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FIN 200: Personal Finance
Topic 8-Credit ILawrence Schrenk, Instructor
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Learning Objectives
1. Discuss the sources and uses of credit in personal finance.▪
2. Explain how your credit score is calculated and how you maintain a good credit rating.
3. Describe how to avoid identity theft.▪
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Types and Sources of Credit
Three Types
TypeSpecific
PurchaseLong Term
Multiple Payments
Time Limit
Non-Installment ■ ■Installment ■ ■ ■ ■Revolving ■ ■
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Payments Patterns Interest then Principal
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1 2 3 4 5 6
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Payments Patterns Interest and Principal Simultaneously
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Va
lue
1 27 53 79 105 131 157 183 209 235 261 287 313 339
Months
Amoritization Schedule
Monthly Interest Principal Repayment
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Possible Advantages of Credit
1. Purchase of expensive items
2. Emergency funds
3. Tax savings
4. Anticipate a price increase
5. Convenience
6. Delay payment without interest
7. Avoid carrying cash
8. Spending record
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Possible Disadvantages of Credit
1. Excess spending
2. Increased cost of purchase
3. Excessive debt
4. Increased monitoring
5. Identity theft
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‘Good’ versus ‘Bad’ Debt
Good Debt–Investment Home Education Car Improvements increasing value of home Borrowing at lower interest rate to reduce credit
card debt Bad Debt–Consumption
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Credit Bureaus, Ratings and Reports
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Credit Bureaus
Central Collection of Credit Information Three Main Credit Bureaus
Experian Equifax, and TransUnion (Credit Report Guide)
Independent May have different information and provide
different scores
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Credit Report, Part I
Identifying Information includes: Name Alias or AKA (Also Known As) Current and previous addresses Social Security number Telephone number Date of birth Current and previous employers
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Credit Report, Part 2
Credit History provides an ongoing historical and current record of a consumer's buying and payment activities, including accounts such as: Retail stores Banks Finance companies Mortgage companies
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Credit Report, Part 3
Public Records include: Tax liens Court judgments (including child support
judgments) Bankruptcies
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Credit Report, Part 4
Inquiries include: Regular inquiries: Credit grantors and other authorized
parties who have requested a copy of the consumer's credit report with a legally permissible purpose.
Account review inquiries: Credit grantors with whom a consumer has an existing relationship and who are permitted to periodically review the information.
Promotional Inquiries: Companies, with a legally permissible purpose, that have obtained certain limited information about a consumer, such as name and address, in order to send targeted, mutually beneficial firm offers of credit or insurance.
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Credit Score–FICO
Credit Score–FICO Median US score is 723 Range 300-850
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FICO–Payment History
Account payment information Credit cards, retail accounts, installment loans, etc.
Presence of adverse public records Bankruptcy, judgments, suits, liens, wage attachments, etc.
Severity of delinquency Amount past due Time Number of past due items on file Number of accounts paid as agreed
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FICO–Amounts Owed
Amount owing on accounts Amount owing on specific types of accounts Lack of a specific type of balance, in some
cases Number of accounts with balances Proportion of credit lines used Proportion of installment loan amounts still
owing
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FICO–Length of Credit History
Time since accounts opened Time since accounts opened
by specific type of account Time since account activity
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FICO–New Credit
Number of recently opened accounts, ... Number of recent credit inquiries Time since recent account opening(s)... Time since credit inquiry(s) Re-establishment of positive credit history
following past payment problems
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FICO–Types of Credit Used
Number of (presence, prevalence, and recent information on) various types of accounts Credit cards, Retail accounts, Installment loans, Mortgage, Consumer finance accounts, etc.
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Financial Impact of FICO Score
Calculator
Your Credit Report
Get and check your free credit report from each agency at AnnualCreditReport.com.
Each credit report; one per year Do not use any other web site; do not get it
from the guy playing the guitar on the TV commercial!
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Further Information
Web Pages MyFICO.com
Pamphlets Understanding your FICO® score (MyFICO.com) Your Credit Scores (MyFICO.com) Credit Report Guide (TransUnion)
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Identity Theft–Why Worry?
Loss of Money Credit Score Weakened Difficulty Opening New Accounts Fraudulent Criminal Record
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Some Key Information
Social Security Number Driver’s License Number Bank/Credit Card Account Numbers PIN Numbers/Passwords Date of Birth
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Weak Points–Your Mail
Mailbox with Lock Outgoing Mail in Postal Box Shredder (Cross-Cut or Micro)
Mail with Personal Information ‘Pre-Approved’ Credit Applications
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Weak Points–Personal Information
Don’t Give Out Social Security Number Don’t Carry Social Security Card or Use it on
Checks, IDs, etc. Outgoing Mail in Postal Box Shredder (Cross-Cut)
Documents with Personal Information Keep List of Important Data
Account Numbers Telephone Numbers, etc.
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Weak Points–Computer
Avoid Obvious Passwords, e.g., Birthday Don’t Send Sensitive Information in E-Mails
Especially if Requested Suspect Links in E-Mail and Attachments Don’t Keep Passwords on your Computer Password Protect
Laptop, Flash Drives, Back-Up Drives Sensitive Documents
Computer Software
Anti-Virus Anti-Spyware Anti-Spam Firewall MyIDProtector
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Active Measures Check Credit Card/Bank Account Statements
Regularly Online Check Credit Reports
www.AnnualCreditReport.com Consider Credit Monitoring Consider Identity Theft Insurance
NOTE: Terms, Coverage and Reimbursement Varies
Watch for the Unexpected: Credit Cards, Account Statements, Denials of Credit, etc.
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Further Information
Federal Trade Commission Identity Theft Resource Center (non-profit) Identity Theft and You (MyFICO.com)
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Ethical Dilemma
Rita is a medical office manager, and her brother, Juan has recently begun work for a health insurance company. Juan asks Rita if she will provide him with a list of all the doctors' patients who do not currently have health insurance, and she runs the list that includes names, addresses, telephone numbers, Social Security numbers, and brief medical histories. a. Is Rita acting ethically? Explain. b. What problems could Rita be creating for the practice's
patients?
