Understanding Credit

Why are credit and good credit history important?

1. Why are credit and good credit history important?
   • Because they will either expand or reduce your credit opportunities now and in the future.
   • Because using credit helps you to achieve your personal goals like owning a home, buying a car and paying for your education.
   • Because using credit helps most Americans increase their assets and net worth over their lifetime.
2. Credit is a very useful financial tool which can expand your opportunities.
   • Understanding the basics of credit will help you to build a positive credit history and allows you to use credit to your advantage.
   • As you may need a private loan, be sure to plan ahead. Learn about credit basics at least 6 months before you apply for credit.
   • To maximize your success with credit become a cautious consumer of credit products.
3. Remember-Credit is Debt-Not Income.
   • Borrowing or using a credit card creates debt.
   • Debts are paid by you with future income unless you have parents willing to pay your bills.
4. How does missing payments or paying bills late, impact future credit opportunities?
   • Missing payments or making late payments can cause future credit requests to be denied or cause the interest rate offered to be higher.
   • These are some of the opportunities you may miss out on because of poor credit:
     • private student loan
     • a car loan
     • a mortgage
     • rental of an apartment, or even
     • unemployment

What Basics Do You Need to Understand to Use Credit Effectively?

1. Your credit score, "Who is FICO and why do I need to know about it?
   • If you plan to apply for private loans, a mortgage, buy a car, etc. you'll be evaluated based on your credit score.
   • Your credit score is a number (based on information in your credit file) used to predict how likely you are to repay debts responsibly.
   • The higher your score the less risk you represent to lenders. Scores tend to fall between a range of 300 and 850. Most private loan lenders require a score of 630 or higher to approve a loan.
   • Your credit score determines whether you qualify for a loan and the interest rate you'll pay.
   • FICO is short for the credit score systems offered by Fair Isaac Corp. the company that invented the credit score model most widely used by lenders.
   • The exact mathematical formula is a closely guarded secret, but it is based on these broad categories:
   • FICO scoring does not review:
     • Age
     • Salary
     • Occupation
     • Race
     • Where you live
     • Interest rates you are currently paying
     • Any information not proven to predict future credit performance
   • Tips for raising your credit score:
     • Pay your bills on time
     • Keep credit card balances low
     • Limit the number of new credit accounts to only those you need
     • Don't close unused credit card accounts as a short term strategy to raise your credit score
     • Check your credit report annually for accuracy, correct errors immediately
   • To learn more about credit and credit scoring we recomment 2 on-line resources:
     www.myfico.com
     www.edfund.org (click on the "Schools" link and then the "On-line Money Management Library" link)
2. Your credit report, "Isn't a good credit score enough?"
   • No, when you apply for credit or a loan, lenders check both your credit report and your credit/FICO score to make their decision to approve or deny your loan and the interest rate you will be charged.
   • Your credit report is a summary or history of your repayment and identify information as provided by credit card companies and other lenders, who have extended credit to you.
   • In addition, the information in your credit report becomes an important part of the numeric component of your credit score.
   • Credit information includes specific account information, such as when an account is opened, credit limit, balance, and payment pattern. Active positive credit information may remain on your report account indefinitely, while most negative information remains up to seven years.
   • According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may inquire about your credit information without your prior consent.
   • Public record information in some states may also include bankruptcy and overdue child support.
   • To learn more about reading credit reports go to the following on-line resource:
     http://www.experian.com/credit_report_basics/pdf/samplecreditreport1.pdf
   • To learn more about managing credit and credit reporting agencies go to these on-line resources:
     www.equifax.com
     www.experian.com
     www.transunion.com