Understanding Credit & Debt

FIVE “ C ’ S ” OF
CREDITWORTHINESS



Character - the honesty and reliability to repay a debt.
Have you used credit before? Do you pay your bills on time? How long have you lived at your present address or have been employed?
Capital/Collateral - if you have valuable assets such as real estate, personal property, investments, or savings with which to repay debt if income is unavailable.
Capacity/Cash Flow - your ability to repay the debt – employment, income.

“ Creditors have better memories than debtors.
”

 Debt & How To Handle It
 Your Credit Score & How To Raise It
 Credit Reports & How To Obtain One
 Credit In The Current Market
 Talking To Your Students

 Credit is a valuable tool, yet many people misuse and overuse it.

Signs of someone who may be in trouble:
1)
Making only the minimum payment
2)
Maxing or nearly maxing out credit cards
3)
Not knowing how much is owed
”

Signs of someone who may be in trouble:
4)
Using credit cards to purchase items that used to be purchased with cash
5)
Paying off one card with another card
6)
Phone calls or letters from creditors

Lowering Your Debt




Ask Your Credit Card Company To Lower
Your Interest Rate
If Your Card Company Wont Lower – Shop
For A Lower Rate Card
Set up a tight budget and stick to it. Find ways to save money – America Saves
Set realistic goals

If You Are In Trouble




Stop Borrowing
Contact Your Creditors
Review the Fair Debt
Collection Act
Speak with a credit counselor
Washington State Department of Financial Institutions
” Regulating financial services to protect and educate the public and promote economic vitality.
”

 Credit Counselors
 National Foundation for Credit Counseling www.debtadvice.org
 Debt Management Plans
 Friends or Family
 Ask to borrow money from a friend or family
 No to low-interest loans

 Be wary of organizations or individuals that:
 Promise to solve your problem overnight
 Charge high up front fees
 Won ’ t disclose the costs for their services
If It Sounds Too Good To Be True
… It Probably Is

 Only 49% of Americans have obtained their credit score in the past two years.
(Consumer Federation of America, 2008)
”

 What Is A Credit Score?
 The score given to an individual to determine their credit worthiness.
FICO and Vantage.
 Who checks your credit score?
 Credit card companies
 Lenders
 Insurance Companies
 Employers
 Phone companies

 How your score can affect you:
 Interest Rates

If your rate goes up on 1 card it can go up on another
 Insurance Rates
 Some Employers Use It When Hiring

 On a $225,000 home:
 6% Interest Rate

30-year fixed = $1348/mo
 5% Interest Rate

30-year fixed = $1207/mo.

$141.14/mo. difference

$50,810 over 30 yrs

How Your Score Is
Calculated

FICO® scores are calculated based on your rating in five general categories :
1) Payment History
2) Amounts Owed
3) Length Of Credit History
4) New Credit
5) Types Of Credit Used

What ’ s A Good Score?
 FICO Scores Range From 300 – 850
 In the eyes of most lenders, FICO credit scores above 700 (750) are very good .
 Recent changes in the economy have changed what lenders as a very good score

 A credit report is a report containing a detailed credit history of an individual.
 What ’ s On Your Credit Report?
 Personal Information (Name, SSN, Etc.)
 Public Records & Collection Accounts (Bankruptcies,
Foreclosures, Etc.)
 Your Credit History & Current Obligations
 Credit Inquiries

 You are entitled to 1 free credit report a year from each of the 3 major credit bureaus.
 To request your free credit report visit www.annualcreditreport.com
 You can also request your credit score.
A small fee may apply.
”

 Pay Bills On Time (Get current, stay current)
 Pay Off Debt – Don ’ t Move It Around
 Don ’ t Close Unused Credit Cards As A Short-
Term Strategy To Raise Your Score
 Don ’ t Open New Credit You Don ’ t Need.

More Tips For Improving
Credit Scores
 Repair Errors (Outstanding Debts You Paid)
 Pay Down Balances To 20-30% Of Credit
 If You Have 1 Or 2 Old Cards You Haven't Used
Put A Little On The Card And Then Pay It Off
 Do This About 1 Every 6 Months

 Lenders are lowering credit limits
 20% banks lower on prime borrowers
 60% banks lower on subprime borrowers
 Lenders are tightening their requirements.
 Good Score - 750 or higher
 Lenders are closing inactive cards
 Less liability


BASIC RULES TO FOLLOW:
 They should charge only what they can afford to pay back.
 Credit cards shouldn't be a money substitute for items they can't afford.
 They need to pay their bills on time and not just the minimum amount.
 Credit companies specifically target college students.
”




FTC Credit Web Site
 www.ftc.gov/credit
AICPA
 www.360financialliteracy.org/Life+Stages/
College/
Bad Credit Hotel
 www.controlyourcredit.gov/