FINANCIAL AWARENESSCREDIT CARDS & LOANS

Lesson 2: Credit Basics – Part 2

Instructor PowerPoint

Copyright © 2009, Thinking Media, a division of SAI Interactive, Inc. All rights reserved. The Career Ready 101 logo is a registered trademark and Career Ready 101 is a trademark of SAI Interactive, Inc.

2

Building a Credit History

Getting credit is only the first step to building a credit history and increasing your credit score.

It takes time to build good credit.

It could take a few years of responsible spending habits and prompt payments to increase your credit score.

3

Building a Credit History

Many factors determine your credit score such as:

• your payment history,

• the length of time you have had credit,

• calculation of credit versus available income and

• many more factors.

4

Bad credit can keep you from buying a home, a car or financing your education.

This is why it is important to build a good credit history.

Building a Credit History

5

Here are some guidelines to follow when building credit:

Building a Credit History

• Start with only one credit card

• Charge only what you can afford

• Use only a small amount of available credit

• Pay your balance in-full and on time

• Carry a manageable balance

6

Start With One Credit Card Congratulations, you have been approved for your first credit card! Now you need to be disciplined in how you use it.

Many first-time credit card users apply for and accumulate a collection of credit cards.

Having too many credit cards can actually reduce your credit score because your debt to income ratio may be too high.

7

Start With One Credit Card

• Start off with just one credit card.

• Use it responsibly for 6 months to a year before applying for another credit card.

• Having too many credit cards encourages spending more than you should.

When you have too many cards, it can also be overwhelming to manage and keep track of all of the accounts.

8

Start With One Credit Card

Even if you were not approved or did not open an account, each inquiry will remain on your credit report up to two years.

You need to learn how to be responsible with credit before you begin applying for additional credit.

9

Directions:Circle the best answer to this question.

Question 1Why should you start building your credit with only one credit card?

Exercise #2: Credit Basics – Question 1

A. Because having too many credit cards encourages overspending

B. Because having too many credit cards can be overwhelming to manage

C. Because having too many credit cards can reduce your credit score

D. All of the above

10

ExplanationIn the previous question, all of the answers are correct.

You should only apply for and accept one credit card when you are trying to establish and build a credit history.

Having too many credit cards:

• encourages overspending,• can be overwhelming to manage and• can actually reduce your credit score.

11

Only Charge What You Can Afford

Once you have been approved for a credit card or loan, you need to be disciplined in how you use it.

A credit card or loan is not free money; it is borrowed money that you must pay back with interest.

You need to view a credit card or loan as a way to establish good credit and increase your credit score so you can qualify to buy a home, car or other major purchase in the future.

12

When establishing and building credit, you want to start slowly.

Make small charges on your credit card and pay the balance in full each month.

You do not want to use a credit card or loan to buy things that you cannot afford to pay cash for, but to begin building a good credit history and develop good spending habits.

Only Charge What You Can Afford

13

When you only charge what you can afford, this shows future lenders and creditors that you are a responsible borrower and it will make it easier to get more credit in the future.

The habit of only charging what you can afford will also help you avoid creating excessive debt.

Only Charge What You Can Afford

14

Only Use Small Amount Available Credit

When you begin to use your credit card, only use a small amount of the total available credit.

You do not want to max out the credit card, which means spending the entire credit limit.

Chances are you will not be able to pay the full balance and will have to carry a large balance creating a debt situation that can take years to pay off.

15

Financial experts suggest that you only utilize 30 percent of your credit limit and do not exceed 50 percent.

Individuals who max out their credit limit are viewed as high-risk by lenders and can significantly lower your credit score.

Maxing out a credit card is one of the most irresponsible ways to use credit.

Only Use Small Amount Available Credit

16

Pay Your Balance In-Full & On Time

The next guideline to follow when building credit is to pay off your credit card balance in-full and on the due date.

If you make a payment after the due date, you will be charged interest on the balance as well as an additional late fee.

17

Pay Your Balance In-Full & On Time

If you have a history of making late payments, this information will be submitted to the credit bureaus and will become a part of your credit history.

Therefore, while it is extremely important to pay your bill, it is equally important to pay it on time.

18

Pay Your Balance In-Full & On Time

If you only charge what you can afford to pay cash for, you should have no problem paying off the balance each month.

Lenders want to see that you are responsible in managing your debt.

A large part of your credit score is based on your promptness in paying your bills and how much of the balance you carry.

19

Carry a Manageable Balance If you are unable to pay off your credit card balance each month, make more than the minimum payment.

If you do not pay off your credit card balance each month, you will start accruing interest on the balance.

By only making the minimum payment, a large portion of the payment goes towards the interest and only a small portion will go towards the actual principal or balance.

20

Carry a Manageable Balance

This is how a lot of consumers get into debt.

They get in the habit of only paying the minimum balance and the interest starts accumulating on the account.

Once your balance becomes unmanageable, you can end up carrying the debt for years.

21

Carry a Manageable Balance

Carrying a credit card balance is not disastrous as long as you keep it manageable.

However, you always want to pay more than the minimum amount due so you can pay off your balance as quickly as possible.

22

Question 2Place an ‘X’ in the correct column to identify if the individual in each scenario is spending responsibly.

Exercise #2: Credit Basics – Question 2

RESPONSIBLE SPENDING HABITS

Yes No Scenario

Tyrone is having dinner with friends at a local restaurant. When the bill comes, Tyrone uses his credit card to pay the $150 tab even though he does not have the money in his checking account.

Suzanne is also having dinner with Tyrone and offers to pay her part of the bill with cash.

Damon offers to split the dinner tab with Tyrone because he has a large credit limit.

Beth suggests that everyone pay for their portion of the dinner bill.

23

Credit Basics Summary If you do not establish a good credit history, you will be unable to get a loan to purchase a house, a car or for other items or needs in the future.

Building good credit takes time and you must continue to maintain your credit in order to increase your credit rating and have access to lower interest rates.

24

Paying bills and making purchases are a big part of everyday life.

It is important that you understand that how you manage your money and make financial decisions will affect your ability to establish credit in the future.

Credit Basics Summary