Credit

CREDIT DEFINITIONS

CreditTrust given to another person for future payment of a loan, credit card balance, etc.

CreditorA person or company to whom a debt is owed.

Slide 1 – Credit Definitions Lesson Reference: Credit, Activity 1 – Handout 1 2

The c’s of creditcharacter—will you repay the debt?From your credit history, does it look like you

possess the honesty and reliability to pay credit debts?

■ Have you used credit before?■ Do you pay your bills on time?■ Do you have a good credit report?■ Can you provide character references?■ How long have you lived at your present

address?■ How long have you been at your present

job?

capital—what if you don’t repay the debt?

Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if incomeis unavailable?

■ What property do you own that can secure the loan?

■ Do you have a savings account?■ Do you have investments to use as

collateral?

capacity—can you repay the debt?◦Have you been working regularly in an

occupation that is likely to provide enough income to support your credit use?

◦ Do you have a steady job? What is your salary?

◦ How many other loan payments do you have?

◦ What are your current living expenses? What are your current debts?

◦ How many dependents do you have?

WHEN TO USE CREDIT

Can you describe a situation when

it is a good time to use credit and

when it is NOT a good time to use

credit?

Slide 3 – When to Use Credit Lesson Reference: Credit, Activity 1 – Handout 26

QUESTIONS TO ASK BEFORE USING CREDIT

1.2.3.4.5.6.7.

Slide 4 – Questions to Ask Lesson Reference: Credit, Activity 1 – Handout 37

Advantages and disadvantagesWhat are some advantages of

credit?

What are some disadvantages of credit?

Consolidating debt

If you have high interest credit card or loan debt, it can make sense to take out a consolidation loan at a lower interest rate.

Good Debt vs. Bad debtDon’t write thisGood debt is a loan to buy

something that will usually grow in value such as your home, cottage or investments.

Bad debt is a loan for a depreciating asset such as an SUV, a motorcycle or a trip.

WHAT IS A CREDIT SCORE?

WHAT IS A CREDIT SCORE?• A credit score is a number that helps a

lender predict how likely an individual is to repay a loan, or make credit payments on time.

• A credit score is a number that changes as the elements in a credit report change.

• FICO® scores, one of the most common credit scoring systems, vary between 350 and 850.

• VantageScoreSM, a new credit scoring system developed by the three credit bureaus, ranges from 501-990.

Slide 1 – What Is a Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 112

WHAT MAKES UP A TYPICAL CREDIT SCORE?

Slide 2 – What Makes Up a Typical Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 213

Source: Fair Isaac and Consumer Federation of America, 2005

IMPROVING YOUR CREDIT SCORE

• Pay bills on time.• Get current and stay current.• Don’t open a lot of new accounts too

rapidly.• Correct mistakes.• Shop for loan rates within a focused

period of time.• Keep balances low on revolving credit.• Pay off debt.• Check your credit report.

Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 214

Slide 1 – Types of Credit Lesson Reference: Credit, Activity 3 – Handout 1

TYPES OF CREDIT Cash CreditSales CreditSecured Credit

Revolving CreditRetail stores

• Financial institutions that issue credit cards

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Single Payment Credit-Utility companies, medical services

• Some retail businesses

Installment Credit-appliance dealers

Slide 2 - Sources of Credit Lesson Reference: Credit, Activity 3 – Overhead 1

SOURCES OF CREDIT

What are other sources of credit?

What sources of credit should be avoided? Why?

Banks

Mortgage & Loan Companies

RetailStores

FinanceCompanies

Credit Unions & Caisses Populaires

Internet Stores

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QUESTIONS TO ASK WHEN APPLYING FOR CREDIT

QUESTIONS TO ASK WHEN APPLYING FOR CREDIT1. What is the annual fee? Amount charged to use

the card or credit2. What is the annual percentage rate (APR)?ex.

10% APR, you will pay $10 per $100 you borrow.3. When are payments due?4. What is the minimum payment required each

month?5. Is there a grace period?6. Are there other fees associated with the credit,

such as minimum finance charges?7. What is the credit limit?8. What are the penalties for late or missed

payments?9. What are the terms and conditions of the

credit? What else is included in the fine print?

Slide 6 – Questions to Ask Lesson Reference: Credit, Activity 3 – Handout 518

handoutShould they use credit?

Slide 1 – Debt-to-Income Thermometer Lesson Reference: Credit, Activity 4 – Overhead 1

DEBT-TO-INCOME THERMOMETER

20

Rulenever borrow more than 20% of

your yearly net income■ If you earn $400 a month after

taxes, then your net income inone year is:12 x $400 = $4,800■ Calculate 20% of your annual net

income to find your safedebt load.$4,800 x 20% = $960

HandoutHow much can they safely

carry?

Credit report

Request Your Free Credit Report Once Every 12 Months

Consumers are entitled to a free copy of their credit report by mail every 12 months from Equifax and TransUnion.

Review Your Credit Report

Check the last page of your report for instructions for claim disputes.

Contact the credit bureau and report the error immediately.

Put it in writing – if the issue remains unresolved, provide a letter of explanation and request that it become part of your report.

How to read a credit report?Credit reportCredit reports activity – pg. 19

Jan Smith is considering a loan to finance her college education. She currently owes money on several charge accounts and credit cards.

What actions would you recommend?

Slide 5 - Things to Establish Good Credit Lesson Reference: Credit, Activity 4 – Overhead 3

THINGS TO DO TO ESTABLISHAND MAINTAIN GOOD CREDIT

What can everyone do to establish and maintain good credit?

1. Pay all bills on time.

2. Avoid late fees.

3.

4.

5.

6.

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