Financial &Leadership Development Program

All About Credit & Debt

Credit

The ability to borrow money or access goods or services with the understanding that you’ll pay later.

Definition

• Employers
• Job Opportunities
• Background Checks

• Lenders
• Credit Opportunities
• Mortgage Opportunities
• Car Loan Opportunities
• High Credit Score = Lower Interest Rates on Loans

Importance

Credit Report

A record of person’s payment history

Includes:

• Biographical, Account, Public, Information
• Inquiries
• Payment History, Debt, Length of Credit History, Mix of Credit

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Good to know:

• Evictions show up in “public information” of report
• Check Report…
• 3-6 months before mortgage application
• 1-2 months before car shopping
• 1 month before applying for credit card

annualcreditreport.com lists all three bureaus in detail!

Credit Report

• Duplicate accounts
• Reinsertion of info after being corrected
• Old debts shown after 7 years

• Name, address, number errors
• Accounts never opened
• Incorrect balances posted

Credit Score, Credit Report Resources

Credit Counseling Resources

Common Credit Errors

National Foundation of Credit Counseling Clearpoint

Operation HOPE

Credit Karma Credit Sesame Experian

My FICO

Annual Credit Report

Filing a Dispute

Inform Credit Bureau(s) of Error

• File dispute with credit bureau(s)
• Can file via phone, online, mail

Create a Trail

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• Mail a letter to credit bureaus
• Save confirmation of

dispute if filed online

Inform Creditor of Error

• Mail a letter if you know the company
• Include name, return address

www.consumerfinance.gov/learnmore

1. ALWAYS KEEP RECORDS

What Else to Know

2. Disputed items must be investigated within 30-45 days
• Can file additional complaint with Consumer Financial Protection Bureau

File complaint with Federal Trade Commission

• https://www.ftccomplaintassistant.gov
• Fill Out Identity Theft Affidavit
• Create a recovery plan - identitytheft.gov

Submit report to the 3 credit-reporting agencies

• Approval – bureaus prevent info from showing on credit report

Consult creditor to put a freeze on credit report

• Creditors and lenders cannot review report
• Most states: account freeze lasts until removed
• Some states: account freeze expires in 7 years

Identity Theft

REBUILDING CREDIT

1. Review credit report for errors
2. Pay off debt
3. Secured credit cards
4. Credit Building Loan

1. Secured Credit Cards
2. Become an Authorized User

ESTABLISHING CREDIT

Rebuilding Credit

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• Requires a cash security deposit when

you open the account

• What you pay in the deposit is your credit limit
• Minimum deposit is $200
• Deposit is not used to pay for purchases
• Recommended to only use 30% of the credit limit to boost credit score

Secured Credit Card

• Holds the amount borrowed in a bank account while you make payments

• Offered by credit unions and community banks or CDFIs

• Can’t access the money until you have fully repaid the loan

– Able to build savings and credit at the same time

• Acts as a safety net for the lender if you have no credit or low credit score

Credit Building Loan

Cardholder Rights

Equal Credit Opportunity Act (ECOA)

• Can’t be denied credit based on sex, race, marital status, religion, national origin, age, or receipt of public assistance
• Legal right to know why you were denied credit

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The Fair Credit Reporting Act

• Right to receive a credit report copy
• Right to dispute incomplete or inaccurate information
• Employers can’t access report without your consent

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Fair Credit Billing Act

• Protection from unfair billing practices
• Applies to open-end credit accounts

Good Habits to Develop

• Pay bills on-time using electronic reminders or automatic payment

• Use <30% of total credit limit

• Review report annually

• Reminder – TAKES TIME TO BUILD

<580 = Poor Credit

580-669 = Fair Credit

670-739 = Good Credit

740 - 799 = Very Good Credit

800+ = Excellent

Credit Score

• History of revolving debt
• History of installment debt
• History of late, missed, or on-time payments
• Lenders look to determine risk of extending credit limit

Payment History (35%):

Credit Score

What is debt?

• Something, typically money, that is owed or due

How does it begin?

• Falling behind on bills + interest charges
• Unexpected expenses

How does it affect my finances?

• Lowers credit scores
• Lose approval for low interest rate loans

Debt

Secured Debt

• Borrowed money is backed by a physical item

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• Failure to make payments – lender seizes property to satisfy debt

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• Secured debt minimizes risk for lenders

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• May lead to owing more than the item’s actual worth

Unsecured Debt

• Borrowing money not backed by an asset
• Ex. Credit cards, medical bills, student loans, personal loans
• Higher interest rates
• Beware: this debt can pile up quickly

Types of Debt

• Credit Card Debt
• Required to make minimum monthly payments
• Interest rate vary by card, average interest rate 15%

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• Mortgages
• Monthly payments
• On time payments show responsible borrowing
• Auto Loans
• Set number of monthly payments over several years
• Low or no-interest financing available

for individuals with good credit

• Student Loans
• Generally, a 10-year payoff period, can be on income-based repayment plan
• Interest paid is set by federal government
• Medical Debt
• Payment plan can be worked out with billing department
• 180-day waiting period before medical debt reported by a collection agency appears on your credit report

Debt Consolidation

• Combining old debts into a single debt
• Open new line of credit to “pay off” combined debt
• Low Credit Score – Higher Risk if you consolidate debt
• Don’t close consolidated accounts

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Debt Settlement

• Negotiate a payment plan to settle or reduce debt
• Debt settlement charges vary by state
• May help avoid bankruptcy
• Requires you to avoid paying debts – late fees or interest
• May damage credit report
• Get everything in writing

Debt Snowball Strategy

1. List debts from smallest to largest
2. Make minimum payments on all debts but the smallest
3. Find extra money to pay smallest debt
4. Then move onto the next smallest debt to pay off

Credit Cards

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1. Safer to carry than cash or debit cards
1. Generally, not held responsible for fraudulent purchases
2. Can earn significant rewards
• Research which cards give back which rewards
3. Easy to track your spending
4. Easiest and fastest way to build credit if used responsibly

Pros of using Credit Cards

1. Pay off your credit card bill each month
1. Use it as you would your debit card
2. Takes discipline, but stay

focused

2. Watch out for CCs with fees
2. Merchant fees, yearly fees
3. Do not use a credit card if you cannot pay off the balance each month!
• You will be charged a high interest rate

Credit Card Tips

Balance Transfers

What is a balance transfer?

- Let’s you move debt from one account to another

Why do a balance transfer?

• Move high interest debt to a credit card with 0% APR (no interest) can save you money
• Gives you time to pay off debt without paying interest

What to look for when doing a balance transfer:

• Balance transfer fee
• Card limit – make sure card limit will cover your full balance
• Look for time limit with no interest (usually one year no interest depending on card)
• Look for:
• 0% APR
• $0 Annual fee
• $0 Balance transfer fee

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