (you haven’t taken out many loans or used a lot of credit). You age does factor into their decision when they consider your credit score. Also, explain that consumers will likely have a different score from each credit bureau, since they each use different methods to calculate the credit scores. Generally, a score of 720 will get you the best interest rates. Source: Experian, 2012

Factors that affect your credit score Slide 25: Factors that affect your credit score   Payment History: Payment history accounts for approximately 35% of your credit score. This makes sense since someone with a long history of never missing a payment is likely to continue to be a safe person to lend money to. How much you currently owe: Think of this as a “worry index” for lenders. It tells how many other people you owe money to. To give an example that the students can relate to, discuss store credit card offers (i.e. 10% off if you open a new credit card account at Target, Old Navy or another store). If the student wants to buy a car, and they have accepted several of these offers, having several new lines of credit (even if they have closed them) will negatively affect their credit score, which will affect the interest rate they’re offered when applying for a car loan. How long you have had credit: Longer credit histories are favorable. The longer you’ve had credit the easier it is to identify pattern of behavior. Your last application for credit: Recent credit applications indicate a “need” for money and needing money is a negative factor on your credit score. The types of credit you are using: A higher score is given to people with a blend of credit from various sources. This is seen as a reflection of trust, due to each credit card or loan being seen as an endorsement from a different company.

Why does all of this matter? Slide 26: Why does all of this matter

Your credit score is your reputation It affects your future options and choices. Slide 27: Your credit score is your reputation   When you take out credit, you are strengthening your financial report card.

Credit scores impact: Employment offers Auto insurance rates Home/apartment rental approval Loan interest rates Access to loans   Slide 28: Credit Scores Impact All of these activities can be influenced by your credit scores.

So how do you take control? Slide 29: So how do you take control?

How to obtain a copy of your credit report One FREE report each year Visit www.annualcreditreport.com Experian Transunion Equifax Phone and mail requests also available Slide 30: How to obtain a copy of your report   You take control by knowing what is on your credit report and making sure that it is correct.

Tips to build your credit score Pay your bills on time Keep your balances low on credit cards Maintain long credit relationships/accounts Apply for and open new accounts only when necessary Pay off debt, don’t move it around Slide 31: Tips to build your credit score   Explain how building your credit score is similar to preparing for college. To get into a good college, you spend years working hard in school to get good grades, do well in the ACT and SAT tests and participate in activities, all to build a strong college application. Building a strong credit report is a similar process. A credit report records all of the financial decisions that you have made in your life and your credit score is like a “grade” that you get that measures how well you have done in making financial decisions and carrying our financial actions. When discussing the importance of paying your bills on time, you can mention that even one late payment can lower your score by 50-100 points. Source: MSN Money article, “Beef Up Your Credit Score in 5 Steps,” by Liz Pulliam Weston. Discuss how you’ll have a higher credit score the longer you keep accounts open, and that lower credit card balances can reduce the interest rates you’re offered for car loans, mortgages or other credit offers.

Tips to re-build your credit score Pay off past due accounts Work with credit bureau and creditors to make sure your report is accurate Do not close all your credit cards Keep your credit cards active Slide 32: Tips to re-build your credit score   If you make a mistake or two you can still repair your credit, however, it does not happen immediately. It improves by taking care to create a good history over time. PAY OFF PAST DUE ACCOUNTS. Past dues destroy a credit score. Pay the creditor the past due amount reported immediately. GET RID OF YOUR LATE PAYMENTS. Request a good faith adjustment from the creditor that removes the late payments. Persistence and politeness pays off in this scenario. If you are frustrated, rude, and unclear with your request, you are making it very difficult for them to help you. DO NOT CLOSE YOUR CREDIT CARDS. If you have more than six department store cards, close the newest accounts. Otherwise, do not close any at all. KEEP YOUR OLD CREDIT CARDS ACTIVE. Use cards once every 6 months. Closing those cards will decrease the average length of time you've had credit. The one thing all credit scores over 800 have in common is a credit card that is twenty years old or older.

Seek help if you need it Communicate with your creditor if you are having financial difficulties; see if a temporary payment plan can be arranged. Work with a nonprofit agency to set up a debt repayment plan if you’re overloaded with high interest debt or falling behind in payments. Slide 33: Seek Help if you need it   Mention the importance of seeking a reputable credit counseling service (I.e. contact the Attorney General’s office for advice). Explain that there are serious consequences for not seeking help when needed. For example, a legal judgment could result in garnished wages. Or a bankruptcy can lower your Credit Score by 200 points. Source: MSN Money article, “Beef Up Your Credit Score in 5 Steps,” by Liz Pulliam Weston.

Who controls your credit score? Slide 34: Who controls your credit?   You are the one in control of your credit. You create a good credit score. Ask the students if they have any questions. You!

“Like” BestPrep on Facebook! www.facebook.com/bestprep Thank You! BestPrep gratefully acknowledges the financial and volunteer support provided by the Foundation for Financial Planning and the Financial Planning Association of Minnesota to offer the Financial Matters PowerPoint series of Money Matters, Budgeting Matters, Credit Matters and Investing Matters to the students and teachers of Minnesota. Content Reviewed & Updated 2012