Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 9 Building Good Credit

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-2

Building Good Credit Just how important is your credit history, your score? Copyright ©2004 Pearson Education, Inc. All rights reserved.7-3

Building GOOD Credit We all want ‘good credit’ –Having ‘no credit’ will get in the way of making future purchases Copyright ©2004 Pearson Education, Inc. All rights reserved.7-4

Building Good Credit Your Credit History Credit Bureaus and Credit Scoring Understanding Your Credit Report Your Credit Score Copyright ©2004 Pearson Education, Inc. All rights reserved.7-5

Your Credit History When you go to borrow money—for example, a car—the options available to you for borrowing and the interest rate you pay will depend in part on your credit history. Credit history – records of credit usage –Times borrowed? Paid on time? –Info. indicated w/in credit report Copyright ©2004 Pearson Education, Inc. All rights reserved.7-6

Credit History continued… Each person’s credit history is collected in his or individual credit report. Lenders use this information every time you apply and use credit. Every time you make a credit purchase, it will further establish your credit history good or bad. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-7

Credit Report Credit report – document including credit history –Times applied? Bankruptcy? Payments on time? Carry a balance? –Requested by lender when credit is applied for Decides whether/not to extend credit –6 categories: report #, personal info., public records, collection agencies, current credit, inquirie s Copyright ©2004 Pearson Education, Inc. All rights reserved.7-8

Credit Bureaus and Credit Scoring Credit bureaus organizations that collect credit info. on individuals & keep track of your credit history. Three main credit bureaus –Equifax –Experian –Transunion Provide credit reports to potential lenders, employers, and others upon requests. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-9

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-10 Credit Report Credit check –Credit report: a statement of creditworthiness based on information such as whether you have made late payments, and any unpaid current bills –Credit scoring often determines whether or not you are approved for credit

Protect Yourself Against Inaccurate Credit Reports Get a copy of your free credit reports form all credit rating agencies. Examine it thoroughly. If you find something that is incorrect, ask the agency to investigate the information. If that doesn’t resolve the issue, you can attach a short statement to your credit report. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-11

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-12 Credit Card Application Applying for a credit card — potential creditors obtain information from you, about you, and about the economy –Personal information Cash inflows Cash outflows Credit history Capital Collateral

Credit score – numeric value representing a person’s ‘credit worthiness’ –Calculated using a model created by the Fair Isaac Corp., often called a person’s ‘FICO Score’ – Higher # = ‘better credit’ –Lower interest rates, due to ‘lower risk’ for creditors –Can save you ‘thousands’ most between Credit Score

Credit Score is Determined by… –Determined by mathematical model/equation Credit history, credit being used –Score can be improved by: Paying bills on time Keep revolving debt low Pay off existing debt Copyright ©2004 Pearson Education, Inc. All rights reserved.7-14

How Credit Scores Are Determined Your payment history Information about how you make your payments on credit cards, store accounts, car loans, finance companies, mortgages – Accounts in collection or past due, and how long past due – Information in public records, such as bankruptcy, judgments, liens, wage attachments or child support Copyright ©2004 Pearson Education, Inc. All rights reserved.7-15

How Scores are Determined Your overall debt – How much you owe on all your accounts – How much credit you have available to use Your credit account history –When you opened and used each of your accounts –How recently you applied for new credit –Recent good credit history following past payment problems Copyright ©2004 Pearson Education, Inc. All rights reserved.7-16

How Credit Scores are Determined Types of Credit –The different types of credit accounts you have –The total number of accounts you have Copyright ©2004 Pearson Education, Inc. All rights reserved.7-17

Get and Keep a Good Score Make sure your credit report is accurate Pay all your bills on time. Apply for credit only when you need it. Lower the balances on all your credit accounts. Pay off debt rather than moving it around. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-18

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-19 Credit Cards –Interpreting credit ratings High ratings usually provide easy credit approval How ratings make obtaining credit difficult

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-20 Financial Planning Online: Your Credit Card Report Go to: This Web site provides a credit report that assesses your creditworthiness. The report is available to you online for a small fee.

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-21 Credit Cards Focus on Ethics: Guarding your financial information –Financial institutions must provide privacy policies telling what information they collect and what information they intend to share –Evaluate your credit report regularly –Creditors may also consider debt level and economic situation

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-22 Credit Cards –The credit decision You should receive a reply within 30 days If you are rejected, the creditor must give an explanation Laws prohibit discrimination in credit based on race or gender Creditors may not consider criminal records, political preferences, or religion

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-23 Credit Cards Types of credit cards –Visa, MasterCard and American Express most popular –Visa and MasterCard allow partial payments –American Express requires full payments

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-24 Credit Cards –Retail (or proprietary) credit card: a credit card that is honored by a specific retail establishment Retail stores and gas stations Limits purchases to a single merchant Credit limit — maximum amount of credit allowed Annual fee Incentives to use the card

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-25 Financial Planning Online: Estimating Your Future Credit Card Payments Go to: sellingtools/calculators sellingtools/calculators Click on: “Credit Card” then “How Important is the Interest Rate?” This Web site provides estimates of your future credit card payments.

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-26 Credit Cards Prestige cards: credit cards, such as gold or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing Grace period — period between time of purchase and when payment is due Cash advances –Usually charge high interest plus a fee

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-27 Credit Cards Interest rate — usually between 15 and 20 percent –Finance charge: the interest that you must pay as a result of using credit Credit card statement details differences in new balance and previous balance

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-28 Credit Cards Comparing credit cards –Acceptance by merchants –Annual fee –Interest rate Watch for “teaser rates” –Maximum limit

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-29 Financial Planning Online: Your Rights When Using Credit Go to: Click on: “Project Money $mart,” then “Your Credit Rights: How the Law Protects You” under the heading “Using Credit Wisely.” This Web site provides information about various laws that protect your rights when using credit.

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-30 Tips on Using Credit Cards Use a credit card only if you can cover the bill Impose a tight credit limit Pay credit card bills before investing money Use savings if necessary to pay the credit card bill on time If you cannot avoid credit card debt, pay it off before other debt

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-31 Tips on Using Credit Cards Avoid credit repair services Avoid credit card fraud Deter identity theft

Copyright ©2004 Pearson Education, Inc. All rights reserved.7-32 Financial Planning Online: The Best Credit Card for You Go to: cc_home.asp cc_home.asp This Web site provides links to help you get the best overall credit card rate, the lowest introductory rate, frequent flier credit cards, and other special features.

Summary Opening a credit card and using it responsibly is one way to build a good credit rating. When shopping for a credit card, reach each contract carefully know the clauses to avoid, and compare disclosures. Before using credit, consider other alternatives. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-33

Summary Some ways to avoid credit problems include tracking spending, checking monthly statements, reviewing credit reports annually, and reporting lost or stolen cards. Copyright ©2004 Pearson Education, Inc. All rights reserved.7-34