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					credit
UNit 3: CREDit
table of contents


key terms .................................................................................................................. 2


understanding credit ............................................................................................ 3


applying for credit: what factors in? ................................................................. 4


credit fundamentals .............................................................................................. 5


7 tips: getting the most from your credit card ................................................ 6


credit worthiness ................................................................................................... 8


how to rebuild good credit ............................................................................... 11


resources ............................................................................................................... 14




                                    Financial Smarts for Teachers • Unit 3: Credit
                                                            3–1
UNit 3: CREDit
key terms


Annual Percentage Rate (APR): the interest rate for a whole year, rather than just a monthly
fee/rate.


Credit: borrowing money from an institution with the agreement that it will be paid back.


Credit Limit: the maximum amount of money you are allowed to borrow.


Credit Report: a record of your personal credit history, which is pulled by lenders to determine
your credit worthiness.


Credit Score (FICO): the number that reflects your credit history and is used to determine your
credit worthiness.


Debt: the entire amount of money owed to lenders.


Grace Period: the length of time given before you start to accumulate interest.


Hard Inquiry: inquiry that appears on your credit report when you give a business, financial
institution, landlord or employer permission to check your credit to open a new account, obtain
a loan, rent a property or get a job.


Interest: the amount you pay to borrow money.


Spendable Income: your take-home pay minus your basic needs.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                 3–2
UNit 3: CREDit
understanding credit


When most people think of credit, they think of a credit card. Many don’t realize that you use
credit in several different ways. Anytime you buy goods or services, and agree to pay later, you
are using credit. Put simply, it is a business transaction where you make an agreement with an
institution to pay them back. In this unit, we’ll discuss the importance of good credit, how to
obtain and monitor your credit report, and how to manage your debt.


the benefits & pitfalls of credit
Credit can be a wonderful tool—when used responsibly. For one thing, credit is convenient.
You can purchase a desired item or make accommodations for an upcoming trip with little
to no effect on your pocketbook (at least at first). Credit can act as a safety net in case of an
emergency, potentially protecting you and your family from financial hardship. Credit also is
pivotal in establishing a good credit history, which enables you to make purchases such as a car
or home at a reasonable interest rate.

But there are different types of credit, and not all are created equal. For example, installment
credit is considered the more desirable type of debt to creditors. That’s because the seller owns
the item purchased until it is paid off in full; often the seller requires a down payment. Interest
rates vary depending on the item and the buyer’s credit history and typically involve set, regular
payments for a predetermined term. An example of installment credit is a car or home loan.

On the other hand, revolving credit has a set limit, which can be raised by the lender and allows
the buyer to purchase items and pay them off later. Revolving credit can have a very low or very
high interest rate, depending on the buyer’s credit history. At the end of each monthly cycle,
the buyer has the option to pay the balance or make the minimum payment. An example of
revolving credit is a credit card.

Depending on the type of credit and, more importantly, the way in which you use it, credit can
either benefit or hinder you. Using credit wisely takes a great deal of responsibility and discipline.
The ease and instant gratification of credit can tempt some into living beyond their means. It can
give the phrase “buy now, pay later” a new meaning. Getting behind on payments or owing hefty
fees will tie up future uses of credit and can put you in dire financial straits. Finally, the misuse of
credit can seriously damage your credit history and prevent you from making important financial
steps in your life. A good rule of thumb is to never allow your payments to exceed 15 percent to
20 percent of your take-home pay or no more than one-third of your spendable income. This will
ultimately assist you in maintaining control over your finances.




                             Financial Smarts for Teachers • Unit 3: Credit
                                                  3–3
UNit 3: CREDit
applying for credit: what factors in?


What Should You Consider?

• What is the APR?

• What is the grace period?

• What is the balance?

• What are the perks?



What Do Creditors Consider?

• Credit history

• Income

• Total monthly expenses



Tips for Reducing Credit Costs

• Shop around for the best deal.

• Try to pay the balance in full every month.

• Keep the balance allowed/balance used ratio low.

• Only use credit when you need to unless you can pay the balance in full within the month.



When applying for credit, the following information is required:

Name
Address
Social Security Number
Phone
E-mail
Household income
Rent or own
Occupation
Investments and debt
Balance transfers




                           Financial Smarts for Teachers • Unit 3: Credit
                                                3–4
UNit 3: CREDit
credit fundamentals


establishing credit
You’ll usually need some sort of credit history to borrow. Your credit report will log all of your
debt obligations and help lenders see how you use credit and determine if they should lend you
money. But what happens if you don’t have a credit history? You’ll want to establish credit so
that lenders have something to go by when you ask to borrow money.

One way to establish credit is to ask your bank for a secured credit card. With a secured credit
card, you back a line of credit with your own money. You then can use the card to pay for items,
but you must make monthly payments to the bank to cover the charges.


using credit
While large volumes of revolving debt can be harmful, credit is a beneficial asset (even a
necessity at times). A good track record shows lenders that you are responsible and, therefore,
can be trusted with higher credit limits and lower interest rates. However, not all credit cards are
created equal, and it is your duty as a responsible user of credit to understand how your credit
cards work—and how they can work against you. Take your time when researching what credit
card is the right fit for you. One way to compare cards and features is to visit the online Credit
Card Guide from Bankrate at www.creditcardguide.com.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                 3–5
UNit 3: CREDit
7 tips: getting the most
from your credit card

1. pay on time
This is arguably the most important rule for using credit wisely. Late payments lead to pricey
late penalties, and some companies will raise your interest rate after one or two late payments.
Late payments damage your credit record and lower your credit score. Get too behind on your
payments, and lenders may close your account. Making excuses doesn’t work with lenders
either (they have heard it all), so get in a habit of paying early to avoid a situation beyond your
control, such as lost mail. Nowadays, most banks and credit unions have web payment options,
which allow you to schedule automatic payment of your bills.


2. stay below your credit limit
Give yourself some wiggle room. Keeping your balance at the maximum limit leaves no available
credit in case of an emergency. Also, many creditors will charge you a fee for going over your
limit and may even raise your interest rate.


3. pay more than the minimum payment
Try to pay your balance in full every month to avoid paying any interest fees. It’s also a step in
building good credit. However, if you can’t pay in full, pay as much of the total as you can. This
will save you money in the long run, and it also demonstrates responsible credit use.


4. stick with one
There are a lot of credit card companies out there that would love to have your business. But
just because you can get multiple credit cards, doesn’t mean you should. Having several bank
and department store cards does not look good on your credit record (even if you get 15 percent
off your first purchase). The application process alone can damage your credit record. Each time
you apply for credit, an inquiry is placed on your credit rating. Many credit providers count
those inquiries (often negatively) heavily in their decision to grant you credit. So keep your
applications to a minimum. Plus, it is easier to manage just one card instead of several.


5. read the fine print
Be aware of the terms and conditions of your credit cards. For example, many credit card
companies offer low, introductory rates to attract new customers, such as 0 percent for the first
year. (Sound familiar?) These rates are short lived and can jump into the 20 percent range after
the introductory period is over. With the latest reform in the financial services sector in the United
States, you need to make sure you understand all of the details about how your account will be
managed by the credit grantor, including what they are required to inform you about (and what
they aren’t). Read the contract and your monthly bills regularly to make smart decisions about
when to use your credit card and if that credit card is the right choice for you.




                             Financial Smarts for Teachers • Unit 3: Credit
                                                  3–6
6. avoid unnecessary fees
Credit card companies have a fee for just about everything. Besides late fees, interest rate
and over-limit fees, there are fees for cash advances, transfers and returned payments. Some
companies charge extra when you pay by phone or the Internet. Learn about your specific
card and what can be incurred—then do your best to avoid using any features associated with
additional charges.


7. avoid unnecessary purchases
Having the ability to buy now, pay later can lead to frivolous spending. So think of a credit card
as cash in hand. Ask yourself, “Will I be able to pay this off at the end of the month?” and “If
I had to pay for this right now, would I still consider purchasing it?” If the answer is no, then it
would be wise to avoid putting the purchase on your credit card.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                 3–7
UNit 3: CREDit
credit worthiness


As previously mentioned, credit is simply a consumer transaction where you agree to pay for
a purchased item or service at a later date. When a lender is considering whether or not they
should allow you to borrow money, and under what terms, they primarily evaluate four key
components, also known as the 4 C’s of Credit.

• Character

   Your character is basically your credit history. The longer your credit history is (i.e., the
   more history you have with using credit positively, paying your bills on time, having few or
   no delinquencies), the more favorable you look to a lender. A short credit history (i.e., no
   lengthy records of using credit or being extended credit, lack of lengthy payment histories)
   does not give you a proven record of responsible credit use, so limits will typically be lower
   and interest rates higher.

• Capacity

   Your capacity is defined by how much you make (salary) and your work history. This tells
   potential lenders how much income you have coming in, and for how long, which provides
   insight as to whether or not you will be able to maintain your scheduled payments.

• Capital

   Your capital is simply your net worth. At the highest level, your net worth is the total worth
   of all your assets (house, savings, investments) minus your liabilities (outstanding debt and
   known expenses).

• Collateral

   Your available assets (car, house, etc). Collateral is an important part of credit-granting
   decisions because they help to lower the risk and exposure by the bank or credit card
   company. A bank or card company will sometimes use a security interest in collateral (your
   home—for a home equity line of credit; items you purchase—for a credit card) as a means of
   recovering the funds they lent you through credit in the event you default on what you owe.

These four factors allow lenders to evaluate your credit worthiness. Many times, this
information can be obtained by a simple credit check.


credit report & your fico score
Your credit report is a record of your personal credit history, which contains all positive and
negative information pertaining to your credit. As soon as you start incurring debt, whether it is
paid on time or not, it all becomes part of your credit history. Delinquent accounts can be visible
for up to seven years.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                 3–8
Your credit report contains the following information that any lender has access to:

• Your credit accounts (including closed or inactive)

• Loan and credit limits

• Payment terms

• Payment history

• Loan balance

• Available credit

• Credit score

Your FICO or credit score is a number that summarizes your credit worthiness. Potential lenders
can see that number and quickly determine whether you have good credit or not. FICO score
ranges from 350-850, and the higher your score the better.

How does your credit score stack up?

• Good credit is 700 or above.

• Average credit is 630-700.

• Poor credit is 629 or lower.

You can (and should) monitor your credit on a regular basis. Every person has the right to pull
his or her credit report for free at least once a year from the major credit bureaus. This report
contains your credit history. Some credit card companies will also provide you with your FICO
score, either as a free benefit as a card member or for a nominal fee. Pulling your own credit
report will not hurt your credit score.

There are three credit bureaus that keep track of your credit:

• Equifax: www.equifax.com/fcra.

• Experian: www.experian.com/consumer-products/personal-credit.html.

• TransUnion: www.transunion.com.

Not all three are the same, so it is important to periodically evaluate all three to check for any
misinformation. This is particularly important because credit bureaus provide your information
to potential lenders, landlords, employers or insurers.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                 3–9
beyond loans
We all know that it will be more difficult to find a bank or credit card company to lend you
money if you have a low credit score. But your score also affects everything from insurance rates
to employment opportunities.


insurance rates
Whether you are insuring your vehicle or are purchasing homeowner’s insurance, your credit
score will likely play a role in determining your premium. Insurers typically create what is called
an “insurance score” that is largely based on your credit score, but with a few different factors.
A poor credit score can cost you hundreds of dollars in additional premiums each year, while a
good credit score can qualify you for a discount.


employers can check your credit
An increasingly common and somewhat controversial practice is employers checking the credit
of prospective employees. The argument is that employers believe they can use credit history to
determine responsibility. Clearly, there are situations where a bad credit history may be due to
something completely out of an individual’s control, but this is still something to keep in mind.


find money to pay off debt
When money is tight, it seems like there is nothing left to put toward that lingering credit card
debt. Even if you feel like you’re living paycheck to paycheck, there is money in your budget to
accelerate those debt payments. Find out how you can spot that hidden money.


where to seek help for spending and debt problems
Overspending can be a serious problem, but help is available. Debtors Anonymous is a non-
profit organization that can help you get your spending under control. If you can’t stop buying
and continue driving yourself further into debt, it can be worth it to talk to someone.


what to do if your credit report is wrong
Under the Fair Credit Reporting Act, you have the right to have any incorrect or misleading
information removed from your credit report. If an error appears on your credit report, you
should contact the credit bureau and request a reinvestigation of the disputed information. If the
error is not removed, you have the right to add a 100-word consumer statement to your credit
bureau file to explain your side of the story.



Material on this page reprinted with permission of the American Institute of Certified Public Accountants.



                                  Financial Smarts for Teachers • Unit 3: Credit
                                                         3–10
UNit 3: CREDit
how to rebuild good credit


Living paycheck to paycheck? Worried about debt collectors? Can’t seem to develop a workable
budget, let alone save money for retirement? Need to re-establish your credit after a bankruptcy?

If any of the above sounds familiar, you may want to consider the services of a credit counselor.
Many credit counseling organizations are nonprofits and work with you to solve your financial
problems. But beware—just because an organization says it is “nonprofit” doesn’t guarantee that
its services are free, affordable—or legitimate. Some credit counseling organizations charge high
fees, some of which may be hidden, or urge consumers to make “voluntary” contributions.

Most credit counselors offer services through local offices, the Internet or on the telephone. An
organization that offers in-person counseling is preferable. Many universities, military bases,
credit unions, housing authorities and branches of the U.S. Cooperative Extension Service
operate nonprofit credit counseling programs.


choosing a credit counseling organiZation
Reputable credit counseling organizations advise you on managing your money and debts, help
you develop a budget and usually offer free educational materials and workshops. Their counselors
are certified and trained in consumer credit, money and debt management, and budgeting.

A reputable credit counseling agency should send you free information about itself and the
services it provides without requiring you to provide any details about your situation. If a firm
doesn’t do that, go elsewhere for help. Once you’ve developed a list of potential counseling
agencies, check them with your state attorney general, local consumer protection agency and
Better Business Bureau. They can tell you if consumers have filed complaints about them,
although the absence of complaints is not a guarantee that they’re legitimate.


debt management plans
If your financial problems stem from too much debt or your inability to repay your debts, a
credit counseling agency may recommend that you enroll in a debt management plan (DMP).

Under a DMP, you deposit money each month with the credit counseling organization, which
then uses your deposits to pay your unsecured debts, like credit card bills, according to a
payment schedule the counselor develops with you and your creditors. Your creditors may
agree to lower your interest rates and waive certain fees, but check with all your creditors to
be sure that they offer the concessions that a credit counseling organization describes to you.
A successful DMP requires you to make regular, timely payments and could take 48 months or
longer to complete. You may have to agree not to apply for—or use—any additional credit while
you’re participating in the plan.

Beware of any organization that tells you it can remove accurate negative information from your
credit report. Legally, it can’t be done. Accurate negative information may stay on your credit
report for up to seven years.




                            Financial Smarts for Teachers • Unit 3: Credit
                                                3–11
debt negotiation programs
Debt negotiation is not the same thing as credit counseling or a DMP. It can be risky and can have
a long-term negative effect on your credit report and, in turn, your ability to get credit. That’s why
many states have laws regulating debt negotiation companies and the services they offer.

Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange
for your unsecured debt—typically, credit card debt—to be paid off for anywhere from 10
percent to 50 percent of the balance. For example, if you owe $10,000 on a credit card, a debt
negotiation firm may claim it can arrange for you to pay the debt with only $4,000.

The firms often pitch their services as an alternative to bankruptcy. They may claim that using
their services will have little or no negative effect on your ability to get credit in the future or
that any negative information can be removed from your credit report when you complete the
debt negotiation program. The firms usually tell you to stop making payments to your creditors
and, instead, send your payments to the debt negotiation company. The firms may promise to
hold your funds in a special account and pay the creditors on your behalf.

Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s
no guarantee that the services they offer are legitimate. There also is no guarantee that a
creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments
on a credit card, late fees and interest usually are added to the debt each month. If you exceed
your credit limit, additional fees and charges also can be added. All this can quickly cause a
consumer’s original debt to double or triple. What’s more, most debt negotiation companies
charge consumers substantial fees for their services, including a fee to establish the account with
the debt negotiator, a monthly service fee and a final fee of a percentage of the money you’ve
supposedly saved.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have
a legal obligation to provide accurate information to the credit reporting agencies, including
your failure to make monthly payments. That can result in a negative entry on your credit
report. And, in certain situations, creditors may have the right to sue you to recover the money
you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your
wages or put a lien on your home. Finally, the IRS may consider any amount of forgiven debt to
be taxable income.

If you decide to work with a debt negotiation company, be sure to check it out with your state
attorney general, local consumer protection agency and the Better Business Bureau to determine
if any consumer complaints are on file about the firm. Also, ask your state attorney general if the
company is required to be licensed to work in your state and, if so, whether it is.




                             Financial Smarts for Teachers • Unit 3: Credit
                                                 3–12
consider a secured credit card
Another way to establish or re-establish credit is through a secured credit card. With this
method, you deposit a specific amount into a special account, and you receive a card with a
credit limit that equals your deposit. In effect, you are borrowing against your own money and
paying interest to do so. If you declared bankruptcy, you normally can’t apply for a secure credit
card until after your bankruptcy has been discharged by a court.

It may take months, even years, to establish a good credit rating after having missed numerous
payments or declaring bankruptcy. But you won’t be able to unless you have a plan and pay
your debts in a timely fashion.

Adapted from an article by the Federal Trade Commission.



identity theft
Do you know how much information someone needs to impersonate you to someone else? Your
name, birth date or address? It is easier than you might think. Many identify theft and fraud
cases have been perpetrated simply by using these few pieces of information, along with a few
others, such as the high school you went to, your dog’s name or your mother’s maiden name.
This is all someone might need to access your existing accounts or establish new loans or credit
in your name.

Protecting your personal information and identity
Don’t let scammers or fraudsters steal your information, pose as you and ruin your credit. One
of the biggest steps you can take to protect yourself is to treat your Social Security Number
(SSN) with great care. When asked for your SSN, provide a substitute identifier when possible.
Your SSN is often used as a unique identifier, especially for things having to do with financial
records, loans and credit. Often you will be asked for your SSN over the telephone when talking
to your bank or credit card company. To be safe, ask if you can provide some other identification
information, such as mother’s maiden name or a recent history of transaction made by you. In
some cases, you will also be able to establish a user ID as an alternative unique identifier. Also,
refrain from including your SSN in e-mail messages.

For more information about how to prevent identity theft, read “Ten Tips to
Prevent Identity Theft Protect Your Personal Information” by Tony Bradley at
http://netsecurity.about.com/od/newsandeditorial1/a/aaidenttheft.htm.




                                Financial Smarts for Teachers • Unit 3: Credit
                                                      3–13
UNit 3: CREDit
resources


Annual Credit Report
www.annualcreditreport.com
This central site allows you to request a free credit file disclosure, commonly called a credit
report, once every 12 months from each of the nationwide consumer credit reporting companies:
Equifax, Experian and TransUnion.

Debtors Anonymous
www.debtorsanonymous.org
The site provides information and tools to help people deeply in debt find their way back to
healthy financial practices.

Equifax Credit Information Services, Inc.
www.equifax.com
One of the three nationwide consumer credit reporting companies.

Experian Consumer Assistance
www.experian.com
One of the three nationwide consumer credit reporting companies.

National Foundation for Credit Counseling (NFCC)
http://www.nfcc.org
A national nonprofit credit counseling network with more than 100 member agencies and
nearly 850 offices in communities throughout the country. NFCC members are often known as
Consumer Credit Counseling Service (CCCS).

Trans Union Corp
www.transunion.com
One of the three nationwide consumer credit reporting companies.




                           Financial Smarts for Teachers • Unit 3: Credit
                                               3–14

				
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