Credit

The reputation one has built in his or her dependability in regard to paying back borrowed money

50 year old person who has bought several cars, two houses, and other items with millions of borrowed dollars never having missed a payment will have good credit

Creditors, or people lending money, would be more than willing to lend him money

On the other hand, someone who has a credit history of paying late or not paying at all will have difficulty borrowing money

To what sort of person would you be willing to lend money?

Banks and other creditors use the services of credit agencies to decide whether or not to lend someone money

These agencies keep track of people’s tendency to pay back borrowed money

If people do not pay on their debt, the creditor will report them to the credit agencies

When those people go to borrow again, they might be turned down

This credit history follows us for seven years

When considering someone’s credit health, financial institutions consider four aspects of an individual. These are known as the 4 C’s

4 C’s

Credit History- when money was borrowed in the past, how faithfully was it paid back?

Character- Does the person have a criminal past?

Capacity to Pay- What is the person’s monthly income and can he or she handle a monthly payment schedule?

Capital- How much does the person have in the bank? Or does the person have capital resources that could be considered collateral (objects that can be handed over to the bank in the event the person doesn’t pay the loan)?

Many people today borrow more money than they can afford to pay back

A major reason for this is credit cards

Credit cards- money is lent at high interest rates- usually between 15 to 20% for people just starting out

Credit cards are issued through and managed by banks

They work through massive computer systems by companies like Mastercard or Visa

While credit cards do afford holders a certain amount of financial freedom, they often get people into trouble

Credit CardsApply for at least one in collegeUse as a convenience, pay it off

each monthCharge at least one thing each

monthOnly get one to three cards

Credit CardsCredit card should not have an annual

feeShould get a card with some type of

rewardCash back is bestGasAirline miles (takes a long time,

difficult to use before expire)

Credit Cards

Steer clear of store credit cardsThey have high interest ratesPeople end up having multiple

cards all of a sudden

You are entitled to one free credit report a year

Get one and look at it3 main credit bureaus:

Trans UnionEquifaxExperian

Keep same credit card for as long as possible- do not keep closing and opening new ones

Length of history is one criterion to be judged by

Credit Scores:FICO (Fair Isaac Corporation)Range typically between 300-850660 borderline sub-prime (high

risk) Vantage Score started Spring

2006 may replace FICO scores are 501-990

FICO Factors35% punctuality of payments in the

past30% capacity used (maxed out?)15% length of credit history10% type of credit used (installment,

revolving, etc.)10% recent applications for credit/

recent credit obtained