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You and Your Credit UNIT VII – Personal Financial Literacy Common Forms of Credit Type of Credit Lender Advantages Disadvantages Home Mortgage • • • • Commercial Bank • Homes can increase • Long-term in value commitment Savings & Loan • Interest rates are • Involves extensive Credit Union relatively low credit checks Consumer Finance • Interest paid is taxCompany deductible Car Loans • • • • Commercial Bank • Cars make it easier • Cars lose value to work and earn an quickly Savings & Loan income Credit Union Consumer Finance Company College Loans Personal Loans Credit Cards • Students sometimes • Commercial Bank • A college education borrow more than • Savings & Loan is usually a good is necessary • Credit Union investment • Can be difficult to repay • • • • Commercial Bank • Allow individuals to • Higher interest purchase an item rates Savings & Loan they want • Some borrow more Credit Union immediately than their income Consumer should allow Finance Company • • • • Commercial Bank • Convenient to use and help in Savings & Loan emergencies Credit Union • Provide a record Department of charges Stores • Higher interest rates • Some spend more than income allows Maintaining Good Credit • Your ability to get a loan depends on your credit report. • Credit Report – record of an individual’s personal credit history • Used as an indicator to determine if an applicant is reliable to pay the loan back • They tell in detail – how much a person has borrowed, from whom, and if bills have been paid on time Credit Bureaus • Compile credit reports • Get information about consumers from ▫ Stores ▫ Credit Card Companies ▫ Banks ▫ Mortgage Companies ▫ Medical Providers ▫ Credit Application 3 Cs of Credit • Lenders look for certain qualities in loan applicants Capacity Ability to repay • • • • • • • Steady job? Salary? Reliable income? Sources of income? Other loans? Current debt? Alimony or child support? Character Reliable person Used credit before? Pay bills on time? Good credit report? Character references? • Length at present address? • Length at current job? • • • • Collateral Back-up • • • • • • • Checking account? Savings account? Stocks or bonds? Anything of value? Own home? Own car? Own boat? Why you should care… • Good credit scores allow you to receive loans more easily and at better rates • Poor credit scores can make it difficult to receive a loan, find a place to live, and even get a job • By law you are entitled to one free credit score report each year to check its accuracy – mistakes can happen Score Calculation •Payment history (35%) •Amounts owed (30%) •Length of credit history (15%) •Types of credit (10%) •New credit and inquiries (10%) How to Keep a Good Credit Score • Pay bills on time • Don’t borrow more than you can handle • Borrow only what you need • Know how much you owe at all times • Contact lenders with payment problems • Develop good spending habits • Report lost/stolen cards immediately • Never give credit card info over the phone/internet unless you initiate the call • Open a checking and savings account • Do not apply for too many credit cards Credit Cards: Friend or Foe •73% of U.S. families have at least one credit card •46% of families have credit debt •Average amount owed is $7300 •Total credit debt of U.S. households is almost $866 BILLION! Not All Credit Cards are Created Equally •Credit limit, APR (annual percentage rate), annual fees, and grace periods vary from card to card •The better your credit score the better your rates will be
