UNIT 2: CREDIT

CREDIT the ability to borrow money in return for

the promise of REPAYMENT

Before using credit you should ask your self: Is it a want or a need?Do you have to borrow?Can you afford the payments?

FUNCTIONS OF CREDIT Credit stabilizes the economy

Allows individuals and businesses to borrow money when income is temporarily limited

Credit promotes business growth

Credit expands production

Credit raises the standard of living

WHAT CREDIT AFFECTS Buying or Renting a house Buying or Leasing a car Getting a loan Opening up an account for certain bills

Some companies require your SS Number and will do a credit check on you to make sure you can pay the bills and you do not have any outstanding charges.

WHAT LENDERS LOOK FOR… CREDITWORTHINESS CAN YOU REPAY THE LOAN?

Income & Expenses Lenders will look at what you earn and your regular

expenses; such as rent, utilities, food, and other ongoing items. The amount left tells them whether you can afford to take on additional debt.

Assets Do you have assets that can serve as collateral? Lenders

will look for things like bank accounts, insurance, and valuable items such as a house, if you own one.

Credit History How do you manage debt? If you have credit cards or

have borrowed money before, you have a history that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.

HOW TO ESTABLISH CREDIT Open a savings and checking account in your name.

Demonstrates that you can handle money responsibly.

Apply for department store and gasoline credit cards Easier to obtain than major credit cards Only good at that location Understand the Terms of the card

Have an income

Make payments ON TIME! NO LATE PAYMENTS

Get someone to Cosign for you This will affect both of your credit scores.

Building credit takes time.

CREDIT BUREAUS AND CREDIT SCORING Credit Bureaus - organizations that collect

credit information on individual consumers. Equifax, Experian, and TransUnion Provide credit reports to potential lenders,

employers, and others upon request.

Credit Report - shows every time you have applied for credit of any kind, whether you have paid your bills on time, if you have paid your credit cards in full every month or carried a balance, and if you paid late fees. Also shows other public information such as:

bankruptcies, court judgments, and inquires by potential employees or companies

CREDIT REPORTS You can access a free credit report every 12

months. When you apply for credit the potential

creditor will evaluate your report and decide to extend credit or not.

Employers may use this information to determine employment.

Insurance companies may use this to determine insurance rates.

Fair Credit Reporting Act Is a federal law that limits the sharing of your

financial information only to firms that have legal purposes to evaluate this information.

CREDIT SCORE An evaluation of your credit history to

assess your creditworthinessHigher the score the better the interest

rates on loans because there is less risk of you defaulting on the loan.

A good credit score can save thousands of dollars in finance costs and interest charges.

Credit scores are calculated based on a model created by Fair Isaac Corporation (FICO score) Its between 300 and 850 higher the score

the better the credit a person has.

CREDIT SCORE FACTORS

FICO® Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories.

HOW TO IMPROVE YOUR CREDIT SCORE Pay your bills on time Keep credit card and other “revolving

credit” balances low (less than 30% of credit limit)

Pay off debt rather than moving it around