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					                1.4.2.G1




Understanding
Credit
                                                                                                                                                                       1.4.2.G1




          The Credit Process
Credit – when goods, services, and/or money are received in exchange
 for a promise to pay back a definite sum of money at a future date.




                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 2
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




              Credit Advantages
•   Able to buy needed items now
•   Don’t have to carry cash
•   Creates a record of purchases
•   More convenient than writing checks
•   Consolidates bills into one payment




                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 3
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




   Credit Disadvantages
• Interest (higher cost of items)
• May require additional fees
• Financial difficulties may arise if one loses track
  of how much has been spent
  each month
• Increased impulse buying may occur



                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 4
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




What Lenders Look For—
       The 3 C’s
Character—will you repay the debt?
From your credit history, does it look like you possess the
  honesty and reliability to pay credit debts?
•   Have you used credit before?
•   Do you pay your bills on time?
•   Do you have a good credit report?
•   Can you provide character references?
•   How long have you lived at your present address?
•   How long have you been at your present job?

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 5
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




  What Lenders Look For—
         The 3 C’s
Capital/Collateral—what if you don’t repay the debt?
Do you have any valuable assets such as real estate, savings,
  or investments that could be used to repay credit debts
  if income is unavailable?
• What property do you own that can secure the loan?
• Do you have a savings account?
• Do you have investments to use as collateral?
• Do you own your own home?

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 6
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




  What Lenders Look For—
         The 3 C’s
Capacity—can you repay the debt?
Have you been working regularly in an occupation that is
  likely to provide enough income to support your credit
  use?
• Do you have a steady job? What is your salary?
• How many other loan payments do you have?
• What are your current living expenses? What are your
  current debts?
• How many dependents do you have?
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 7
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




Borrower 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.
•   Never give your card number over the phone
    unless you initiated the call or are certain of the
    caller’s identity.


                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 8
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




 Types/Sources of Credit
Single-Payment
Items and services are paid for in a single payment,
   within a given time period, after the purchase.
   Interest is usually not charged.
• Utility companies, medical services
• Retail businesses when buying on account or
   running a tab

                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 9
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




  Types/Sources of Credit
Installment Credit
Merchandise and services are paid for in two or more regularly
   scheduled payments of a set amount. Interest is charged.
• Auto dealers
• Appliance companies
Money may also be loaned for a special purpose from depository
   institutions such as:
• Commercial banks
• Consumer finance companies
• Savings and loans
• Credit unions

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 10
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




 Types/Sources of Credit
Revolving Credit
Many items can be bought using this plan as long as the
   total amount does not go over the credit user’s assigned
   dollar limit.
Repayment is made at regular time intervals for any
   amount at or above the minimum required amount.
Interest is charged on the remaining balance.
• Retail store credit cards—JC Penney, Carson’s
• Credit cards from credit card companies—Visa,
   Discover

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 11
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




Credit Report Detectives
Meet Isabella, your new client:
• About to graduate from college
• In extreme debt
• Concerned about finding a job
• Doesn’t understand her credit report

 YOUR MISSION:
 Help Isabella understand her credit report, identify
 what she did to get into this situation, and decide
 what she can do to improve her credit report.

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 12
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                      Isabella’s Story
IN SMALL GROUPS:
READ ISABELLA’S SCENARIO




• What is your analysis of her situation?
   • Does she need your help?
   • Why?


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 13
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                                 1.4.2.G1




                                       Credit History
                                         Reporting


What they do


 Additional
Information

                                     © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 14
              Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                  Credit Reporting
                     Agencies
• Acquire information from:
    Retail stores that
                                                                     Credit card                                         Mortgage and
      offer credit
                                                                     companies                                        finance companies
       accounts


                                                                                                                              Depository
     Utility accounts                                                 Landlords
                                                                                                                              Institutions



           Cell phone                                                Collection
           companies                                                  agencies

                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 15
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1



                   Information in a
                    Credit Report
Information can be divided into 4 categories:
• Personal Information
• Accounts Summary
• Public record items related to credit
• Credit Inquiries
        Lenders may or may not report information to
              all three credit reporting agencies.
  An individual’s information may be different in each report.
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 16
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                            1.4.2.G1




      Personal Information
Personal Information                                                                   Isabella’s Personal Information:
•   Name and aliases                                                                   • Name – Isabella G. Langley
•   Current and past addresses                                                         • Addresses – 101 Hopeful Ave. &
•   Social security number                                                                695 Parent Street
•   Date of birth                                                                      • Date of birth – 05/04/86
                                                                                       • Telephone numbers –
•   Employment history
                                                                                          555-354-2368 & 555-198-2358
                                                                                       • Employers – Lucky’s Restaurant
    FIND ISABELLA’S                                                                       & Jane’s Daycare
    PERSONAL
    INFORMATION
                                © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 17
         Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                         1.4.2.G1




         Accounts Summary
Accounts Summary
• Types of accounts                                                                     Isabella’s Accounts
• Date the account was                                                                  • Sam’s Electronic World
   opened                                                                               • City of Anywhere
• Credit limit or loan                                                                  • U.S. Department of Education
   amount                                                                               • Financial Institution School
• Account balance                                                                          Loan
• Payment history, including                                                            • Shop ‘Til You Drop Store
   missed or late payments                                                                 Credit Card
 WHAT LENDERS                                                                           • Love to Read Store Credit
 DOES ISABELLA                                                                             Card
 HAVE ACCOUNTS                                                                          • The Free Money Credit Card
 WITH?
                             © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 18
      Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                   1.4.2.G1




   Accounts Summary
                                     DOES ISABELLA
                                     HAVE ANY LATE OR
                                     MISSED PAYMENTS
                                     ON ACCOUNTS ?




                                   Isabella’s Late or Missed Payments
                                   • Sam’s Electronic World
                                               • Past due
                                   • Store Credit Card
                                               • Occasional late payments


                       © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 19
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                          1.4.2.G1



           Public record items
            related to credit
Public Record Items
• Accounts turned over to                                                                  Isabella’s Public Record Items
  collection agencies                                                                      • City of Anywhere
                                                                                                       • In Collection
• Public records
   •     Bankruptcy
   •     Tax liens
   •     Legal suits
   •     Foreclosures

IDENTIFY
PUBLIC RECORD ITEMS
IN ISABELLA’S
REPORT
                              © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 20
       Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                        Credit Inquiries
• Requests for an individual’s credit report
• Completed by:
   •    Insurance agencies
   •    Potential credit companies
   •    Financial institutions
   •    Landlords                 WHAT INQUIRIES
   •    Potential employers, etc. DOES ISABELLA
                                                                                               HAVE ON
                                                                                               HER REPORT?
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 21
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                        Credit Inquiries
               Not all credit inquiries are the same!
Type of inquiry Soft check                      Hard check
Do they impact                              Not usually                                                                    Yes
your credit
score?
Examples                                    •Individuals checking                                                          Permission given by
                                             their credit reports                                                          the individual when
                                            •Credit card companies                                                         seeking credit
                                             pre-approving                                                                 •Credit card
                                             individuals                                                                   •Automobile loan
                                            •Pre-employment checks                                                         •Insurance
                  Individuals should avoid too many hard credit checks at one time!
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 22
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                  Isabella’s Report
                                                                          Inquiries
Type of inquiry Soft checks                                                                                              Hard checks
Examples        •A Very Big Bank                                                                                         •Shop ‘Til You Drop
                •Need More Credit
                •Keeping You Insured
                •The Dream Sales Job




                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 23
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                    1.4.2.G1




   Medical Information
Information                                                • Where an individual was
NOT allowed                                                  treated
 on a credit
   report:                                                 • What they were treated for


Information
                                                           • Information regarding late
allowed on a                                                 medical payments
credit report

                        © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 24
 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                      Equal Credit
                     Opportunity Act
• Prohibits credit discrimination on the basis of:
   •    Race
   •    Religion                                                                                     Creditors may ask for this
                                                                                                         information (except
   •    Marital status                                                                                    religion) in certain
   •    Nationality                                                                                  situations, but may not use
                                                                                                       it to discriminate when
   •    Gender                                                                                        deciding whether to grant
   •    Age                                                                                                    you credit



                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 25
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                              Credit Scores
Mathematical tool created to help a lender evaluate the
risk associated with lending a consumer money
•Based upon information in the credit report

•At a particular point in time

•Numeric “grade” of a consumer’s financial reliability

•Used by lenders to determine a consumer’s risk of
defaulting on a loan
                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 26
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                              Credit Scores

• Most common scoring
  system is FICO                                                                                                   WHAT IS
                                                                                                                   ISABELLA’S
• Credit scores range from                                                                                         SCORE?
  300-850, with 850 being the
  best score



                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 27
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                   1.4.2.G1




   Credit Score Impact




        $256,680 saved over the lifetime of this loan
              because of a good credit score!

                       © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 28
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




How Credit Scores are
     Determined
      Five categories of information from a credit
                     report are used:
•   Payment history
•   Outstanding debt
•   Length of credit history
•   Pursuit of new credit
•   Types of credit in use

                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 29
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                      Payment History
• The timely manner in
  which a consumer did or
  did not repay debt
• Includes:
   • Several types of credit
     accounts
   • Late or missed payments
   • Public records and
     collection items


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 30
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




                        Payment History
WHAT IS ISABELLA’S                                                                           • Found in status column
PAYMENT HISTORY?
                                                                                             • Payment history
                                                                                                        •       Sam’s Electronic World is past due
WHAT IMPACT                                                                                             •       City of Anywhere is in collection
DOES THIS HAVE ON                                                                                       •       Shop ‘Til You Drop has occasional
HER CREDIT SCORE?                                                                                               late payments
                                                                                                        •       Love to Read was closed and never
                                                                                                                late
                                                                                                        •       The Free Money Credit Card is paid
                                                                                                                on time

                                                                                             • Credit score impact
                                                                                                        • Negative
                                                                                                        • Too many late accounts
                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 31
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




               Outstanding Debt
• The total dollar amount
  of debt currently held
• Includes balances on all
  reported accounts
• When a high percentage
  of debt is used, then it
  negatively impacts a
  score


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 32
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




                 Outstanding Debt
HOW MUCH TOTAL                                                                               • Total debt
DEBT DOES ISABELLA                                                                                      • Found in recent balance
HAVE?                                                                                                     column
                                                                                                        • $37,325
HOW MUCH                                                                                     • Available credit
AVAILABLE CREDIT IS                                                                                     • Found in credit limit column
ISABELLA USING?                                                                                         • $37,546
                                                                                             • Impact
WHAT IMPACT DOES                                                                                        • Negative
THIS HAVE ON HER                                                                                        • $37,546-$37,325 = $221
CREDIT SCORE?                                                                                             she is using almost all her
                                                                                                          available credit
                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 33
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                 Length of Credit
                     History
• Length of time a
  consumer has held credit
  accounts
• Includes how long ago
  credit accounts were
  established
• A longer credit history
  will generally increase a
  credit score

                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 34
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                    Length of Credit
                        History
WHEN DID ISABELLA                                                                           • Credit history
FIRST BEGIN HER                                                                                        • Found in date opened
CREDIT HISTORY?                                                                                          column
IF ISABELLA KEEPS HER                                                                                  • 08/05 U.S. Dept. of
FREE MONEY CREDIT                                                                                        Education
CARD OPEN FOR                                                                               • Free Money Credit Card
ANOTHER 10 YEARS AND PAYS                                                                              • Score will improve
OFF THE BALANCE, WHAT
WILL HAPPEN?




                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 35
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




   Pursuit of New Credit
• Assesses how many accounts
  have been opened recently
  and the type of account
• Includes the number of
  recently opened accounts as
  well as requests for new
  credit
• Opening too many types of
  accounts in a short period of
  time has a negative affect


                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 36
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                                          New Credit
HAS ISABELLA                                                                                • Additional credit
PURSUED ANY                                                                                            • Shop ‘Til You Drop in
ADDITIONAL CREDIT                                                                                        August 2008
SINCE JANUARY 2008?
                                                                                            • Impact of seeking
IF ISABELLA ACQUIRED                                                                          additional credit
ANOTHER CREDIT                                                                                         • Credit score will go down
CARD AND SHOPPED FOR
AN AUTOMOBILE LOAN, WHAT
WOULD HAPPEN TO HER
SCORE?


                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 37
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




   Types of Credit in Use
• Analyzes the types of
  credit in use
• Credit cards, retail cards,
  mortgages, automobile
  loans, etc.
• Variety is generally good
  to have



                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 38
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                                    Credit in Use
WHAT TYPES OF                                                                               • Types
CREDIT DOES                                                                                            • Credit card (revolving)
ISABELLA HAVE?
                                                                                                       • School loan (installment)
WHAT ARE                                                                                               • Private school loan
ADDITIONAL FORMS                                                                                         (installment)
OF CREDIT SHE MAY SEEK?                                                                                • Store cards (revolving)
                                                                                            • Additional forms
                                                                                                       • Mortgage
                                                                                                       • Automobile loan

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 39
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




 Information not
 included in a FICO score
• FICO score is only based upon credit use
• Information not included is:
   • Personal information such as age, where you live, marital
     status, race, color, religion, national origin, gender
   • Employment information
   • Interest rates charged on accounts
   • Overall wealth (assets an individual may have)

           These variables may still be considered when a lender
                        reviews a loan application.
                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 40
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                         1.4.2.G1



     Positive vs. Negative
        Credit Impact
Positive                                                                                      Negative
• Informs the lender a                                                                        • Informs the lender a
  consumer is:                                                                                  consumer is:
   • Financially responsible                                                                              • Not financially responsible
   • Less risk                                                                                            • May be a higher risk
• Benefits to the consumer                                                                    • Impact on the consumer
   • Lower interest rates                                                                                 • May pay higher interest
   • Access to additional credit                                                                            rates
                                                                                                          • May not be able to qualify
 IS ISABELLA A POSITIVE                                                                                     for credit
 OR A NEGATIVE RISK?                                                                                      • May limit employment
 WHY?                                                                                                       opportunities
                             © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 41
      Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




  Activity - What You Do
   Makes a Difference
1. Read the scenario
2. Determine if the scenario will have a positive or
   negative impact on an individual’s credit report
3. Move to the side of the room representing your
   selected answer
4. Be prepared to explain “why”



                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 42
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                                                        Activity
Action:                                                                                         Credit report impact:

       • Joey rented a TV                                                                                      Negative
         from “The Best                                                                                        Joey owes the store the
         Deal” rent to own                                                                                     money which was
         store during                                                                                          agreed upon in the
         college
                                                                                                               contract
       • The TV was                                                                                            May be responsible for
         neither returned
         nor paid for as                                                                                       additional fees
         stated in the                                                                                         He may be referred to
         contract                                                                                              collections



                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 43
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




                                                      Activity

Action:                                                                                          Credit report
                                                                                                 impact:

        • Sally pays the                                                                                       Positive
          total amount                                                                                         An excellent
          due on her                                                                                           habit for
          credit cards                                                                                         building a
          each month                                                                                           positive report



                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 44
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




                                                      Activity
Action:                                                                                          Credit report
                                                                                                 impact:

        • Fernando                                                                                           Negative
          rented a DVD                                                                                       Fernando is
          from Busting                                                                                       responsible for the
          Bronco Rental                                                                                      movie replacement
          and never
          returned the                                                                                       Could be reported
          movie                                                                                              to collections


                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 45
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




                                                      Activity
Action:                                                                                          Credit report
                                                                                                 impact:

        • Cassie has                                                                                           Negative
          received three                                                                                       Cassie has probably
          parking tickets                                                                                      already been referred
          throughout                                                                                           to collections
          the past year                                                                                        Will owe for the
          and has not                                                                                          parking tickets and
          paid them                                                                                            additional fees



                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 46
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                                                       Activity
Action:                                                                                          Credit report impact:

         • Sam acquired a                                                                                       Positive
           loan from Buy                                                                                        Demonstrated the
           More Credit                                                                                          ability to
           Union for
           $1,000 to                                                                                            responsibly use
           purchase a                                                                                           credit
           motorcycle. He
           paid the loan
           back in full and
           on-time


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 47
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




                                                      Activity
Action:                                                                                         Credit report
                                                                                                impact:

        • Corey’s credit
          card bill is paid                                                                                  Negative
          in monthly                                                                                         Although Corey is
          installments.                                                                                      paying his bill, he
          However, it is                                                                                     is doing so late!
          due on the 15th
          and usually paid
          a few days late



                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 48
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                                                       Activity
Action:                                                                                          Credit report impact:

        • Kari bought a car                                                                                     Positive
          and financed it
          though the “Drive                                                                                     All payments were
          Bigger and Better”                                                                                    made in time
          promotion                                                                                             Having automatic
        • Payments are                                                                                          withdrawals with the
          automatically                                                                                         money in the account
          removed from her
          checking account                                                                                      is a good practice
        • Money is always in
          the account



                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 49
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                                                       Activity
Action:                                                                                          Credit report
                                                                                                 impact:

         • In the past three                                                                                Negative
           months, Tammy                                                                                    This is too many
           has applied for                                                                                  inquiries for new
           credit cards at                                                                                  credit at one time
           these
           establishments:                                                                                  from a variety of
         • Tarmore, Wally                                                                                   types of stores
           World, JcMoney,
           and Seemores


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 50
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                                                       Activity
Action:                                                                                          Credit report impact:

        • Jessica has several                                                                               Negative
          types of credit
                                                                                                            A variety of types of
          cards
                                                                                                            credit may be good,
        • Each of her
          credit card                                                                                       however, Jessica’s
          balances are at the                                                                               balances are at the
          maximum level                                                                                     maximum level




                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 51
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                                                       Activity
Action:                                                                                          Credit report impact:

        • It is 12 months                                                                                     Negative
          after graduation
          and Jon has not                                                                                     Jon is delinquent
          started paying his                                                                                  on the account.
          student loan back                                                                                   If he contacts the
          because he has
          not found a job
                                                                                                              loan company,
        • He has not                                                                                          they may be able
          contacted the                                                                                       to work with him
          loan company


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 52
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                            Positive Credit
                              Practices
                                                                     Positive
Practice good banking techniques, such as keeping a checkbook
balanced, managing accounts online, and not bouncing any
checks
Pay bills consistently and on time
Maintain reasonable amounts of unused credit
Apply for credit sparingly, thus keeping credit inquiries to a
minimum
Check credit reports annually and search for errors

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 53
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




                         Negative Credit
                           Practices
                                                                   Negative
Having non-sufficient funds (NSF) when writing checks, also
known as bouncing checks
Routinely paying late on credit cards, utility, and cell-phone bills
Maxing out limits on credit cards
Numerous credit applications in a short period of time




                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 54
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




            When Credit is not
              established
• Although the following are all positive financial
  habits, no credit is established when:
   •    Credit is never used
   •    Accounts are not in own name
   •    Cash is paid for all major purchases
   •    Phone and utility bills are paid on time
             • It only negatively impacts a score if payments are late


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 55
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




   Building credit history
• Important for consumers to build a credit
  history to be able to purchase items on credit
   • For example – house, vehicle
• Having no credit history may be just as
  challenging to a consumer as having a negative
  history



                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 56
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  Ways to Establish/Build
                                                                                                                                                                       1.4.2.G1




          Credit
• Pay all bills promptly.
• Apply for a local store credit card
  and make regular monthly                                                                                                             If someone is a
                                                                                                                                        co-signer on a
  payments.
                                                                                                                                       an account, they
• Acquire a secured credit card                                                                                                         are equally as
  which requires a security deposit                                                                                                    responsible and
  to ensure payment.                                                                                                                     their credit
• Get a co-signer or use your savings                                                                                                      report is
  account for collateral to get a loan                                                                                                    impacted.
  and pay back the loan as agreed.
DOES ISABELLA HAVE ANY CO-SIGNERS?
WHAT IMPACT DOES HER ACTIONS HAVE ON THEM?
                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 57
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




             What is a Co-Signor?
• Someone who has a good credit history
  • They meet the 3 C’s requirement and qualifies for
    the loan
• Someone who agrees to pay the debt if the
  borrower does not

        What is a Co-Signor’s
          Responsibility?
• To pay the debt if the borrower does not
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 58
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




                        2009 CARD Act
                       Changed how young adults receive
                            certain types of credit

To receive a credit card:
  • Generally must be 21 years of age or older
                       UNLESS
  • Show documentation of sufficient income
  • Have a co-signer
                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 59
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                          1.4.2.G1


   Requesting A Credit Report
• One free credit report annually from each of the three
  credit reporting agencies
   •     Equifax
   •     TransUnion
   •     Experian
   •     Credit scores are available for a small fee
                           Access the website: annualcreditreport.com

                                       Calling toll free: 1-877-322-8228

                                        Send a written request:
                                 Annual Credit Report Request Service
                                           PO box 105281
                                      Atlanta, GA 30348-5281
                              © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 60
       Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




Annualcreditreport.com
 annualcreditreport.com - Only government sponsored Web site
          Other sites may be fraudulent or charge a fee




                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 61
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




               Mistakes in Credit
                   Reports
• Two common errors
   • Fraud (identity theft)
   • Mistaken identity
             • When a lender reports a transaction on the wrong
               person’s credit report
• Important to check each credit report annually
  to correct mistakes


                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 62
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1




   Fair Credit Reporting
            Act
• Gives consumers the right to review and correct
  their report
• If a person is denied credit, they have the right
  to request their credit report from the credit
  reporting agency
   • If within 60 days it is free of charge




                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 63
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




 Correcting Errors on
    Credit Reports
Write a letter
• To the credit bureau that has the incorrect
  information and/or the information provider
Bureau has 30 days to investigate
• If investigation is not completed within this time,
  the information must be dropped from the credit
  file
                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 64
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                     1.4.2.G1




 Correcting Errors on
    Credit Reports
Incorrect information must be corrected
• Consumer can request the corrected report be
  sent to any creditors who viewed the incorrect
  report
Negative information on a credit report
• Usually removed after seven years
• Bankruptcy is removed after ten years
                         © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 65
  Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                        1.4.2.G1




   Credit Repair Agencies
• Offer to help a consumer “fix” his/her negative credit
  report
• According to the Better Business Bureau (BBB) and the
  Federal Trade Commission (FTC):
   • Consumers can do just as good of a job repairing their credit
     report errors as a fee based debt repair agency
   • Be cautious of debt repair agencies promising instant help
     because there is no immediate fix for negative credit



                            © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 66
     Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                          1.4.2.G1



                       Advice Isabella
                         was given
From Angie                                                                                   From George
• Credit ratings improve as                                                                  • Shopping around too much
   people get older and income                                                                  for credit is not good because
   increases                                                                                    it increases inquiries
• Isabella’s credit score will                                                               • Opening new accounts, even
   improve when she:                                                                            if not used, provides evidence
   • Moves to a better side of town                                                             of credit worthiness
   • Gets a better interest rate on                                                          • Close old accounts, including
     loans                                                                                      those with loans not paid on
   • Is promoted                                                                                time to wipe the slate clean

 WAS THE ADVICE GOOD? WHY OR WHY NOT?
                              © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 67
       Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                      1.4.2.G1



CREDIT REPORT
DETECTIVES ADVICE
• Will Isabella receive her dream job?
• What advice would you give Isabella to improve
  her credit report and score?
  • What should she do immediately?
  • What recommendations would you suggest she
    employ in the near future?




                          © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 68
   Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




 How Much Credit Can You
   Afford? (20-10 Rule)
Never borrow more than 20% of your yearly net income
• If you earn $400 a month after taxes, then your net income in
  one year is:
               12 x $400 = $4,800
• Calculate 20% of your annual net income to find your safe debt
  load.
               $4,800 x 20% = $960
• So, you should never have more than $960 of debt outstanding.

• Note: Housing debt (mortgage payments/rent) should not be
  counted as part of the 20%, but other debt should be included,
  such as car loans, student loans and credit cards.

                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 69
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                       1.4.2.G1




 How Much Credit Can You
   Afford? (20-10 Rule)
Monthly payments shouldn’t exceed 10% of your monthly net
  income
• If your take-home pay is $400 a month:
                $400 x 10% = $40
• Your total monthly debt payments shouldn’t total more than
  $40 per month.

• Note: Housing payments (mortgage payments/rent) should not
  be counted as part of the 10%, but other debt should be
  included, such as car loans, student loans and credit cards.



                           © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 70
    Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
                                                                                                                                                                   1.4.2.G1




                              QUESTIONS?




                       © Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 71
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

				
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