Credit

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Credit

• WHPE

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What is Credit?
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What is Credit

• Credit can be a useful tool that helps you to
  make major purchases, like a car or a house, by
  letting you pay for them over time.
• It's convenient, it can help in emergencies, and
  its safer than carrying cash.

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What is Credit, cont

• Credit can also be dangerous if not used in the
  right way. Its tempting to buy something using
  a credit card, even though you dont have the
  cash to pay it back. If used too much, credit
  payments can add up quickly, leaving less money
  for your basic necessities.

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Look Before You Leap!

• Before buying something on credit, ask yourself
• What is the cost of this credit?
• What is the risk of this credit?
• What is the obligation of this credit?

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Managing Your Credit

• Every time you pay a bill (or dont) it
  contributes to your credit history
• Paying slow or not at all is seen as a warning
  to other lenders
• Signs of Risky behavior
• May result in
• Higher interest rates and fees
• More rejections of loans
• Smaller loan amounts

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Types of Credit

• An open-end credit account is one under which
  you can make repeated purchases. You can either
  pay the balance in full or in installments.
• Examples of open-end credit include credit cards
  like Master Card and Visa, gas cards, and
  department store cards

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Types of Credit, cont.

• Is the credit youre borrowing secured or
  unsecured?
• When a debt is unsecured, there is no collateral
  attached to the money being borrowed.
• Secured credit means there is some kind of
  collateral attached to the money youre
  borrowing.
• Collateral is defined as property that a borrower
  puts up to secure a loan.

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Controlling Your Use of Debt

• 28/36 Rule
• A good credit risk when mortgage payments are
  below 28 of gross monthly income, and total debt
  payments are below 36.

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What is Credit Management?
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Credit Reporting Agencies

• Equifax
• Experian
• TransUnion

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The Credit Bureau andYour Rights

• Congress passed the FACT Act in 2003.
• Allowing individuals a free credit report
  annually.
• Contact the bureaus regarding incomplete or
  inaccurate information in your report.

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Getting your FREE Credit Report

• Consumers are entitled to receive one free credit
  file disclosure every 12 months from each of the
  nationwide consumer credit reporting companies
  Equifax, Experian and TransUnion (one from each
  per year 3 total)
• Many imposter websites and 800s try and sell
  you a credit report or score
• Totally Needless. Many capture credit score and
  charge monthly fee.
• You can do it yourself for free

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FREE Credit Report

• www.annualcreditreport.com
• 1-877-322-8228
• Annual Credit Report Request Service
• PO Box 105281
• Atlanta GA 30348-5281

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A credit report tells

• How youve paid your debts
• How much debt you have
• Whether youve made payments on time

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Credit Report Sections

• Person requesting report
• Potentially negative items
• Accounts in good standing
• Requests for your credit history
• Personal information

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Who cares about your credit report?

• Creditors / Lenders
• Insurance Companies
• Landlords
• Employers
• Utility Companies
• Government Agencies
• YOU!

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How to read your credit report

• Make sure you name, social security number, and
  current/past addresses are correct.
• Public Records Verify any information appearing
  here from local courthouses regarding defaults
  and legal judgments
• Account History Check that balances make sense,
  payment history is accurate, and the account
  listed is in fact yours.
• Look for anything suspicious in the section that
  lists who has received copies.
• Make sure no inquiries have been made about loans
  or leases you didnt apply for.
• Mark or highlight items you feel are not
  accurately reported
• If incorrect information, contact the creditor
  and the Credit Bureau. Follow up with a letter.
  Report the problem quickly and in writing.

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What if theres a mistake on my credit report?

• You can dispute mistakes or outdated items for
  free. Ask the credit-reporting agency for a
  dispute form or submit your dispute in writing,
  along with any supporting documentation. Do not
  send them original documents.
• If the reinvestigation does not resolve your
  dispute, have the credit bureau include your
  version of the dispute in your file and in future
  reports.

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2. Understanding Credit Scores
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Determining Creditworthiness

• Your credit information translates into a three
  digit number your credit score which measures
  your creditworthiness.
• Involves the numerical evaluation or scoring of
  applicants.
• Reduces the lenders uncertainty, enabling the
  lender to make credit available to good risk
  customers at lower interest rates.

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How Your Credit Score is Computed

• A credit score is referred to as a FICO score.
• Based on models developed by Fair Isaac
  Corporation.
• The models begin with information on your report,
  using it to calculate your score.
• Scores range from 300-850.
• The majority are between 600 and 800.
• They vary from one credit bureau to another.
• Visit www.myfico.com/ScoreEstimator.html to get
  an estimate of your score.

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How Your Credit Score is Computed

• What is a good score?
• The national average is 678.
• This is often the minimum for receiving credit.
• A good credit score doesnt just mean that youll
  get a loan, it also means youll pay less for
  it.
• A low FICO score may result in a credit card rate
  twice that of a high FICO score.

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Credit Scores

• FICO Score most widely used
• Vantage Score 3 Bureaus
• Many other score brands

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Your Credit Score

• A credit bureau is a private organization that
  maintains credit information on individuals,
  which it allows subscribers to access for a fee.
• Experian, Trans Union, and Equifax are examples.
• They compile a credit report on you and assign a
  credit score.
• Your credit information not only impacts whether
  you get a loan, it affects your interest rate.

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Impacts of Types of Credit

• Credit cards Revolving credit accounts
• Very common due monthly huge variations
• Store credit cards
• Store specific limited use and amounts
• Credit accounts for store or service
• Due periodically mostly convenience
• Payday Loans
• Short-term high cost loans
• Rent to Own
• Rental is disguised as loan

• Reported?
• Yes
• Yes
• Sometimes
• No (rarely)
• No (rarely)

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FICO Score
Source Fair Isaac Corporation
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Factors That Determine Your Score

• Your Payment History
• Lenders want to know how you have handled credit
  payments in the past.

• Amount You Owe and Your Available Credit
• Shows the amount you owe on your mortgage, car
  loan, and all other outstanding debt, along with
  your total available credit.

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Factors That Determine Your Score

• Length of Credit History
• The longer the credit accounts have been opened,
  and the longer you have had accounts with the
  same creditor, the higher your credit score.

• Types of Credit Used
• The wider the variety of credit, the higher the
  score.
• Using different types of credit indicates you
  know how to handle your money.

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Factors That Determine Your Score

• New Credit
• New applications for credit will lower your
  score.
• Those moving towards bankruptcy take all
  available credit to stay afloat.

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3. Dealing with Debt Overload
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Credit Danger Signs

• Paying only the minimum monthly payment on credit
  accounts
• Being charged fees for late payments, partial
  payments or over the limit
• Inability to make all monthly credit payments
• Using savings to cover everyday items
• Using credit on items you formerly paid cash

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Credit Repair Agencies

• Disreputable agencies often make claims like
• "Credit problems? No problem!"
• "We can erase your bad credit-100 guaranteed."
• "We can remove bankruptcies, judgments, liens,
  and bad loans from your credit file forever!"

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Credit Repair Agencies, cont.

• For a fee, they promise to clean up your credit
  report so you can get a car loan, a home
  mortgage, insurance, or even a job. The truth is,
  they can't deliver. Only time, a conscious
  effort, and a personal debt repayment plan will
  improve your credit report.

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Steps to repair your credit

• Stop creating debt.
• Determine how much money you have each month to
  put toward debt repayment.
• Organize your debt information to develop a
  repayment plan
• Use debt management plans (DMPs)
• Restructure your debt

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Restructuring your debt

1. Consolidation loans
2. Refinancing your home
3. Transferring balances
4. Use a credit counselor to negotiate debt
5. Discharge debt (file bankruptcy)

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Rebuilding Your Credit

• Pay your bills on time
• Pay off outstanding collections and judgments
• Dont max out credit cards
• Pay off re-affirmed credit cards and loans with
  high interest rates
• Re-establish credit by opening a secured credit
  card (caution!!)

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What To Do If You CantPay Your Bills

• Go to creditors to get help resolving your
  situation or see a credit counselor.
• Consider using savings to pay off debt.
• Use a debt consolidation loan to lower monthly
  payment and restructure debt.
• Final alternative is personal bankruptcy.

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4. Seeking Help

• Caution!
• Unscrupulous providers charge upfront fees
• May make situation worse
• www.debtadvice.org or [phone]
• National Foundation for Consumer Credit (NFCC)
• Nonprofit certified organizations
• Local agencies CCCS of ______ (Consumer Credit
  Counseling Service)
• Provide budgeting and other advice to people in
  trouble

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DMPs

• Debt Management Plans
• Voluntary Agreements between borrower and lenders
• Designed to help organize debts
• Counselor Can re-negotiate bills due
• See Fiscal Fitness Choosing a Credit Counselor
  and Knee Deep in Debt.
• See http//www.ftc.gov/bcp/edu/pubs/consumer/credi
  t/cre19.shtm
• See also http//www.ftc.gov/bcp/edu/pubs/consumer/
  credit/cre38.shtm

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Bankruptcy
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Bankruptcy

• Personal bankruptcy doesnt wipe out all
  obligations.
• Chapter 7 Straight bankruptcy
• Chapter 11 For businesses or those exceeding
  debt limitations or lack regular income.
• Chapter 12 Available to family farmers.
• Chapter 13 The wage earner plan
• personal bankruptcy doesnt wipe out all
  obligations

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Chapter 7 Straight Bankruptcy

• Allows individuals who dont have any chance of
  repaying debts to eliminate them and begin again.
  
• While you will not lose everything, courts
  confiscate and sell most assets to pay off debts.
• Some debts remain including child support,
  alimony, student loans, and taxes.

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Chapter 7 Straight Bankruptcy

• To qualify, you must pass a means test and
  cannot file Chapter 7 bankruptcy if
• Income is higher than median in your state.
• Have more than 100 in monthly disposable income.
• Have sufficient disposable income to repay at
  least 25 of your debt over 5 years.

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Chapter 13 The Wage Earner Plan

• To file for Chapter 13, you must have
• Regular income
• Secured debts under 922,975
• Unsecured debts under 307,675
• Repayment schedule is designed to cover your
  normal expenses while meeting repayment
  obligations.
• For creditors, it means controlled repayment with
  court supervision.

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Chapter 128 Receivership a bankruptcy
alternative

• An alternative to bankruptcy for individuals or
  businesses in a difficult financial situation.
• Helps consumers catch up on unsecured debt
  payments for up to three years.
• Unlike a bankruptcy, the consumer can choose
  which debts to include in the plan.
• While a bankruptcy will eliminate the debt (and
  stay on your credit history for ten years), a
  receivership will simply stop additional interest
  from being added

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Rebuilding and improving your credit following
bankruptcy

1. Pay your bills on time 
2. Pay off outstanding collections and judgments
3. Dont max out your credit cards
4. Pay off re-affirmed credit cards and loans with
   high interest rates
5. Re-establish credit by opening a secured credit
   card.