The ABCs of Credit Overview What is credit? The five Cs of credit Pros and cons of using credit The big decision—Should I use credit? 1

CREDIT DEFINITIONS Credit Trust given to another person for future payment of a loan, credit card balance, etc. Creditor A person or company to whom a debt is owed. Slide 1 – Credit Definitions Lesson Reference: Credit, Activity 1 – Handout 1 2

Slide 2 - The Five Cs of Credit Lesson Reference: Credit, Activity 1 – Overhead 1 THE FIVE Cs OF CREDIT C = Capacity C = Capital C = Collateral C = Conditions C = Character 3

WHEN TO USE CREDIT Can you describe a situation when it is a good time to use credit and when it is NOT a good time to use credit? Slide 3 – When to Use Credit Lesson Reference: Credit, Activity 1 – Handout 2 4

Credit - Activity 2 ACTIVITY 2 Credit Scores Overview Credit scores and their impact The factors that make up a credit score Strategies to improve your credit score 5

WHAT IS A CREDIT SCORE? A credit score is a number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time. A credit score is a number that changes as the elements in a credit report change. A credit score has broad use and impact. Your credit past is your credit future. FICO ® scores, one of the most common credit scoring systems, vary between 350 and 850. VantageScore SM, a new credit scoring system developed by the three credit bureaus, ranges from Slide 1 – What Is a Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 1 6

WHAT MAKES UP A TYPICAL CREDIT SCORE? Slide 2 – What Makes Up a Typical Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 2 7 Source: Fair Isaac and Consumer Federation of America, 2005

IMPROVING YOUR CREDIT SCORE Pay bills on time. Get current and stay current. Don’t open a lot of new accounts too rapidly. Correct mistakes. Shop for loan rates within a focused period of time. Keep balances low on revolving credit. Pay off debt. Check your credit report. Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2 8

Slide 1 – Debt-to-Income Thermometer Lesson Reference: Credit, Activity 4 – Overhead 1 DEBT-TO-INCOME THERMOMETER 9

Credit - Activity 3 ACTIVITY 3 Establishing Credit Overview Types and sources of credit Credit safeguards Applying for credit Questions to ask when applying for credit 10

Slide 1 – Types of Credit Lesson Reference: Credit, Activity 3 – Handout 1 TYPES OF CREDIT Cash Credit Sales Credit Secured Credit Revolving Credit 11 I.O.U. Single Payment Credit Installment Credit Other Types of Credit

Slide 2 - Sources of Credit Lesson Reference: Credit, Activity 3 – Overhead 1 SOURCES OF CREDIT What are other sources of credit? What sources of credit should be avoided? Why? Banks Credit Unions Retail Stores Finance Companies Savings & Loan Associations Internet Stores 12

Credit - Activity 4 ACTIVITY 4 Maintaining Good Credit Overview Debt to income thermometer Credit process Credit reporting agencies Credit safeguards for consumers Credit reports, ratings and scores Establishing a credit history 13

THINGS TO DO TO ESTABLISH AND MAINTAIN GOOD CREDIT 1. Pay all bills on time. 2. Avoid late fees. 3. Keep outstanding credit balance below 30% 4. Regularly check credit report and address discrepancies. 14

Credit - Activity 6 ACTIVITY 6 Managing Credit Challenges Overview Warning signs of credit abuse Credit card reductions Correcting credit errors Resources and assistance 15

Slide 1 – Rating Trouble Signs Lesson Reference: Credit, Activity 6 – Handout 1 MEASURING THE SERIOUSNESS OF CREDIT TROUBLE SIGNS Rate how serious you think each of the following trouble signs is. 1 = Not Serious 4 = Very Serious Trouble Signs 16 Delinquent Payments Default Notices Repossessions Collection Agencies Lien Garnishment Others?

Slide 2 – Warning Signs Lesson Reference: Credit, Activity 6 – Handout 2 WARNING SIGNS OF DEBT PROBLEMS 17 1.Delinquent Payments 2.Default Notices 3.Repossessions 4.Collection Agencies 5.Judgment Lien 6.Garnishment

Credit - Activity 7 ACTIVITY 7 Identity Theft Overview The growing problem of identity theft and how it occurs Strategies to protect your personal information Steps to take if your identity has been stolen. 18

Slide 1 – Identity Theft Lesson Reference: Credit, Activity 7 – Overhead 1 IDENTITY THEFT Identity theft occurs when someone uses your personal identifying information to either establish credit under your name or to take over an existing account that you established without your authorization. This information may include: 19 Social Security Numbers Name Address Date of birth Mother’s maiden name Passwords PINs

HOW TO AVOID IDENTITY THEFT 1.Monitor your credit report. 2.Don’t give out personal information to unknown persons or companies. 3.Protect your credit and debit cards. 4.Protect your mailbox. 5.Protect your wallet. 6.Use passwords and PINs that can’t be easily guessed. 7.Use anti-virus software on your computer. 8.Notify your bank when you change your address or phone number. 9.Other suggestions? Slide 2 – How to Avoid Identity Theft Lesson Reference: Credit, Activity 7 – Handout 2 20

Slide 3 – What to Do Lesson Reference: Credit, Activity 7 – Overhead 2 WHAT TO DO IF YOUR IDENTITY HAS BEEN STOLEN If you think your identity has been stolen, take the following steps: 21 Contact the three major credit bureaus (Equifax, Experian, and Trans Union). Close accounts. Contact all creditors involved. File a police report. Keep a record of your contacts.

Credit - Activity 8 ACTIVITY 8 Prime and Subprime Lending Overview Subprime and prime lending definitions Alternative institutions that provide higher-cost loans Strategies to improve credit in order to qualify for prime loans. 22

PRIME AND SUBPRIME MORTGAGE LENDING Prime Prime credit is typically available to an individual who has paid his or her outstanding credit on time. Subprime A subprime loan is typically available to a person with either no credit history or a damaged credit history and who is considered to be a high-risk borrower. Subprime loans have higher-than-average interest rates. Slide 1 – Prime and Subprime Lending Lesson Reference: Credit, Activity 8 – Overhead 1 23

THE PRICE OF SUBPRIME LENDING How much does a subprime loan cost you? If you are making payments on a car, for example, you could be paying significantly more just for getting a loan with a higher interest rate. This added interest is significant over the life of the loan. Slide 2 – The Price of Subprime Lending Lesson Reference: Credit, Activity 8 – Handout 1 24

MOVING FROM SUBPRIME TO PRIME Pay bills on time. Correct mistakes. Pay more than the minimum required. Use credit sparingly. Work with a reputable nonprofit credit counseling organization. Slide 3 – Moving from Subprime to Prime Lesson Reference: Credit, Activity 8 – Handout 2 25 If you currently have a lower credit score and want to be able to qualify for prime loans in the future, you should take steps to improve your credit. The following steps can help.

Credit - Activity 9 ACTIVITY 9 Predatory Lending Overview Characteristics and warning signs of predatory lending. The key targets of predatory lending. Common abuses and scams. Nonprofit organizations that can help consumers plagued by predatory lending. 26

PREDATORY LENDING Sell properties for much more than they are worth, using false appraisals. Encourage borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan. Knowingly lend more money than a borrower can afford to repay. And many other scams. Slide 1 – Predatory Lending Lesson Reference: Credit, Activity 9 – Overhead 1 27 In communities across America, people are losing their homes and their investments because of predatory lenders, corrupt appraisers, mortgage brokers, and home improvement contractors who:

IDENTIFYING PREDATORY LENDING Packaging a loan with single-premium credit insurance products Repeatedly refinancing a loan in a short period of time Charging excessive rates and fees to a borrower who qualifies for lower rates and fees Slide 2 – Predatory Lending Lesson Reference: Credit, Activity 9 – Handout 1 28 Predatory lending is not defined by federal law except to the extent that a loan is a high-cost loan and contains one of a fixed list of terms or conditions. Predatory or abusive lending practices can include:

TEN WARNING SIGNS OF PREDATORY MORTGAGES 1.Unreasonably high interest rates 2.Multiple refinancing 3.Unnecessary debt consolidation 4.Balloon payment 5.Negative amortization 6.Door-to-door solicitation 7.Back-dating of documents 8.Large loan broker fees 9.Kickbacks between lender and broker 10.Single-premium credit life insurance Slide 3 – Ten Warning Signs Lesson Reference: Credit, Activity 9 – Handout 1 29

COMMON SCAMS Advance fee schemes The prize that will cost you Online auctions Fraud jobs Moneymaking schemes Bogus charities Scam schools Slide 4 – Common Scams Lesson Reference: Credit, Activity 9 – Handout 2 30

TOP STRATEGIES TO AVOID SCAMS Don’t become a victim. Investigate strangers who have deals too good to be true. Always stay in charge of your money. Don’t be fooled by appearances. Watch out for salespeople who prey on fears. Monitor your investments. Report fraud or abuse. Do your homework. Be wary of door-to-door solicitations. Slide 5 – Top Strategies to Avoid Scams Lesson Reference: Credit, Activity 9 – Handout 2 31

Credit - Activity 10 ACTIVITY 10 Bankruptcy Overview Chapter 7, 11, and 13 bankruptcies Provisions of the new bankruptcy legislation The credit counseling component of the new law Strategies to avoid bankruptcy 32

BANKRUPTCY Chapter 7 wipes out all allowable debts and allows certain personal property exemptions. Chapter 13 is a court-approved repayment plan. Chapter 11 is typically used for business bankruptcies. Slide 1 – Bankruptcy Lesson Reference: Credit, Activity 10 – Overhead 1 33

NEW PROVISIONS OF THE BANKRUPTCY LAW A test to determine eligibility to file bankruptcy Determining what you can afford to pay Tougher homestead exemptions Lawyer liability Credit counseling and money management New debt may not be discharged. Quicker collections process Slide 2 – Provisions of the Bankruptcy Law Lesson Reference: Credit, Activity 10 – Handout 1 34

THINGS TO CONSIDER BEFORE FILING FOR BANKRUPTCY A bankruptcy filing could determine whether or not you get a job. Your insurance rates could rise. You may find it difficult to rent an apartment or qualify for a home loan. Bankruptcies stay on your credit report for 10 years. Bankruptcy can lower your credit score. Slide 3 – Things to Consider Lesson Reference: Credit, Activity 10 – Overhead 2 35

THINGS TO DO BEFORE DECIDING TO FILE BANKRUPTCY, CONT. Reduce your spending Talk with your creditors. Talk with a nonprofit counseling agency. Talk with an attorney and understand the consequences of declaring bankruptcy. Consider consolidation carefully. Slide 4 – Things to Do Lesson Reference: Credit, Activity 10 – Handout 2 36

TIPS TO REMEMBER Keep track of your daily expenses. Save money on a regular basis. Make changes right away if you see yourself starting to get into financial trouble. Pay attention to your household finances, especially if you are married. Slide 5 – Tips to Remember Lesson Reference: Credit, Activity 10 – Handout 2 37