pfm day1 creditintro - harvard law school · factors lenders consider when you apply for a loan....

1/19/2016

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Your CreditAn Introduction to Personal Credit

Objectives

By the end of this presentation you will have a understanding of: Credit Score

• Where can I find it?

• What is it?

• How do I get it?

Advantages of Good Credit

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Objectives

Tomorrow’s presentation will cover: Your Credit Report:

• Who compiles it

• What info is on it

Wise Credit Use:

• How to build a credit score

• How to repair a bad credit score

How your credit impacts your future

Credit Cards

What is credit?

“Banks [and Credit Unions] more frequently enable honest and industrious men of small and perhaps no capital to undertake and prosecute business to themselves and to the community.”

Alexander Hamilton,1790

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What is credit?

Credit allows you to buy something now

with an agreement that you’ll pay for it later.

What is credit?

Your Credit Score determines your eligibility for credit cards, home loans, student loans, apartment

rentals, and even certain jobs. It can mean the difference between a low or high interest rate.

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What is credit?

3 C’s of Credit: Character: How well do you honor your financial

obligations?

Capacity: How easy will it be for you to repay the debt?

Collateral: Will the loan be secured by something?

Types of Credit

From a lenders point of view, there are several types of credit:

• Unsecured: Credit Cards, Personal Loans

• Guaranteed: School Loans

• Secured: Backed by pledge of investments

• Collateral: Backed by homes, cars

• All extensions of credit must be legally disclosed

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Types of Credit

From a borrowers point of view, there are two main types of credit:

1. Loans allow you to borrow money for a major purchase and pay it back over a set amount of time.

2. Credit cards allow you to make purchases without immediately paying for them, up to a maximum credit limit. If you decide to pay the money back over time, you will pay interest until the borrowed amount is repaid. !BEWARE!

Find Your Credit Score

Get your free credit report at:

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Once per year, the government entitles all consumers to a free credit report from each of the three major credit bureaus:


Once per year, the government entitles all consumers to a free credit report from each of the three major credit bureaus. Your first report is free.

Subsequent reports cost $$$

Cancel membership to avoid the membership fee.

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Credit Score

A good credit score shows lenders that you have responsibly managed your debt and have consistently made timely payments on your accounts.

Your score is a 3-digit number determined by Fair Isaac Corporation (FICO).

Credit Score

Base FICO Scores range from 300-850.

Higher is better.

Every lender sets its own standards for what constitutes a “good” FICO score.

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Credit Score is determined by:

http://www.myfico.com/crediteducation/whatsinyourscore.aspx



Length of History:For particular groups, like people who have not been using credit long, the relative importance of these categories may be different.

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Payment History:DelinquenciesPublic records CollectionsBankruptciesForeclosuresLawsuitsLiensJudgments



Amounts Owed:How many accounts have balances:A larger number of accounts with amounts owed can indicate higher risk of over-extension.

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Credit Mix:1. What types of credit accounts you have2. How many types of credit accountsA closed account will still show up on your credit report, and its history will be considered by your FICO Scores.



New Credit:1. Length of time since credit report inquiries were made2. How long it's been since you opened a new account3. Whether you have a recent good credit history, having bounced back from past payment problems

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Your credit history is one of the most important factors lenders consider when you apply for a loan.

Good credit history makes it more likely

you’ll be approved for loans in the future.

A higher score saves you money.


Sarah and Sam walk into a car dealership together and buy the same car for $19,000. They each make a $4,000 cash down payment

They each borrow $15,000 for 5 years to finance the purchase

Sarah’s credit score is 750.

Sam’s credit score is 575.

How much will they pay

for the same car?

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How much will Sarah (750) pay for her car?

Credit Score Range Type Rate

725 to 850 A 2.99%

675 to 724 B 3.99%

600 to 674 C 4.99%

550 to 599 D 6.99%

Below 550 F 8.99%


How much will Sam (575) pay for his car?

Credit Score Range Type Rate

725 to 850 A 2.99%

675 to 724 B 3.99%

600 to 674 C 4.99%

550 to 599 D 6.99%

Below 550 F 8.99%

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How much will Sarah pay for her car?

Because Sarah has a good credit score, the interest rate on her car loan is 2.99%. The total cost of the $15,000 car loan will be $16,168 over 5 years. ($269/month)

How much will Sam pay for his car?

Because Sam has a poor credit score, the interest rate on his car loan is 6.99%. The total cost of the $15,000 car loan will be $17,817 over 5 years. ($297/month)

Sam will pay $1,649 more for the exact same car as Sarah’s.


Now imagine borrowing $300,000 mortgage loan for 30 years…

Your credit score can mean a difference of $100,000 in interest…

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…next up?

Tomorrow’s Credit presentation will cover: Your Credit Report:

• Who compiles it

• What info is on it

Wise Credit Use:

• How to build a credit score

• How to repair a bad credit score

How your credit impacts your future

Credit Cards

HOMEWORK:Get your FICO Credit Score

and TransUnion Credit Report

…next up?

Taxes & Insurance by Certified Financial Planners from The Colony Group Personal Taxes & Tax Planning

• The Basics, Gross Income, Adjustments

• Deductions, Exemptions

• Ways to Save

Risk Management & Personal Insurance

• Health, Auto, Property, Liability, Life, Disability

• Identity Theft

pfm day1 creditintro - harvard law school · factors lenders consider when you apply for a loan....

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