The Credit Process Credit – when goods, services, and/or money are received in exchange for a promise to pay back a definite sum of money at a future date.
Credit Advantages • Able to buy needed items now • Don’t have to carry cash • Creates a record of purchases • More convenient than writing checks • Consolidates bills into one payment
Credit Disadvantages • Interest (higher cost of items) • May require additional fees • Financial difficulties may arise if one loses track of how much has been spent each month • Increased impulse buying may occur
What Lenders Look For—The 3 C’s Character—will you repay the debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts? • Have you used credit before? • Do you pay your bills on time? • Do you have a good credit report? • Can you provide character references? • How long have you lived at your present address? • How long have you been at your present job?
What Lenders Look For—The 3 C’s Capital/Collateral—what if you don’t repay the debt? Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable? • What property do you own that can secure the loan? • Do you have a savings account? • Do you have investments to use as collateral? • Do you own your own home?
What Lenders Look For—The 3 C’s Capacity—can you repay the debt? Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? • Do you have a steady job? What is your salary? • How many other loan payments do you have? • What are your current living expenses? What are your current debts? • How many dependents do you have?
Borrower Responsibilities • Borrow only what you can repay. • Read and understand the credit contract. • Pay debts promptly. • Notify creditor if you cannot meet payments. • Report lost or stolen credit cards promptly. • Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity.
Types/Sources of Credit Single-Payment Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged. • Utility companies, doctor visits • Retail businesses when buying on account or running a tab
Types/Sources of Credit Installment Credit Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is charged. • Auto dealers • Appliance companies Money may also be loaned for a special purpose from depository institutions such as: • Commercial banks • Consumer finance companies • Savings and loans • Credit unions
Types/Sources of Credit Revolving Credit Many items can be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance. • Retail store credit cards—JC Penney, Carson’s • Credit cards from credit card companies—Visa, Discover
Credit Report Detectives Meet Isabella, your new client: • About to graduate from college • In extreme debt • Concerned about finding a job • Doesn’t understand her credit report Your Mission: Help Isabella understand her credit report, identify what she did to get into this situation, and decide what she can do to improve her credit report.
Isabella’s Story • What is your analysis of her situation? • Does she need your help? • Why? Volunteers to Read Isabella’s Scenario
Credit History Reporting • Lender • Credit Reporting Agency (CRA) • Credit Report • Report consumer’s credit transactions to CRA’s • Keep a record of consumer’s credit transactions (credit history) • Record created by the CRA of an individual’s credit history What they do • Lender examples: store accounts, credit card companies, utility companies, etc. • Agencies include: • Equifax • TransUnion, • Experian • If an individual has not acquired credit, they will not have a report Additional Information
Credit Reporting Agencies • Acquire information from:
Information in a Credit Report Lenders may or may not report information to all three credit reporting agencies. An individual’s information may be different in each report. Information can be divided into 4 categories: • Personal Information • Accounts Summary • Public record items related to credit • Credit Inquiries
Personal Information Personal Information Isabella’s Personal Information: Name – Isabella G. Langley Addresses – 101 Hopeful Ave. & 695 Parent Street Date of birth – 05/04/86 Telephone numbers – 555-354-2368 & 555-198-2358 Employers – Lucky’s Restaurant & Jane’s Daycare • Name and aliases • Current and past addresses • Social security number • Date of birth • Employment history Find Isabella’s Personal Information
Accounts Summary Accounts Summary Isabella’s Accounts Sam’s Electronic World City of Anywhere U.S. Department of Education Financial Institution School Loan Shop ‘Til You Drop Store Credit Card Love to Read Store Credit Card The Free Money Credit Card • Types of accounts • Date the account was opened • Credit limit or loan amount • Account balance • Payment history, including missed or late payments What Lenders Does Isabella Have Accounts With?
Accounts Summary Isabella’s Late or Missed Payments Sam’s Electronic World Past due Store Credit Card Occasional late payments Does Isabella Have Any Late or Missed Payments on Accounts ?
Public record items related to credit Public Record Items Isabella’s Public Record Items City of Anywhere In Collection • Accounts turned over to collection agencies • Public records • Bankruptcy • Tax liens • Legal suits • Foreclosures Identify Public Record Items In Isabella’s Report
Credit Inquiries • Requests for an individual’s credit report • Completed by: • Insurance agencies • Potential credit companies • Financial institutions • Landlords • Potential employers, etc.
Credit Inquiries Individuals should avoid too many hard credit checks at one time!
Isabella’s Report What Inquiries Does Isabella Have on Her Report?
Equal Credit Opportunity Act Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit • Prohibits credit discrimination on the basis of: • Race • Religion • Marital status • Nationality • Gender • Age
Credit Scores • Mathematical tool created to help a lender evaluate the risk associated with lending a consumer money • Based upon information in the credit report • At a particular point in time • Numeric “grade” of a consumer’s financial reliability • Used by lenders to determine a consumer’s risk of defaulting on a loan
Credit Scores • Most common scoring system is FICO (Fair Isaac Company) • Credit scores range from 300-850, with 850 being the best score What is Isabella’s Score?
Credit Score Impact $256,680 saved over the lifetime of this loan because of a good credit score!
Information not included in a FICO score • FICO score is only based upon credit use • Information not included is: • Personal information such as age, where you live, marital status, race, color, religion, national origin, gender • Employment information • Interest rates charged on accounts • Overall wealth (assets an individual may have) These variables may still be considered when a lender reviews a loan application.
Payment History • The timely manner in which a consumer did or did not repay debt • Includes: • Several types of credit accounts—single payment (utilities, phone, rent), installment (auto loan, furniture or appliance loan) revolving (card company, store credit card) • Late or missed payments-negative effect • Public records and collection items-negative effect
Payment History What is Isabella’s Payment History? • Found in status column • Payment history • Sam’s Electronic World is past due • City of Anywhere is in collection • Shop ‘Til You Drop has occasional late payments • Love to Read was closed and never late • The Free Money Credit Card is paid on time • Credit score impact • Negative • Too many late accounts What Impact Does this have on Her Credit Score?
Outstanding Debt • The total dollar amount of debt currently held • Includes balances on all reported accounts • When a high percentage of debt is used, then it negatively impacts a score
Outstanding Debt How much Total Debt does Isabella Have? • Total debt • Found in recent balance column • $37,325 • Available credit • Found in credit limit column • $37,546 • Impact • Negative • $37,325÷$37,546 = 99.4% she is using almost all her available credit How much Available Credit is Isabella using? What Impact Does This have on her Credit score?
Length of Credit History • Length of time a consumer has held credit accounts • Includes how long ago credit accounts were established • A longer credit history will generally increase a credit score (if you responsibly pay back in a timely manner)
Length of Credit History When did Isabella First begin her Credit history? • Credit history • Found in date opened column • 08/05 U.S. Dept. of Education • Free Money Credit Card • Score will improve If Isabella keeps her Free Money Credit Card Open for Another 10 years and pays Off the balance, what will happen?
Pursuit of New Credit • Assesses how many accounts have been opened recently • Includes the number of recently opened accounts as well as requests for new credit • Opening too many credit accounts in a short period of time has a negative affect
New Credit Has Isabella Pursued any Additional credit Since January 2008? • Additional credit • Shop ‘Til You Drop in August 2008 • Impact of seeking additional credit • Credit score will go down If Isabella acquired Another credit Card and shopped for An Automobile loan, what would happen to her score?
Kinds of Credit in Use • Analyzes the kinds of credit in use • Credit cards, retail cards, mortgages, automobile loans, etc. • Variety is generally good to have
Credit in Use What Kinds of Credit does Isabella have? • Kinds • Credit card (revolving) • School loan (installment) • Private school loan (installment) • Store cards (revolving) • Additional forms • Mortgage (installment) • Automobile loan (installment) What are Additional forms Of credit she may seek?
Positive vs. Negative Credit Impact Positive Negative Informs the lender a consumer is: Not financially responsible May be a higher risk Impact on the consumer May pay higher interest rates May not be able to qualify for credit May limit employment opportunities • Informs the lender a consumer is: • Financially responsible • Less risk • Benefits to the consumer • Lower interest rates • Access to additional credit Is Isabella a positive Or a Negative risk? Why?
Activity - What You Do Makes a Difference • Read the scenario • Determine if the scenario will have a positive or negative impact on an individual’s credit report • Move to the side of the room representing your selected answer • Be prepared to explain “why”
Activity Negative Joey owes the store the money which was agreed upon in the contract May be responsible for additional fees He may be referred to collections
Activity Positive An excellent habit for building a positive report
Activity Negative Fernando is responsible for the movie replacement Could be reported to collections
Activity Negative Cassie has probably already been referred to collections Will owe for the parking tickets and additional fees
Activity Positive Demonstrated the ability to responsibly use credit
Activity Negative Although Corey is paying his bill, he is doing so late!
Activity Positive All payments were made in time Having automatic withdrawals with the money in the account is a good practice
Activity Negative This is too many inquiries for new credit at one time from a variety of types of stores