Building Credit!

1. Building Credit!

2. What Is Credit? Borrowed money: It’s not yours to keep! Definition: Money loaned to an individual or a group with the intention of receiving future re-payment ofprincipal(the amount loaned) and interest What are some things you might borrow money for?

3. Responsible Borrowing Habits Homeownership Jewelry Vacations College Tuition “Good” uses of credit: “Bad” uses of credit: Using a credit card to pay for expenses that you don’t have cash for, like: • Student loans • Mortgage and associated tax credits • Basic transportation (a cheap reliable car to get you to your workplace) • Building your credit history • Vacations • Jewelry • Huge TV • An expensive car that you can’t otherwise afford

4. Two Common Types of Credit • Mostly used in the form of credit cards • Typically for large purchases, such as car or computer *Often times fixed loans will have a lower interest rate because an asset (i.e. house of car) is offered as collateral

5. Sample Credit Card Statement

6. Using a Credit Card Don’t spend more than you can pay off each month! Banks make money from people who spend more than they can pay by charging them fees.

7. Benefits and Risks of Using Credit Cards Benefits Risks • Develop responsible money spending habits • Earn rewards! Let your credit card company pay you by taking advantage of rewards • Build credit! "Even if you don't want a house or car — you need good credit to start a small business. Landlords check your credit; future employers may check your credit."  • Temptation to spend beyond your means and accumulate debt • Lose your ability to make “good” use of credit: Unpaid debt can lead to bankruptcy and becomes part of your credit history for 7 to 10 years • Overspending will lead to higher interest payments. You’ll lose even more money on interest expenses

8. The Importance of Having a “Good” Credit Score • What does it mean to have “Good Credit”? • “Good Credit” means you have a proven history of repaying your debts. This means you pay your cell phone bill on time, pay your credit card bill on time, etc. • Why is it important to have good credit? • Don’t get denied for a loan for mortgage or tuition. • Obtain loans at lower interest rates in the future. • How do I get good credit? • Pay your bills on time and in full (including medical bills). If you don’t have an established history of using credit, consider wisely using a credit card to build credit history. • BUT, do not take out too much credit at once. • Open a bank account. • NEVER miss a debt payment!

9. What Does Your Credit Score Mean?

10. Makeup of the FICO Score Fair Isaac is the company that invented credit scoring. The “FICO” score is still the most commonly used. FICO Score Factors that determine risk: • Your bill-paying history • The number & types of accounts you have • Ratio of debt to available credit (smaller is better) • Do you pay your bills by the due date? • Collection actions • Outstanding debt • The age of your accounts

11. How to Prevent Identity Theft • Protect your Social Security Number and bank accounts; NEVER give that information over the phone! • Check your credit report. The three reporting agencies that collect information and create credit reports are: • Equifax, Experian, and Trans Union • Checking your credit report • Use annualcreditreport.gov; NOT freecreditreport.com • CreditKarma.com is also a free site to gauge creditworthiness • What if there is an error on your credit report? Call or write a letter immediately! • There are consumer protection laws to keep in mind: visit http://www.consumer.ftc.gov for information if you are a victim of identity theft.

12. Co-signers Credit card availability is limited for those under the age of 21 if you don’t have a part-time job or savings, so a co-signer may be required. • A co-signer is a person that pledges to meet the obligations of your debt in case you fail to pay your credit card bill. • Co-signer for loans may be your parents (during your early years) • Co-signers must have a high enough credit score (a relative with a poor credit history may not be able to co-sign a credit card for you). • If you don’t pay your credit card, your co-signer will be responsible for all payments due, including interest and late fees. Beware of co-signing for ANYONE! Their irresponsibility can become your credit problem!

13. Case Study – Handout or plain paper • I am 18 years old and just started college. • A small group of my friends want to bust out for spring break and take a one-week vacation in Florida. • I am planning to charge the $1,500 cost of the trip on my credit card because I haven’t saved up enough money from my part-time job and I probably won’t be able earn that much in a long time. My parents or friends won’t lend me the money either. I plan to pay the cost off incrementally over time. • What are the advantages of putting the vacation on a credit card? • What are the disadvantages of using a credit card to pay for the vacation? • Do you recommend that this client charge the trip on their credit card?

14. Talk About It! Ask your parents, family members/relatives and older friends: • When did they first start using a credit card? • Do they pay the minimum payment or pay the full balance every month? • Do they know their credit score?

15. Any questions? The End