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Credit

WHPE

What is Credit?

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.

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.

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?

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

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

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.

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%.

What is Credit Management?

Credit Reporting
Agencies
Equifax
Experian
TransUnion

The Credit Bureau and


Your 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.

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 800#s try
and sell you a credit report or score
Totally Needless. Many capture credit
score and charge monthly fee.

FREE Credit Report


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

A credit report tells


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

Credit Report Sections

Person requesting report


Potentially negative items
Accounts in good standing
Requests for your credit history
Personal information

Who cares about your


credit
report?
Creditors
/ Lenders

Insurance Companies
Landlords
Employers
Utility Companies
Government Agencies
YOU!

How to read your credit report


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

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.

2. Understanding Credit
Scores

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.

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.

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.

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

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.

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

Reported?
Yes
Yes
Sometimes

Due periodically; mostly convenience

Payday Loans
Short-term; high cost loans

Rent to Own
Rental is disguised as loan

No (rarely)
No (rarely)

FICO Score

Source: Fair Isaac Corporation

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.

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.

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.

3. Dealing with Debt Overload

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

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!"

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.

Steps to repair your credit


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

Restructuring your debt


1.
2.
3.
4.
5.

Consolidation loans
Refinancing your home
Transferring balances
Use a credit counselor to negotiate debt
Discharge debt (file bankruptcy)

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!!)

What To Do If You Cant


Pay 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.

4. Seeking Help
Caution!
Unscrupulous providers charge upfront fees
May make situation worse

www.debtadvice.org or (800) 388-2227


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

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/credit/cre19.shtm
See also
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm

Bankruptcy

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

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.

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.

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.

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

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.

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