What is Credit • Credit can be a useful tool that helps you to make major purchases, like a car or a house, by letting you pay for them over time. • It's convenient, it can help in emergencies, and it’s safer than carrying cash.
What is Credit, con’t • Credit can also be dangerous if not used in the right way. It’s tempting to buy something using a credit card, even though you don’t have the cash to pay it back. If used too much, credit payments can add up quickly, leaving less money for your basic necessities.
Look Before You Leap! • Before buying something on credit, ask yourself: • What is the cost of this credit? • What is the risk of this credit? • What is the obligation of this credit?
Managing Your Credit • Every time you pay a bill (or don’t) it contributes to your credit history • Paying ‘slow’ or not at all is seen as a warning to other lenders • Signs of ‘Risky behavior’ • May result in • Higher interest rates and fees • More rejections of loans • Smaller loan amounts
Types of Credit • An “open-end” credit account is one under which you can make repeated purchases. You can either pay the balance in full or in installments. • Examples of open-end credit include credit cards like Master Card and Visa, gas cards, and department store cards
Types of Credit, con’t. • Is the credit you’re borrowing secured or unsecured? • When a debt is unsecured, there is no collateral attached to the money being borrowed. • Secured credit means there is some kind of collateral attached to the money you’re borrowing. • Collateral is defined as property that a borrower puts up to secure a loan.
Controlling Your Use of Debt 28/36 Rule • A good credit risk when mortgage payments are below 28% of gross monthly income, and total debt payments are below 36%.
Credit Reporting Agencies • Equifax • Experian • TransUnion
The Credit Bureau andYour Rights • Congress passed the FACT Act in 2003. • Allowing individuals a free credit report annually. • Contact the bureaus regarding incomplete or inaccurate information in your report.
Getting your FREE Credit Report • Consumers are entitled to receive one free credit file disclosure every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion (one from each per year = 3 total) • Many “imposter’ websites and 800#s try and sell you a credit report or score • Totally Needless. Many capture credit score and charge monthly fee. • You can do it yourself for free
FREE Credit Report • www.annualcreditreport.com • 1-877-322-8228 • Annual Credit Report Request Service • PO Box 105281 • Atlanta GA 30348-5281
A credit report tells… • How you’ve paid your debts • How much debt you have • Whether you’ve made payments on time
Credit Report Sections • Person requesting report • Potentially negative items • Accounts in good standing • Requests for your credit history • Personal information
Who cares about your credit report? • Creditors / Lenders • Insurance Companies • Landlords • Employers • Utility Companies • Government Agencies • YOU!
How to read your credit report Make sure you name, social security number, and current/past addresses are correct. Public Records: Verify any information appearing here from local courthouses regarding defaults and legal judgments Account History: Check that balances make sense, payment history is accurate, and the account listed is in fact yours. Look for anything suspicious in the section that lists who has received copies. Make sure no inquiries have been made about loans or leases you didn’t apply for. Mark or highlight items you feel are not accurately reported If incorrect information, contact the creditor and the Credit Bureau. Follow up with a letter. Report the problem quickly and in writing.
What if there’s a mistake on my credit report? • You can dispute mistakes or outdated items for free. Ask the credit-reporting agency for a dispute form or submit your dispute in writing, along with any supporting documentation. Do not send them original documents. • If the reinvestigation does not resolve your dispute, have the credit bureau include your version of the dispute in your file and in future reports.
Determining Creditworthiness • Your credit information translates into a three digit number – your credit score – which measures your creditworthiness. • Involves the numerical evaluation or “scoring” of applicants. • Reduces the lender’s uncertainty, enabling the lender to make credit available to good risk customers at lower interest rates.
How Your Credit Score is Computed • A credit score is referred to as a FICO score. • Based on models developed by Fair Isaac Corporation. • The models begin with information on your report, using it to calculate your score. • Scores range from 300-850. • The majority are between 600 and 800. • They vary from one credit bureau to another. • Visit www.myfico.com/ScoreEstimator.html to get an estimate of your score.
How Your Credit Score is Computed • What is a good score? • The national average is 678. • This is often the minimum for receiving credit. • A good credit score doesn’t just mean that you’ll get a loan, it also means you’ll pay less for it. • A low FICO score may result in a credit card rate twice that of a high FICO score.
Credit Scores • FICO Score most widely used • Vantage Score – 3 Bureaus • Many other “score” brands
Your Credit Score • A credit bureau is a private organization that maintains credit information on individuals, which it allows subscribers to access for a fee. • Experian, Trans Union, and Equifax are examples. • They compile a credit report on you and assign a credit score. • Your credit information not only impacts whether you get a loan, it affects your interest rate.
Impacts of Types of Credit • Credit cards & Revolving credit accounts • Very common; due monthly; huge variations • Store credit cards • Store specific; limited use and amounts • Credit accounts for store or service • Due periodically; mostly convenience • Payday Loans • Short-term; high cost loans • Rent to Own • Rental is disguised as loan • Reported? • Yes • Yes • Sometimes • No (rarely) • No (rarely)
FICO Score Source: Fair Isaac Corporation
Your Payment History Lenders want to know how you have handled credit payments in the past. Amount You Owe and Your Available Credit Shows the amount you owe on your mortgage, car loan, and all other outstanding debt, along with your total available credit. Factors That Determine Your Score
Length of Credit History The longer the credit accounts have been opened, and the longer you have had accounts with the same creditor, the higher your credit score. Types of Credit Used The wider the variety of credit, the higher the score. Using different types of credit indicates you know how to handle your money. Factors That Determine Your Score
New Credit New applications for credit will lower your score. Those moving towards bankruptcy take all available credit to stay afloat. Factors That Determine Your Score
Credit Danger Signs • Paying only the minimum monthly payment on credit accounts • Being charged fees for late payments, partial payments or over the limit • Inability to make all monthly credit payments • Using savings to cover everyday items • Using credit on items you formerly paid cash
Credit Repair Agencies Disreputable agencies often make claims like: • "Credit problems? No problem!" • "We can erase your bad credit-100% guaranteed." • "We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!"
Credit Repair Agencies, con’t. • For a fee, they promise to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. The truth is, they can't deliver. Only time, a conscious effort, and a personal debt repayment plan will improve your credit report.
Steps to repair your credit • Stop creating debt. • Determine how much money you have each month to put toward debt repayment. • Organize your debt information to develop a repayment plan • Use debt management plans (DMPs) • Restructure your debt
Restructuring your debt • Consolidation loans • Refinancing your home • Transferring balances • Use a credit counselor to negotiate debt • Discharge debt (file bankruptcy)
Rebuilding Your Credit • Pay your bills on time • Pay off outstanding collections and judgments • Don’t max out credit cards • Pay off re-affirmed credit cards and loans with high interest rates • Re-establish credit by opening a secured credit card (caution!!)
What To Do If You Can’tPay Your Bills • Go to creditors to get help resolving your situation or see a credit counselor. • Consider using savings to pay off debt. • Use a debt consolidation loan to lower monthly payment and restructure debt. • Final alternative is personal bankruptcy.
4. Seeking Help • Caution! • Unscrupulous providers charge upfront fees • May make situation worse • www.debtadvice.org or (800) 388-2227 • National Foundation for Consumer Credit (NFCC) • Nonprofit certified organizations • Local agencies: CCCS of ______ (Consumer Credit Counseling Service) • Provide budgeting and other advice to people in trouble
DMPs • Debt Management Plans • Voluntary Agreements between borrower and lenders • Designed to help organize debts • Counselor Can re-negotiate bills due • See: Fiscal Fitness: Choosing a Credit Counselor and Knee Deep in Debt. • See http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm • See also http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm
Bankruptcy • Personal bankruptcy doesn’t wipe out all obligations. • Chapter 7 Straight bankruptcy • Chapter 11 For businesses or those exceeding debt limitations or lack regular income. • Chapter 12 Available to family farmers. • Chapter 13 The wage earner plan **personal bankruptcy doesn’t wipe out all obligations
Chapter 7: Straight Bankruptcy • Allows individuals who don’t have any chance of repaying debts to eliminate them and begin again. • While you will not lose everything, courts confiscate and sell most assets to pay off debts. • Some debts remain including child support, alimony, student loans, and taxes.
Chapter 7: Straight Bankruptcy • To qualify, you must pass a “means test” and cannot file Chapter 7 bankruptcy if: • Income is higher than median in your state. • Have more than $100 in monthly disposable income. • Have sufficient disposable income to repay at least 25% of your debt over 5 years.
Chapter 13: The Wage Earner Plan • To file for Chapter 13, you must have: • Regular income • Secured debts under $922,975 • Unsecured debts under $307,675 • Repayment schedule is designed to cover your normal expenses while meeting repayment obligations. • For creditors, it means controlled repayment with court supervision.
Chapter 128 Receivership: a bankruptcy alternative • An alternative to bankruptcy for individuals or businesses in a difficult financial situation. • Helps consumers catch up on unsecured debt payments for up to three years. • Unlike a bankruptcy, the consumer can choose which debts to include in the plan. • While a bankruptcy will eliminate the debt (and stay on your credit history for ten years), a receivership will simply stop additional interest from being added
Rebuilding and improving your credit following bankruptcy • Pay your bills on time • Pay off outstanding collections and judgments • Don’t “max out” your credit cards • Pay off re-affirmed credit cards and loans with high interest rates • Re-establish credit by opening a secured credit card.