Establishing Credit - Martin County Extension Office

4
Establishing Credit
Credit is the opportunity to borrow money
to use now and then repay over time at an
agreed upon cost. It’s a convenience and
an important financial tool if used wisely.
Smart investing@your library® Series
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the American Library Association - and the FINRA Investor Education Foundation. The program funds
library efforts to provide patrons with effective, unbiased financial education resources.
Martin County Cooperative
Service
Establishing Credit • Smart investing@your library •Extension
1
“What do you find most
useful about having a credit
card?”
❑ Good for emergencies
❑ Pay for big-ticket items and
stretch out the payments over
time
❑ Establish a credit history
❑ Insurance or replacement for
purchases
❑ Safer than carrying large
amounts of cash
❑ Airline miles or other rewards
❑ Protection from fraud
Not managing your credit wisely
can lead to:
❑ Increased annual percentage
rates (APRs)
❑ Unnecessary fees
❑ A decline in your credit score
❑ Denials of future credit,
employment or insurance
Credit Cards
Debit Cards
Payments
Buy now, pay later.
Buy now, pay now.
Interest
Charges
Yes, if you carry a balance or your card offers no “grace period”.
No.
Other
Potential
Benefits
Freebies, such as cash
rebates and bonus
points good for travel
deals. Some purchase
protections.
Easier and faster than
writing a check. Avoid
debt problems. More
cards now offering
freebies. Some
purchase protections.
Other
Potential
Concerns
Fees and penalties.
Also not all cards
offer grace periods
(time to repay without
incurring interest).
Over-spending can
cause debt problems.
Fees on certain
transactions. You may
overdraw your
account if you don’t
record debit card
transactions into your
check register and balance your checkbook.
Benefits of Making More Than The Minimum Payment
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18%
Minimum
Payment
(MP)
123
10
$3,915
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18%
MP + $25
50
4
$3,258
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18%
MP + $50
33
3
$2,839
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This chart assumes you are not making additional purchases, and you are making your payments on
time. The minimum payment rate is 4 percent.
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Of course,
the best way to save money
and avoid paying
interest charges
is to pay off your
balance
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Establishing Credit • Smart investing@your library • 2
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18%
Minimum
Payment
87
7
$1,516
Sample Truth in Lending Disclosure Statement
Look at the other fees that may be involved (here’s an example):
$20.00 Late payment fee (if you forgot to mail your check before the “due date” on the statement)
$20.00 Over-the-limit fee (Example: Your credit card limit for spending is $1,000.00 and you
spent $1,000.01 or more.)
$20.00 Returned check fee
$ 2.00 ATM transaction fee (this is also a cash advance)
• The grace period does not apply to cash advances. (grace period = 25 days to mail your payment to
the credit card company to pay this month’s bill before it is late)
• The annual percentage rate for cash advances (like getting cash at the local ATM) is 24%.
(The 19.4% rate listed above, would be for purchases.)
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Credit Cards Comparison Chart
Credit
Card 1
Credit
Card 2
Name of credit card issuer/card
What is the annual percentage rate (APR)?
�
Introductory APR?
�
Penalty APR?
What is the finance charge?
What is the annual fee?
What are other fees (late fees, over-the-limit
fees, closing fees, etc.)?
Is there a grace period?
What are other benefits (points earned, etc.)?
What is my credit limit?
Other? (for example, customer service hours;
online access; can you talk to a real person?)
Establishing Credit • Smart investing@your library • 3
Credit
Card 3
Types of Credit
Tips on how to use your
credit card responsibly
❑ Revolving credit — the type of credit agreement used by most credit cards. It allows consumers to pay all or part of the outstanding
balance in each billing cycle. As credit is paid
off, it becomes available again to use for another
purchase or cash advance.
Check off things you do:
Check off the types of credit you have:
❑ Charge cards — cards that are not subject to
interest, but you cannot carry a balance — you
must pay your bill in full each month. Charge
cards often have annual fees. There is no set
credit limit because cardholders agree to pay
the full amount they owe every month.
❑ Secured credit cards — obtained only after
you have deposited money in a savings
account to guarantee that you will pay for your
credit card charges. Secured cards look like
and are used just like unsecured cards. Secured
credit cards are an option for people who have
no credit history or have a poor one.
❑ Protect your credit card
and account numbers to
prevent unauthorized use.
Draw a line through blank
spaces on charge slips so the
amount cannot be changed. Tear up carbon
copies of your receipts.
❑ Keep a record of your account numbers,
expiration dates, and the phone numbers of each
credit card issuer in a safe place, separate from
your credit card, to quickly report a loss.
❑ Carry only the credit cards you think you
will use.
❑ Pay off your total balance each month.
If you cannot pay the total balance, try to
pay more than the minimum amount.
❑ Subprime cards — are marketed to people
with poor or damaged credit. Subprime credit
is high-interest credit offered to borrowers who
may not qualify for any other credit.
❑ Read the fine print. Low advertised interest
rates might not last as long as you think. You
might not have a grace period with balances you
have transferred from other credit cards.
❑ Stored value cards — cards that look like
credit cards and use the same magnetic stripe
to retain account information. Payroll cards,
electronic benefits transfer cards, travel funds
cards and store gift cards are examples of
stored value cards.
❑ After you have established a good credit
history, ask the credit card issuer to waive the
fee or lower the interest rate.
❑ Retail (store) credit cards — cards issued
by department stores, national chain retailers
and gasoline companies as a convenience for
their customers. These cards are more limited in
their use as compared to general purpose credit
cards issued by banks and financial services
companies (bank cards). Store cards cannot be
used to purchase goods and services from
other merchants or service providers.
❑ Do not keep more than two or three credit
cards. Too many cards make overspending
tempting. There are, however, good reasons
to have more than one card, especially if your
credit limit is not high enough on one card to
cover an emergency.
❑ Many financially responsible people can
become overwhelmed by expenses or reduced
income triggered by a serious illness, a job loss,
or some other unexpected event.
To seek help call toll free 800.251.2227
http://www.CredAbility.org
Establishing Credit • Smart investing@your library • 4
How to get a free copy of your
credit report once a year from
each of 3 reporting agencies
amount of your monthly mortgage payment.
Each company may ask you for different information because the information each has in your
file may come from different sources.
To order your free annual report from one
or all of the credit reporting agencies, do not
contact the three nationwide consumer reporting
companies individually.
Remember, you may also be able to obtain a
free credit report if:
• Your application for credit, insurance, or
employment is denied based on information in
your credit report.
• You are unemployed and plan to look for a job
within 60 days.
• You are receiving public assistance.
• Your report is inaccurate because of fraud,
including identity theft.
You can obtain
FREE annual credit
reports by doing
ONE of the
following:
❑
Submit a request online at
❑
Call toll-free:
❑
http://www.annualcreditreport.com
If you are not eligible for a free annual credit
report, a credit reporting agency may charge you
up to $10.00 for each copy.
To buy a copy of your report, contact one of
the following credit reporting agencies:
• Equifax:
877-322-8228
Complete the Annual Credit
Report Request Form
in this booklet on page 7 and mail it to:
Annual Credit Report Request Service
P. O. Box 105281
Atlanta, GA 30348-5281
You can print a copy of the Annual Credit
Report Request Form (same as on page 7) from
http://www.annualcreditreport.com or
http://www.ftc.gov/credit
• You need to provide your name, address,
Social Security number, and date of birth.
• If you have moved in the last 2 years, you may
have to provide your previous address.
• To maintain the security of your file, each
credit reporting agency may ask you for some
information that only you would know, like the
800-685-1111 or
http://www.equifax.com
• Experian:
888-EXPERIAN (888-397-3742) or
http://www.experian.com
• TransUnion:
800-916-8800 or
http://www.transunion.com
Every 4 months, try getting your free
credit report from a different credit
reporting agency (Equifax, Experion or
Trans Union), to keep track of how you
are doing througout the year.
Establishing Credit • Smart investing@your library • 5
Penny Parker
http://www.mycreditgroup.com/images/Large-credit-report.jpg
Establishing Credit • Smart investing@your library • 6
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Establishing Credit • Smart investing@your library • 7
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30 percent of your credit limit. It’s always good to
pay off your balances every month. But creditors
may take a few weeks or even a couple of months to
report your payment to the credit bureaus.
To boost your score: Don’t charge anything for
at least 60 days before applying for a loan. That way
it’s likely that all the payments you’ve made to date
will be reflected in your credit score by the time a
lender requests it.
If you can’t pay off your total balance in full, at
least keep it under 30 percent of your total credit
limit.
6 ways to kill your Credit Score
Lenders, insurers, landlords and others will charge
you more or flat-out reject you if you show up with a
low FICO score.
Here’s how you may be doing yourself harm.
By Jeanne Sahadi, CNNMoney.com senior writer
Find out your credit score
Know how lenders see you. Take seven minutes to
download a free credit report at annualcreditreport.
com or calling 877-322-8228. For year-round monitoring, get a report from one of the three major credit
bureaus every four months. If you spot an error, notify the bureau (online, by phone or by mail) and the
creditor (call and also send a letter). You won’t find
your credit score here, so when you request a report
from Equifax, pay $7.95 for your FICO score, the
most commonly used score. The range is 300 to 850,
with 700 and above being good.
2 - Be a payment-slacker
Sending in your loan or credit card payments late
can really hurt.
When you’re 30 days past due and your balance
is still unpaid, your score could take a 60-point hit.
That kind of drop could mean a much higher interest
rate on loans you take out.
Late payments from your past that you have since
paid off will have less and less of a negative effect
on your score as time goes on. On average, past delinquencies that have since been resolved, might cost
you 15 to 20 points.
To boost your score: Pay your bill in full and
mail it as soon as it arrives, or at the very least the
minimum due. Set up automatic online bill payments
so you’ll never be late. Or, if you are late one month,
be sure to pay off what you owe as soon as possible.
3 - Be too thin
When it comes to your credit record, fat is good,
emaciated bad. Even if you’re the most responsible,
on-time, in-full bill payer on the planet, your credit
score won’t be as high as it could be if you have just
one credit account.
The reason: Your credit profile
is too thin and lenders ideally
like to see a potential borrower
responsibly managing a mix of
revolving debt (such as credit
cards, where you can reuse the
credit after paying it back) and
installment debt (such as a car
loan or most mortgages, where
you pay the same amount every
month for a certain period).
1 - Big spender at the wrong time
The bigger your total balance as
a percent of your total credit limit
across all your credit cards, the
lower your score will be.
You lose 1 point for every percent of your credit limit that you
use. So if you have a total credit
limit of $10,000 and have an outstanding balance of $4,000 (40%),
your score would be 40 points
lower than if you had a $0 balance.
Ideally, credit experts say, your
never want your balance to exceed
Establishing Credit • Smart investing@your library • 8
To boost your score: Consider opening another
credit-card account or two, or taking out a car loan or
small bank loan.
4 - Be too young and eager
Old credit accounts count more than young ones in
your credit score.
Lenders prefer borrowers who have responsibly managed the same accounts for years. That’s a
more reliable indicator of creditworthiness than
a few months of exemplary behavior on a new account. Accounts open less than six months will hurt
your score somewhat. Those open six months or more
won’t, while those open at least two
years will help your score.
Lenders also don’t like to see a
borrower who’s gone on a credit
binge, applying for a lot of new accounts or loans in a short period.
Every time you apply for new
credit, your score may be dinged by
5 points. That’s not the case, though,
if a broker shops around for the best
loans on your behalf. In that case,
if they approach multiple lenders who all pull your
credit report, that will only count as one inquiry so
long as they all do so within a two-week window.
To boost your score: Avoid applying on your own
for a lot of loans and credit cards, particularly in a
short period. And avoid excessive card-hopping.
5 - Be too tidy
The bigger your balance relative to your credit limit, the lower your score. But while it may be tempting
to close out a credit card account when you transfer
the balance to a lower-rate card, you may inadvertently hurt your score. That’s because your total balance
stays the same but your credit limit goes down when
you close an account.
Say you have three credit cards with a combined
credit limit of $24,000 ($8,000 each) and you owe
$6,000 total. Your balance represents 25% of your
credit limit. If you then close out one of your accounts, your credit limit goes down to $16,000 but
your debt is still $6,000, which now represents 37.5%
of your credit limit.
To boost your score: Don’t close unused accounts
when you transfer debt.
6 - Be too nonchalant
You may be a great credit risk, but your score won’t
reflect that if there are errors in your credit report. The
last thing you need is to have someone else’s delinquencies wrongly assigned to you.
Or you may think you’ve got great credit, but don’t
realize that your spouse has been hiding debt from
you, and killing your score in the meanwhile.
Unless you make yourself aware of what’s in your
credit report a few months before applying for a loan,
you’ll have no idea how a lender
will perceive you, rightly or wrongly. And you won’t give yourself the
opportunity to improve your score.
To boost your score: Order a free
credit report once a year from each
of the three major credit bureaus,
and make sure they’re accurate. Order one every four months by going
to annualcreditreport.com or calling 877-322-8228.
Two annoying but true facts: Credit scores aren’t
free, and the credit bureaus don’t share information
on you, so your credit reports and the scores based
on them may vary. So if you’re planning on applying
for a mortgage or other big loan, you might do well to
order a the 3-in-1 deluxe package from myFICO.com
for $47.85. That will include your credit reports from
all three credit bureaus as well as the FICO scores
based on those reports.
Raise your credit score in 8 minutes
Both will lower the size of your outstanding debt as
a percentage of your total borrowing power.
1. Pay down a balance.
2. Call your issuer and ask for a higher credit limit.
And don’t spend it.
Establishing Credit • Smart investing@your library • 9
By paying your credit card bill late — not only will you face a late payment
charge (which could be higher than your minimum payment), your tardiness will show
up on your credit report, damage your FICO score and make it harder to get better terms
for future loans and accounts. Make sure you send your check in plenty of time, or set
up an automatic payment via your bank at least a week before the due date.
Martin County’s Smart investing@your library® Series:
1 - Your Financial Fitness
2 - Designing Your Budget
3 - Banking Basics
4 - Establishing Credit
5 - Credit & Identity Theft
6 - Controlling Debt
7 - Tips for Daily Savings
8 - Saving for the Future
Credits:
❑ This booklet was designed by Chris Kilbride, University of
Florida - Martin County Cooperative Extension Service for the Martin
County Library System’s Smart investing@your library® Series.
For details about Smart investing@your library®, visit
http://www.smartinvesting.ala.org
To learn more about the Martin County Library System, visit
http://www.library.martin.fl.us
❑ We would like to acknowledge the original educational outreach
material:
• “Credit Cards: What You Need to Know” - an educational
partnership between Consumer Action and American Express.
• Charge It Right FDIC Money Smart and To Your Credit FDIC
Money Smart – Financial Education Curriculum Participant Guide
❑ The mission of the FINRA Investor Education Foundation, a
nonprofit organization, is to provide underserved Americans with the
knowledge, skills and tools necessary for financial success throughout
life. The FINRA Foundation envisions a society characterized by universal financial literacy.
For more information and financial literacy resources, visit:
http://www.finrafoundation.org
Establishing Credit • Smart investing@your library • 10