Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Credit 101
Why Credit is Important
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Your Credit Score
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FICO Scoring - From Good to Bad
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Credit Bureaus
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Credit-Worthy vs. Credit-Ready
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Are you Drowning in Debt?
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Why Credit is Important
College is one of the most rewarding
and challenging life experiences. Now
that you are out of school, you are
financially independent and now
responsible for your own earnings.
Establishing good credit is as essential
as obtaining a college degree.
However, the majority of graduates
leaving college are in debt from student
loans and credit cards.
Debt doesn’t always have to carry a
negative connotation; it’s sometimes a necessary reality of life, especially post-college. It’s how
you manage your debt properly that will lead you down the right road to success and financial
freedom.
This booklet is designed to teach you how to maintain and manage your credit.
What is Credit?
Credit is defined as borrowing money from a lender and repaying it at a later date, usually with
accrued interest charged on top of the initial sum borrowed. When a lender issues credit, they
are essentially telling the borrower they are confident in the borrower’s ability and intention to
repay their loan. The level of confidence lenders have in potential borrowers depends on certain
factors, such as: a person’s income, amount of outstanding debt, and how they repay their debt.
What is a credit report?
A credit report provides you with all of the information in your credit file which is maintained by
a consumer recording company. A credit report also includes a record of everyone who has a
received a consumer report about you with a certain amount of time (“inquiries”). You are
entitled to receive a disclosure copy of your credit file from a consumer reporting company under
federal law and the laws of various states.
A credit report will produce a credit score, known as a FICO score, which establishes your credit
rating.
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
What does a credit report contain?
There are four main categories of information in your credit report.
1.Personal Information
Your credit report contains information that identifies you, including the following:
• Name
• Social Security Number
• Date of Birth
• Current address and previous addresses
• Phone number
• Current employer and previous employers
2.Your Credit History
Your credit report includes your history of bill paying with
companies such as:
• Banks
• Mortgage companies
• Retail stores
TWO Main Types of
Credit
✓ Home loans, or
mortgages, and
personal or
department store loans
linked to items
✓ Revolving credit on
credit cards
• Finance companies
• Utility companies
3.Inquiries
Your credit report lists the lenders and credit grantors that have requested or received your
credit report. The general rule is the fewer inquiries on your credit report, the better.
4.Public Records
Your credit report lists any items that may affect your credit, including:
• Court judgments, including child support judgments
• Tax liens
• Bankruptcies
• Delinquencies
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Your Credit Score
What is a credit score?
A credit score evaluates information in your credit file. Lenders use a credit score to help
determine whether a person qualifies for a particular loan. Most credit scores estimate the risk a
company incurs by lending a person money or providing them with a service – specifically, the
likelihood that the person will make payments on time.
FICO Scores
FICO scores judge your credit behavior with score ranges from 300-850. The three-digit
number determines your risk factor in lending money. The higher your FICO, the more likely
you will be approved to borrow more money at favorable terms or rates. Five different categories
exist in determining your FICO score, each weighted with varying degrees of importance.
Payment History (35%) – Are your bills paid on time? Past-due accounts, whether in collections
or bankruptcies, will lower your FICO score. The most recent your past-due accounts are, the
worse it will be for your credit score. Lenders are interested in how timely your pay your bills.
Money Owed (30%) – The amount of debt you owe on and the ratio between outstanding debt
and available credit. Available credit is the sum of your usable credit lines. The lower the ratio of
debt to available credit, the better. However, it is also important to look at how much available
credit you have and this could affect your approval rate. For example, if you have an open credit
card with no balance and a $5,000 credit limit that you know you will never use, and you are
applying for a mortgage, you should close your available credit immediately in order to maximize
your approval for a mortgage. Lenders look at outstanding debt, such as car or home loans and
credit cards at their credit maximum. So, keep your card balances at 25% or less of their limits.
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Duration of Credit History (15%) – How long have you been borrowing? Then more extensive
your credit history, the better your credit score because you have established ‘creditworthiness’ .
The more information about your past payment history gives a more accurate prediction of your
future actions.
New Credit (10%) – Many new account inquiries in the last 12 months can lower your credit
score. If you have applied for multiple credit cards or loans, you will have a lot of inquiries or
“credit hits” on your credit report. Numerous credit inquiries can indicate you may be in some
kind of financial trouble or may be taking on additional debt – even if you have not used the cards
or gotten the loans. This is why you should not apply for multiple loans with the hopes that one
gets approved. FICO scores only count inquiries from the past year.
Type of Credit (10%) – The number of open credit accounts you have and the types of companies
you have taken out credit with, such as department stores, can also affect your credit score.
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
FICO Scoring - From Good to Bad
FICO Scoring (300 to 850)
The Good: 668-850
A FICO score above 668 is considered a good credit risk to lenders. Impeccable credit takes
hard work. A flawless FICO score involves paying your bills on time, condensing the number of
credit cards you have to two or three (especially eliminating department store cards that carry
high interest rates), charging only up to 25% of you credit limit at a time, paying over the
minimum payment, not abusing balance transfers and most importantly, checking your credit
report yearly at a minimum. Not only does a high FICO score allow for a seamless borrowing
process with high approval rates, but it also can guarantee you lower interest rates.
The Average: 484-667
A FICO score between 484-667 is considered average. You
may have missed a few payments that have gone 30-60-90
days into delinquency or have an outstanding dispute on
your credit report that has not been resolved. There may be
some delays in the approval process so lenders can verify
your income and assets.
✓ The national FICO
score average is 678.
The Ugly: 300-483
A credit score below 483 is considered a poor credit risk. Also referred to as a subprime
borrower, poor credit risk borrowers have two or more 30-day delinquencies in the last 12
months, one or more 60 day delinquencies in the last 24 months, a judgment, foreclosure,
repossession or charge-off in the last 24 months, a bankruptcy in the last 5 years or a debt-toincome ratio of 50% or greater. Debt-to-income ratio is defined as your current income versus
your current debt. To obtain a loan with poor credit can be a slow and painful process; a cosigner
may be required and you may be taxed with a higher interest rate. So now you know there’s a
record to your borrowing, it’s important to order your own credit report. After all, it’s YOUR
credit life, as personal as a daily journal, with all your successes and all your downfalls.
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Credit Bureaus
Did you know?
Under the Federal Credit Reporting Act, you can obtain a FREE copy of your credit report once
a year. Visit www.annualcreditreport.com or call 877-322-8228. You can obtain up to three
free credit reports yearly. However, the website will NOT provide your FICO score; you will
need to pay a fee to obtain this critical piece of information.
You can order your credit report and FICO scores through three major credit bureaus. Each
credit bureau can report different credit information about you so you should request
information from all three agencies. Note: Banks will request a tri-merge report (all three credit
bureaus) to review your credit when you apply for a mortgage.
Equifax
Experian
TransUnion
PO Box 740241
PO Box 2104
PO Box 1000
Atlanta, GA 30374-0241
Allen, TX 75013
Chester, PA 19022
www.equifax.com
www.experian.com
www.transunion.com
1-800-685-1111
1-888-397-3742
1-877-322-8228
In addition, if you are turned down for credit, you can obtain a free copy of your credit report
within 60 days of being declined.
Why check your credit report?
Human Error – No one is perfect, but your credit report must be.
Twenty-five percent (25%) of
credit reports contain serious errors. Common mistakes include: identity mix-up and incorrect
or outdated information on the part of the company reporting the information or the bureau
itself. If you detect a human error, it is important to contact your credit reporting agency
immediately, so they can begin an investigation.
– If you have had any unauthorized charges to credit cards, it is important to check your
credit report to see if any other illegal activity has taken place. If fraud occurs, inform your credit
card companies and credit reporting agency and file a report with the police. To prevent identity
theft, check your credit card statements monthly, do not give out your Social Security number,
keep your passwords private, secure your email and shred regular mail. Fraud occurs more
frequently than one would think. Upon checking your credit report, contact the credit agency as
soon as possible if you detect a mistake or fraud. Under the Fair Credit Reporting Act, they have
30 days to investigate and solve any issues.
Fraud
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Credit-Worthy vs. Credit-Ready
Credit-ready applicants are generally those with no established credit history or a limited credit
history. Credit-worthy applicants are generally those with satisfactory established credit.
The Truth about Credit Cards
Zero percent or low introductory rates expire and then increase after a couple of months to a
year. If you miss one payment during that time period, your rate can increase to over twenty
percent (20%) and you will be charged with a late fee.
If the interest rate is variable, it fluctuates with the prime and can therefore increase without
notice.
Certain credit cards award you points for the amount of money your charge on it, escalating your
spending habits.
Sometimes looks are deceiving. Just because you qualify for a $3,000 credit line does not mean
you can afford to spend $3,000 and max out your credit limit. If you do not limit yourself now, a
compulsive shopping habit can follow you into the future.
Credit Card payment example:
Suzy has racked up a credit card balance of $3,000 while in college that charges a 15% interest
rate. She makes a minimum payment of $60 each month. How long will it take Suzy to pay off
her balance and how much interest will she accrue over the life of the loan?
Minimum payment $60
Total interest payment $1,737
Number of payments 79
Number of years to pay off 6
Moral of the story? Always make over your minimum payment. If Suzy simply doubled her
payments to $120/month, she would cut her total interest payments to $620, her number of
payments to 31, and the number of years she has to payoff her balance to 2 years.
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Earning Extra Credit
Understanding what it takes to maintain and manage good credit now and for your future
Are you Drowning in Debt?
If you feel like you are on the road to debt doomsday, there is a way to help you gain back your
financial footing. Check out the following websites for help and information.
National Foundation for
Credit Counseling
Federal Trade Commission
Federal Citizen Information
Center
www.nfcc.org
www.ftc.gov
www.pueblo.gsa.gov
Bankruptcy Blues
Declaring Bankruptcy is like declaring war – on yourself. Contrary to popular belief, bankruptcy
is not a way of dodging your debt or erasing your credit history. If you do file for bankruptcy,
your student loans will not be forgiven. Bankruptcy is a last resort for those who have tried all
other outside sources, including credit counseling.
Why you should think twice about bankruptcy
• Stays on your credit report for up to 10 years.
• Hinders your ability to get a car loan or mortgage.
• New credit cards will carry high interest rates or require you to secure a credit line with a
down payment deposit.
• Can prevent you from being hired for a job or obtaining a lease on an apartment.
• Doesn’t forgive all of you debts such as: child support /alimony, student loans, income taxes,
fines, penalties, criminal resolution.
• It’s more difficult to file a Chapter 7. Your income must be less than the median in the state
you reside in. Others will be required to file a Chapter 13 or have $100 or more of
discretionary income to pay towards debt.
So think twice before filing away your freedom. Consider and exhaust all other alternatives to
clearing your debt before you choose bankruptcy.
Congratulations
on taking the initiative to become a credit-conscious
borrower. After reading this booklet, you should have a better grasp of what
credit means and how to maintain healthy credit today and in the future.
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