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Credit
CREDIT
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Credit
Session Objectives
What is Credit, how it works and why you need it How to establish Credit Borrowers responsibilities How to monitor your Credit and understand your
Credit Report & Score Understand how to use Loans & Credit Cards
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Credit
Credit – What is it?
Credit is the ability to borrow money or obtain goods by paying little or no money at the time of purchase
It is your promise to pay the original cost later or over time plus interest
Image: Salvatore Vuono / FreeDigitalPhotos.net 3
Credit
Why do you need Credit?
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Credit
Oregon Employer Credit Check
As of 2010, employers in Oregon may only check your credit for specific financial jobs
Even in those cases, they need your permission
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How do I establish my credit?
Establish an account Local company Co-signer Secured Credit Card
Use it responsibly Pay all bills promptly Don't bounce checks
Image: jscreationzs / FreeDigitalPhotos.net 6
Credit
Why would my credit be denied?
• No Credit History
• Too much outstanding credit
• Credit not handled responsibly in the past
• Victim of fraud
Image: djcodrin / FreeDigitalPhotos.net 7
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Borrower's 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
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How do Potential Lenders know aboutmy credit?
On-time and late payments
Outstanding credit limits and balances
Public Records
Companies that have requested yourReport
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How do I get a copy of my credit report?
www.annualcreditreport.com Experian Transunion Equifax
Will need to provide Full Name Social Security Number Addresses (2-5 years) Birthdate
Image: Michelle Meiklejohn / FreeDigitalPhotos.net
Credit
Your Credit Report
Name Birth date Past Addresses Employer
Credit AccountsCompany NameAccount Number
Date OpenedMonths Reviewed
Date of Last ActivityHigh Credit
TermsBalancePast Due
StatusDate Reported
Previous Payment History
Companies that requested your credit file (“inquiries”)
Public InformationBankruptcy
Court JudgmentsPast Due Child Support
Property Tax Liens 11
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How much does it cost?
One free copy annually from each bureau
Free if denied credit in past 60 days
Otherwise, about $9 Do not sign up for
extra services Freecreditreport.com Image: Salvatore Vuono / FreeDigitalPhotos.net
Credit
What do I do when I have my report?
Check it carefully Look for accounts that may not be yours Verify all credit limits/balances Make sure accounts you've closed say
“Closed at consumer's request”
Credit
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You have the Right to:
See what is in your report Have an accurate report Have mistakes corrected Tell your side of the story Know who has seen your
report
Image: Michelle Meiklejohn / FreeDigitalPhotos.net
Credit
What is a Credit “Score”?
300 850
Image: jscreationzs / FreeDigitalPhotos.net
Your credit score is based upon the information in your credit report
Similar to a report card. The higher the score, the better your credit.
Most commonly used score is compiled by the Fair Isaac Company (FICO)
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Credit
How do I find out my Credit Score?
May obtain it at same time as credit report
Each agency may have a different score
Cost is usually $5-10 May go to each
agency or Fair Isaac
Image: Rasmus Thomsen / FreeDigitalPhotos.net 16
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How is my Credit Score Determined?
Length of History
Types of Accounts
Payment History Owed Compared to Limits
New Accounts
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What if I have a good score, but make some mistakes?
Beginning Score of 780
Mistake Downgrade New Score
Maxed out Credit Card 25-45 735-755
30 day late payment 90-110 670-690
Debt Settlement 105-125 655-675
Foreclosure 140-160 620-640
Bankruptcy 220-240 540-560
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WHY IS MY CREDIT SCORE IMPORTANT?
FICO Score Interest Rate Monthly
Payment
Total Interest
Paid
720-850 6.0% $608 $1,901
690-719 7.6% $623 $2,430
660-689 9.6% $642 $3,096
620-659 13.4% $678 $4,391
590-619 18.1% $724 $6,077
500-589 18.7% $730 $6,290
New Car - $20,000 paid over 3 years
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Credit
How do loans work?
Typical Home Mortgage $200,000 loan 6% interest rate $1199.10 per month for 30 years
Time Total Paid Total Interest
Principle Paid
Loan Balance
5 years $71,946 $58,055 $13,891 $186,109
21 years $302,173 $202,051 $100,122 $99,877
30 years $431,676 $231,676 $200,000 $0
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How do loans work?
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30 Year Mortgage$200,000 Home in Oregon
FICO Score APR Monthly Payment
760-850 4.4% $1,002
700-759 4.6% $1,029
680-699 4.8% $1,050
660-679 5.0% $1,076
640-659 5.5% $1,130
620-639 6.0% $1,200
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Payday Loans
Payday loans are essentially short term loans• You write a check for the loan which the
company may cash in 31 days
In 2007, Oregon law was changed• Maximum interest rate is 36% per annum• Loan fee of 10% up to maximum of $30
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What about Credit Cards?
Things to check Interest Rate Fees
Don't open too many Pay off highest interest rate first Have a plan to pay for purchases
Image: Francesco Marino / FreeDigitalPhotos.net 23
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What if I just make the minimum payment on my Credit Card?
The minimum payment is the amount you must pay each month to avoid a late fee Credit card companies are now required to disclose how long it will take to pay off the balance if you just make the minimum payment Only making the minimum payment is one of the biggest mistakes people make with their credit
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Credit
Minimum Payment
Item Price APR Interest
Paid
How M uch You
Really Pay for the
Item
Total Years to Pay Off
TV $500 18% $439 $939 8
Computer $1,000 18% $1,899 $2,899 19
Furniture $2,500 18% $6,281 $8,781 34
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Larger Payments
Original Balance
APR M onthly
Payments
Total Number of
M onthly Payments
Total Years to Pay Off
Total of Payments
$2,500 18% M inim um Paym ent 404 34 $8,781
$2,500 18% $50 94 8 $4,698
$2,500 18% $100 32 3 $3,163
How Larger Payments help pay for Furniture:
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Credit Terminology
Fixed Rate Loan
Variable Rate Loan
Annual Percentage Rate
Finance Charge
Collateral
Secured Loan
Unsecured LoanImage: djcodrin / FreeDigitalPhotos.net
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What should I do?
Shop around for Credit
Read the fine print
Know the cost of credit
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Case Studies
Let's look at 4 people who are trying to obtain credit
• Jimmy• Sasha• Carolyn• You
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Useful Resources
www.annualcreditreport.com www.myfico.com www.creditcards.org www.bankrate.com www.ftc.gov/bcp/menus/consumer/credit.shtm www.federalreserve.gov/consumerinfo/
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Credit
Session Objectives
What is Credit, how it works and why you need it How to establish Credit Borrowers responsibilities How to monitor your Credit and understand your
Credit Report & Score Understand how to use Loans & Credit Cards
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