credit. the reputation one has built in his or her dependability in regard to paying back borrowed...
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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