MY ESTABLISHING CREDIT
Checklist
Your credit history is important when applying for a loan, but it’s also important to prospective employers, utility companies, landlords, and
insurance companies in determining whether or not you have demonstrated financial responsibility. That is why it is important to understand
credit and the impact it has on your ability to reach your current and future goals.
LENDING BASICS
Types of Credit
There are two general types of credit: Installment (car loan) and Non-Installment (credit card).
1. Installment Credit, also called closed-end credit, includes loans that require the borrower to repay the principle (original amount) and
interest (lenders charge) in periodic payments, usually monthly, until the loan is paid. This type of credit is typically used to purchase
collateral such as an auto or a home. A collateral loan can be less risky than other loans because the lender can repossess the collateral
if payments are not made. This is also why collateral loans may have a lower interest rate than non-collateral loans.
2. N
on Installment Credit, also called open-end credit or revolving credit, includes credit cards and lines of credit (non- collateral loans).
Both have a predetermined credit limit and the borrower draws against available funds at their convenience as long as the outstanding
balance does not exceed the limit. The borrower reduces the debt by making payments and can also add to it by borrowing or charging
additional amounts without having to reapply for credit. Open-end credit accounts generally allow irregular or partial payments to be made
subject to a predetermined minimum amount established by the lender. This minimum may be a specified dollar amount or a percentage
of the outstanding balance. A non-collateral loan is more risky because there is no collateral for the lender to repossess if the borrower
does not pay, so this type of loan tends to have higher interest rates.
Debt to Income Ratio
Your debt to income ratio and your credit score are both equally important when applying for credit. Your debt to income ratio calculates the
amount of debt you have compared to your income. The calculation is based on a percentage; as you increase your debt it also increases the
debt to income ratio (percentage). You can get an idea of your ratio by dividing your monthly debt by your monthly income. For example if your
monthly debt is $500 and your monthly income is $2000, your debt to income ratio is 25%. Lenders have strict guidelines on debt to income
ratios. Generally the higher the ratio the more likely you will have difficulty paying back your debt. The desired debt ratio varies depending on
the lender and type of loan but generally you do not want to be any higher than 30%.
CREDIT BASICS
History
When a solid credit history is not established, creditors have no way of knowing whether or not you are a good credit risk. The following
describes some of the factors that creditors consider to help determine if they should grant you credit:
q Residence History: How often do you move? Do you rent or own your home? Stable residence often suggests reliability; owning your
own home may carry more weight than renting.
q Employment History: Have you consistently held a job for long periods of time, or changed jobs frequently? Your commitment to a job
is a solid indicator of whether or not you will be committed to repaying your loan.
q
Bank Account: Opening a checking account does not require a credit score; however, successfully managing the account without
overdrawing can be a consideration if you are seeking credit from your financial institution.
Credit Report
A credit report is a record of your credit history. It’s important to review your credit report annually for discrepancies.
q Credit Score: A number that is assigned to your credit report based on credit history.
q Your identity: Name, address, full or partial Social Security number, date of birth, and employment information
q
Your past and existing credit: Information about credit that you have, such as your credit card accounts, mortgages, car loans, and
student loans. It may also include the terms of your credit, how much you owe your creditors, and your history of making payments.
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Your public record: Information about any court judgments against you, any tax liens against your property, or whether you have filed
for bankruptcy or have items (such as unpaid medical bills or utility bills) which have been turned over to collection agencies. Some
companies such as cell phone providers do not report to credit bureaus when you make your payments on time; however they do report
when you don’t pay.
q
Inquiries: A list of companies or persons who recently requested a copy of your report. An inquiry is done anytime you apply for some
type of credit or service i.e. credit card, cell phone provider, etc. A large number of inquiries can affect your credit score negatively.
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MY ESTABLISHING CREDIT
Checklist Continued
CREDIT BASICS CONTINUED
Credit Score
The most common source for credit scores is called the FICO score. FICO stands for Fair Isaac Company, which is an organization that publishes
credit scores based on data collected by the 3 largest credit reporting agencies: TransUnion, Equifax and Experian. The score values can range
from 300-850; the higher the score the better. A higher score means the less likely an individual will become delinquent or default on a loan.
Your credit report is important because lenders, insurers, employers, and others may obtain your credit report from credit bureaus to assess
how you manage financial responsibilities. Your credit score may be a factor for:
• Lenders – may use your credit report information to decide whether you can get a loan and the terms you get for a loan
(i.e., the interest rate they will charge).
• Insurance companies – may use the information to decide whether you can get insurance and to set the rates you will pay.
• Employers – may use your credit report, to decide whether or not to hire you.
• Telephone and utility companies – may use information in your credit report to decide whether to provide services to you.
• Landlords – may use the information to determine whether or not to rent an apartment to you.
Credit Score Calculation
The score summarizes your credit history and helps lenders predict how likely it is that you will repay a loan and make payments on time.
Lenders may use credit scores in deciding whether to grant you credit, the terms you are offered, or the rate you will pay on a loan.
Information used to calculate your credit score can include:
• The number and types of accounts reporting (credit cards, auto loans, mortgages, etc.)
• Whether or not bills are paid on time
• Available credit you currently have access to (the total of your credit card limits together)
• Any collection actions
• Amount of outstanding debt (total amount of what you owe)
• Age of accounts – how long they have they been opened
ESTABLISHING AND PROTECTING YOUR CREDIT
Establish Your Credit
Obtaining credit for the first time often involves a co-signer, secured purchase with a large down payment (i.e. car loan), a savings secured loan
or credit card. When establishing your credit with a credit card it is not necessary to carry balances to build credit. Regular use of a credit card
and paying balances off helps establish credit. It is important not to use a high percentage of your credit limits, even though you may pay them
in full each month. Using a high portion of your limit may cause a decrease in your credit score. Here are some tips to get you started:
q Keep track of your accounts with FinanceWorks™ for budgeting and bill payment reminders.
q Quickly build your savings with Everyday Savings.
q Start building your credit with a TCU Visa® Credit Card or Secured Loan.
q Make payments on time, pay balances off regularly.
q Limit the number of cards you have and don’t use a high percentage of your credit limits.
q Be an informed borrower; know your debt to income ratio and credit score.
Protecting Your Credit
A high credit score reflects an investment of time and effort, which should be protected. Here are some ways to make sure that
your credit stays intact:
q Keep an eye on your account and credit card statements. Always be aware of any suspicious transactions and report them to
your financial institution immediately.
q Immediately report any lost or stolen cards to the proper companies. Don’t loan your cards to other individuals or give out your
passwords or pin numbers.
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Always pay your bills on time. Payment history can count for 35% of your credit score and chronic late payments can slash
your score by up to 100 points.
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Consider Payment Protection plans on qualifying loans to make your payment in the event your income is interrupted.
Ask a TCU Representative for details.
q
Check your credit report annually. You are entitled to a free credit report from the three major credit agencies every year by going to
www.annualcreditreport.com and requesting your free reports. If you see anything that looks out of place, immediately report the
discrepancy to the agency. This step is vital in ensuring your credit history is being reported correctly.
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