Credit ~ The Basics
Homework (Passport Page 32)
Welcome! Define credit and loan Understand credit reports and credit scores Distinguish between secured and unsecured loans Identify the costs associated with getting a loan Identify the factors lenders use to make loan decisions
How’s It Going?
What Do You Know? (Pre-Test on page 4)
Let’s Talk About You
What is Credit & Why is it Important? Credit is the ability to borrow money. When you borrow money on credit, you get a loan. Credit is important because it: Can be useful in times of emergencies Is more convenient than carrying large amounts of cash Allows you to make a large purchase, such as a car or house, and pay for it over time Can affect your ability to obtain employment, housing, and insurance based on how you manage it
What’s the Risk? Guarantee Unsecured Loan Collateral Secured Loan Collateral Secured Loan Collateral Secured Loan Asset Guarantee Unsecured LoanSecured Loan Asset Unsecured Loan
Types of Loans Installment Loans Credit Cards Home Loans Home purchase, Home refinancing, cash out refinance loan Home equity Value of Home $250,000 Minus debt -200,000 Equity $50,000 Remember: Any type of home loan you obtain is secured by your house. If any home loan is not repaid, you could lose your house.
The Cost of Credit Fees Truth in Lending Disclosures InterestFees Truth in Lending Disclosures Interest
The Four C’s C apacity: your present and future ability to meet your payment obligations C apital: the value of your assets and your net worth C haracter: how you have paid bills or debts in the past C ollateral: property or assets offered to secure the loan
Credit Reports Who you are How much debt you have Whether you have made payments on time Whether there is negative information about you in public records
Credit Reporting Agencies Equifax TransUnion ExperianEquifax TransUnion Experian
Credit Score Equifax TransUnion Experian
Tale of Two Scores $20,000 loan Car loan rates 36 mos = 9.94% 48 mos = 10.94% 60 mos = 11.19% Payment = $437 Total Interest = $6,213 Total Paid: $26,213 Car loan rates 36 mos = 3.94% 48 mos = 4.94% 60 mos = 5.19% Payment = $379 Total Interest = $2,754 Total Paid: $22,754 $3,459 difference 680 Score 590 Score
Your Credit Score Past Payment History Capacity Length of Credit History New Credit Mix
Payment History ~ 35% One late payment Two late payments 600 It could take a full year of perfect payments to get your score back up to a 700!
Capacity ~ 30% Credit Card #1 $10,000 limit $5,000 balance Credit Card #2 $10,000 limit $5,000 balance Credit Card #3 $10,000 limit $5,000 balance Credit Card #4 $10,000 limit $5,000 balance $20,000 in debt and $20,000 “open to buy” Credit Card #3 $10,000 limit $10,000 balance Credit Card #4 $10,000 limit $10,000 balance $20,000 in debt and Nothing “open to buy”
The Other 35% Length of Credit History ~ 15% New Credit ~ 10% Credit Mix ~ 10%
What Doesn’t Affect Your Score Race, religion, age, national origin, sex and marital status Interest rate being charged on your loans Credit counseling or financial counseling programs Debt to income ratio Where you live Your salary Occupation and title Employer Date employed Employment history BUT… Negative reporting only Checking history Payday Lenders, Title Loans These factors will be considered by lenders and factor heavily in whether or not you get a loan!
What Can Affect Your Score Tax debt/liens Unpaid child support Co-signing Bankruptcy Dismissals
How to Improve Your Score Ensure your credit report is correct and dispute any legitimate errors. Focus on bringing delinquent loans current. Pay off and close second-tier finance companies, payday lenders and title loans. Pay down credit cards that are near their limits first, assuming the interest rates are similar. Pay down total revolving balances but do not close the accounts (capacity is king!). Move revolving balances to installment debt. Minimize new accounts.
What Have You Learned? (Post-Test page 26)
Homework (Passport page 38)
Questions?