Credit

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CreditWelcome to Ally Wallet Wise

We make decisions about money every day, but sometimes it’s hard to know if we’re doing so wisely.

Issues such as credit, household budgets, banking and investing, and buying and insuring a car can be challenging. That’s where Ally Wallet Wise can help. We’ve created the curriculum to help take the mystery out of these important topics, and provide answers that can help you make good decisions about your money.

Ally Wallet Wise is divided into four different workbooks: Budgeting, Banking & Investing, Credit and Automotive. In this workbook you will learn more about Credit including how to apply for and maintain good credit.

This workbook can be used in a number of helpful ways:

• As an introduction to those who have never applied for credit

• As a refresher for those who want to reacquaint themselves with the many aspects of these important financial services topics

• As a self-study guidebook

Throughout this workbook you will find:

• Key Terms

• Exercises that help explain specific concepts

• Review Questions

• Helpful Resources – numbers to call and websites to visit for more information

• Stories that illustrate how the information in these pages can impact all of us, every day

If you learn just one way to make better decisions about your money, this workbook will have been a success. We hope that by reading and using this workbook, you will be more knowledgeable and better prepared when seeking credit. Also, visit Allywalletwise.com for additional resources and information.

Note: The examples used in this workbook are for illustration only and may not accurately reflect any available transactions. This workbook is a general overview of points and principles you may want to consider as you build your money management skills. Only you can decide what is best for you. Ally makes no representations that this workbook is appropriate for your situation, and Ally takes no responsibility for the decisions you make. This workbook does not offer tax, legal or investment advice. You should consult a professional advisor for advice on those topics.

Credit – making it work for youIn this workbook, you will learn about different types of consumer credit, how to use credit responsibly and the importance of maintaining good credit history. You will also learn about the various resources available to help you better understand credit.

More Than One MeaningThe word credit can be used in two different ways:

1. Credit is a process involving a consumer and a provider of credit, allowing a consumer to buy now and pay later. You may be looking to buy something that you really need, but don’t have the cash to pay for the purchase at that time.

2. Credit also refers to a person’s record relating to paying bills when they are due. This is also referred to as “creditworthiness.”

The Importance of Good CreditIt is important to establish a good credit history, primarily by making your payments on time. Your creditworthiness will affect not only your ability to borrow money or purchase goods and services on credit, but also:

Your Employment• Potential employers may require a credit report

• Poor credit could mean you are not offered a job

Your Living Accommodations• Landlords regularly request credit information

on applicants seeking apartments

• Landlords do not want tenants who do not pay their bills

Your Finance Rate• Individuals with better credit histories can

generally negotiate lower finance rates for loans than those who are greater credit risks

Your Convenience• Renting a car, making hotel reservations and

shopping online are much easier if you have a credit card

• Credit cards may be difficult to obtain if you have bad credit

Why You Need a Credit HistoryIf you have no credit history, creditors have a limited basis on which to make a decision about whether or not to give you credit – particularly if there’s a major purchase such as a car or home involved. You should look for ways to establish good credit early on, such as obtaining a secured credit card and only spending what you can afford.

Did You Know?

Payday loans can be a very expensive form of credit. Here’s how they work:

1. A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing.

2. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday.

3. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically.

4. The loan amount is debited on the person’s next payday.

The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time

the same loan is extended or “rolled over.” In some cases, the roll-over fees can result in finance charges and excessive annual percentage rates of more

than 300 percent.

(This information was taken from the Federal Trade Commission (FTC) Website. www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm. The

FTC works to prevent fraudulent, deceptive and unfair business practices and provides information to help consumers spot, stop and avoid them. To

file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP)

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Types of credit

Credit cards

To make wise choices, it pays to understand the types of credit available to consumers and how you can determine which may be right for you.

Since credit cards, a form of revolving credit, are among the most popular and widely available forms of credit for consumers, we’ll deal with them in more detail here. You may be familiar with credit cards, but do you know how they work and why?

There are many different types of credit. The three common types are:

• Short-Term Credit: This is a loan that is often paid back in less than a year. An example of this is a payday loan or a small loan from a credit union or a small loan company.

A credit card is a payment device issued by a financial company that allows you to make a purchase when you don’t have cash on hand. Borrowing limits for the card are pre-set by the issuing financial institution, based on the cardholder’s credit rating and other factors such as employment or educational status.

When you make a purchase with a credit card, you agree to pay the card issuer the amount owed under the terms of the card. Your credit card company must mail or deliver your credit card bill at least 21 days before your payment is due. For many cards, you have to pay an annual percentage rate on purchases if you carry over a balance. This occurs when you do not repay the full amount charged on the credit card.

While credit cards are convenient for buying things when you do not have cash on hand, they can be expensive if you charge more than you can afford to pay back. Try to avoid making purchases on your credit card if you will be unable to pay the balance in full at the end of the billing period.

In addition to mailing your bill in a timely manner, under the Card Accountability, Responsibility, and

• Installment Credit: This is a loan you agree to pay back at regular intervals, such as monthly installments. An example of this would be a car loan or a mortgage.

• Revolving Credit: This is credit available up to a pre-determined limit so long as regular payments are made as required. An example of this is a credit card.

Disclosure (CARD) Act of 2009, credit card companies are also required to:

• Offernewprotectionsfor college students and young adults. This includes a requirement that card issuers and universities disclose agreements for marketing or distribution of credit cards to students. Potential card holders who are under 21 years of age need to show that they are able to make payments, or they will need a co-signer, such as a parent, to open a credit card account.

• Eliminatetwo-cycle(double-cycle)billing.Thismeans credit card companies can only impose interest charges on balances in the current billing cycle.

• Createcontracttermsthataredisclosedinlanguage that is easy to see and understand. This helps you avoid unnecessary costs and manage your finances better.

For more information, visit: www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm

How to evaluate a credit card offer

Key terms that apply to credit

Consider the following when evaluating a credit card offer:

• Annual percentage rate (APR) – This is the cost of credit, expressed as a yearly rate.

• Periodic rate – This is the interest rate used to figure the finance charge on your balance.

• Annual fee – Amount you pay to be a cardholder. Similar to a membership fee.

• Grace period – This is the number of days you

In any financial transaction, it’s important to understand key terms. This is the best way to ensure you make a wise financial decision that is right for you.

Capacity: Your ability to pay your debts as they come due.

Charge-Off: When a creditor writes off the account balance as a “bad debt.”

Collateral: An asset pledged to the provider of credit until the credit obligation is paid. Example: A home or car may be used as collateral to secure a loan for that home or car.

Co-signer (co-buyer/co-lessee): A person who assumes equal responsibility for a contract or lease agreement.

Creditor: A person or organization that regularly extends credit that is subject to a finance charge and to whom the credit obligation is initially payable on the face of the contract.

Credit Report: A report about you and your payment history, prepared and maintained by a credit reporting agency.

Credit Reporting Agency: A firm that collects, sorts and sells information about an individual’s credit history.

Credit Score: A numerical score that reflects – at a point in time – what your past and current credit usage predicts about your future credit performance. The better your history of credit, the higher your score.

have to pay your bill before finance charges begin to add up.

• Finance charges – Most lenders calculate finance charges using an average daily account balance. Look for offers that use an adjustable balance that subtracts your payment from your beginning balance.

• Other fees – Some cards charge a fee when you get a cash advance, make a late payment or exceed your credit limit.

Lien: A legal claim on ownership stemming from a credit obligation.

Permissible Purpose: The legally acceptable purpose(s) a creditor or organization has to obtain a person’s credit report. Example: When you apply for credit, you are giving your potential creditor the legal right to obtain your credit report.

Repossess: In the event of non-payment of a credit obligation, a creditor’s legal right to take the asset you have pledged as collateral and sell it to pay off the credit obligation.

When I was a freshman in college I received many offers from credit card companies to open an account. I obtained three credit cards and in return, the credit card companies gave me free things like t-shirts and water bottles. Unfortunately, I maxed out my credit card limits and graduated with $5,000 of debt.

Now, students under 21 need to show they are able to make payments or have a co-signer before they can get a credit card. I wish this law was in place when I was 18. I may have only been offered the amount of credit I could reasonably pay or a co-signer like my parents would have made my payments for me if I was unable to do so.

Becoming Wallet Wise

Sometimes it may seem like credit card offers are everywhere – in our e-mail, on TV, in the mail. How can you tell which credit card is right for you?

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When you fill out and sign a credit application, you are giving permission to the creditor to obtain a copy of your credit report. This is an example of when a creditor has a permissible purpose to obtain your credit report.

What’s a Credit Report?

A credit report is a document that contains information about you and your payment history. It’s collected and organized by a credit reporting agency and is available to those who are considering granting you credit, which can be in the form of a credit card, mortgage, car loan or many other financial instruments.

There are three major credit reporting agencies: Equifax, Experian and TransUnion. These credit reporting agencies collect and sort the information obtained from creditors.

How Credit Report Information Is Collected

Each time you are granted credit or make a payment on an account, that information is gathered by Equifax, Experian and TransUnion. Some of the information collected includes the type of account you have – such as revolving or installment credit – and how often you pay.

Next, the credit reporting agencies package and sell the information in the form of a credit report. Your current and potential creditors can then buy the credit report and evaluate whether or not to approve or deny you credit.

What’s in Your Credit Report?

Your credit report provides a lot of useful information, including answers to such questions as: Do you pay your bills on time? How many credit obligations (such as credit cards and loans) do you have? What is the total amount of credit that has been extended to you?

Generally, there are six types of information that your credit report reflects:

1. Personal identification information – Includes your name, spouse’s name, Social Security Number, current and previous

addresses and birth date. This information comes from your past credit applications, so it is important to completely and honestly fill out forms every time you apply for credit.

2. Employment information – Includes current and previous employers.

3. Public records information – Includes bankruptcies, tax liens and monetary judgments and – in some cases – overdue child support.

4. Adverse/collection account information – This reflects any non-payment of a debt, supplied by either the original creditor or a collection agency (an example would be a situation when a utility bill was left unpaid).

5. Credit account information – This lists each of your accounts with banks, stores, credit card issuers and/or other credit sources. For each account, the information about date opened, amount, balance, monthly payment and payment pattern going back several years will be listed. Most negative information may be kept for as many as seven years.

6. Inquiry information – This is the record of who requested and obtained copies of your credit report, usually within the past two years.

Understanding your credit report and credit scoreWhether you want to finance or lease a vehicle, obtain a credit card or buy a home, the credit application you fill out is the first step in the process.

Did You Know?

• YourcreditreportDOESNOTcontaincertain personal information such as your race, religious preference, medical history, personal lifestyle, personal habits, social life, names of friends or relatives, political preference or criminal record. It also does not contain information about your checking or savings accounts, or major purchases paid with cash or check.

• TheEqualCreditOpportunityActprohibits discrimination related to credit because of your sex, race, color, marital status, religion, national origin or age.

It also prohibits discrimination related to credit if you are receiving public assistance or if you have exercised your rights under the Federal Consumer Credit Protection Act. For more information visit: www.ftc.gov/bcp/edu/pubs/consumer/credit/cre15.shtm

Get a copy of your credit report every 12 months – free! It’s a good idea to review your credit report on a regular basis. Making sure that your credit report doesn’t include any credit cards or loans that you didn’t apply for is your best defense against identity theft. Also, checking your report helps ensure that your credit score is being calculated on the basis of accurate information.

You can request a free credit report once every 12 months from each of the nationwide consumer credit reporting agencies. If you’re really focused on monitoring your credit, you may consider ordering one report every four months (by staggering your use of each credit company’s free report policy). Remember that the three major credit bureaus are different private companies and while they may have much in common, they are separate entities. Therefore, it’s important to look at your credit reports from all three agencies – they may differ from each other in important ways.

For information on how to request your report, go to www.annualcreditreport.com or call toll-free (877) 322-8228. Important note: While the credit report is free, you have to pay a fee to obtain your credit score.

Get a copy of your credit report whenever you want – for a feeIf you want to receive a credit report more frequently than the free one you can get once a year, you can – for a fee – obtain a copy of your credit report from any of the three major credit reporting agencies listed below. Call them toll-free or visit their websites for more information.

Equifax 800-685-1111 • equifax.com

Experian 888-397-3742 • experian.com

TransUnion LLC 800-888-4213 • transunion.com

*Answers: 1. Yes, 2. Yes, 3. Yes,

4. Yes, 5. No

Mistakes happen – but you can correct themIf you find mistakes on your credit report, take action immediately. Contact the credit reporting agency with the following information:

• Your name and address

• The item(s) that is (are) incorrect

• Provide documents to support your position

• Request that the error be corrected

The credit reporting agency must look into your request within a reasonable period of time (usually 30 days) and delete any information it can’t verify. For more information on the steps you can take to correct your credit and understand your rights, visit www.consumerfinance.gov.

If you dispute information in your credit report and the investigation does not resolve the dispute, you may add a consumer statement to your credit report. This statement is your personal explanation for errors or adverse items on your credit report. It should be 100 words or less and sent directly to the credit reporting agency in question.

Understanding Your Credit Report and Credit Score (cont.)

Credit Report ExerciseTest your Credit Report IQ. Answer yes or no regarding what is – or is not – in your credit report:*

1. Late payment on your furniture loan

M Yes M No

2. Employment information

M Yes M No

3. On-time payments made on your department store credit card

M Yes M No

4. Your birth date

M Yes M No

5. Your race

M Yes M No

When I got a copy of my credit report I saw an error. I thought: That’s it, it’s all over. I’ll never be able to get this fixed. But I was wrong. I was able to get the documents and show the credit rating agency that a mistake had been made. I didn’t need to hire a lawyer or spend any money.

It took a little effort on my part, but it was worth it to have the error corrected and know that my credit report is accurate.

Becoming Wallet Wise

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Identity theft

Credit monitoring services

If you find the errors on your credit report are more than mistakes and are the result of someone using your information to obtain credit, you may be the victim of identity theft.

There are commercial services that, for a fee, will monitor your credit reports and alert you to changes to your accounts.

What is it? Identity theft is a fraud that is committed or attempted using another person’s identifying information without authority. Often, identity thieves use another person’s information to get credit, such as credit cards and mortgages and other loans.

Who does it? Identity theft can be committed by professional thieves, in sophisticated operations, or it can be committed by someone who knows you and has access to your personal information.

How to prevent it? You can take steps to prevent identity theft by safeguarding your personal information and keeping your important financial papers (including bills) in a safe place. If you no longer need documents that have your personal information, shred the papers before putting them in the trash. You can monitor your credit on a regular basis for signs of fraud or you can pay for a service that will do this monitoring for you. You can also follow up promptly if anything in your financial life seems amiss such as receiving bills for credit cards you

Prices and services vary widely. Many of the services only monitor one of the three major consumer reporting companies.

If you’re considering signing up for a service, be sure you understand what it is you will get for your money. Also, check out the company with your local Better Business Bureau, consumer protection agency and state Attorney General to see if they have any complaints on file.

didn’t think you had or calls from collections agencies. These may be signs your identity has been stolen.

If you are a victim of identity theft, what can you do? The Federal Trade Commission (FTC) suggests these immediate steps:

1. Place a fraud alert on your credit reports and review your credit reports.

2. Close the accounts that you know, or believe, have been tampered with or opened fraudulently.

3. File a report with your local police or the police in the community where the identity theft took place.

4. File a complaint with the FTC.

For more information on identity theft, including details on how to resolve fraud, see the FTC’s website for the latest information and tips: www.ftc.gov/bcp/edu/pubs/consumer/idtheft/idt04.shtm#Identity

A credit score is a number that reflects the information in your credit report. The score is based on your credit history and helps creditors predict how likely it is that you will repay a loan and make payments when they are due. Creditors may use credit scores in deciding whether to grant you credit, what terms you are offered or the rate you will pay on a loan. You also may hear a credit score referred to as a “credit rating” or as a “ FICO®” score. In general, when it comes to borrowing money, the higher your credit score, the more likely you are to be viewed as a better credit risk. Those with higher credit scores are more likely to get a loan or credit card with a low interest rate and low fees.

Explanation of FICO® ScoreCredit scores are sometimes called FICO scores. This is a commonly used credit scoring method that was developed by Fair Isaac Corporation in 1956. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion and

Equifax. Each score is based on information the credit bureau keeps on file about you. The range for FICO credit scores is between 300 and 850, with 850 being the highest score you can receive.

How to get on the right track

What is a credit score?

Now that you understand what credit is, the information on your credit report and what activity can impact your credit score, here are some tips on how to manage credit denial and improve your credit worthiness.

If You Are Denied Credit First, be sure to find out why. That often means asking for an explanation when you receive notification. It may be something simple like not having enough income or living long enough in the community or it may be that you have too many debts.

Under the Equal Credit Opportunity Act, you must be notified within 30 days after you complete your application regarding whether your request for credit has been approved or not. In cases where credit is denied, you must be notified in writing. Specific reasons must be given or you must be told of your right to ask for specific reasons.

Weak Credit on Your Own? A Co-signer May HelpA creditor may allow you to have a co-signer (such as a spouse or parent) sign the finance contract with you in order to make up any credit weakness. In this case, the creditor will evaluate your co-signer’s and your creditworthiness both individually and combined, ideally leading to you being able to obtain the credit you initially desired.

Should You Be a Co-signer? A co-signer needs to know that he/she assumes equal responsibility for the contract, and the account history can be reflected on the co-signer’s credit history as well.

Your credit scoreAccording to Fair Isaac corporation, your FICO® credit score is based on five factors. Here is how much each factor contributes to the overall score:

This information is provided by Fair Isaac Corporation, and is used with permission. Copyright 2001-2011 Fair Isaac Corporation. All rights reserved. FICO is a registered trademark of Fair Isaac Corporation. Further use, reproduction, or distribution is governed by the FICO Copyright Usage Requirements, which can be found at www.fico.com.

Paymenthistory

10%10%15%30%35%

Amountsowed

Lengthof credithistory

Newcredit

Typesof creditused

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When my boyfriend wanted a new truck, he asked me to cosign for him on the loan because his credit was not good. I did it, but now I regret it.

After my boyfriend and I broke up, he stopped paying on the loan and now the bank has taken action to collect from me because I am the co-signer.

I wish I had thought about the consequences of taking responsibility for a loan like that.

Becoming Wallet Wise

Tips for establishing good credit If you are a victim of identity theft, what can you do? The Federal Trade Commission (FTC) suggests these immediate steps:

1. Pay your bills on time. You are considered a good credit risk if you have a history of paying your bills on time.

2. Have a small amount of total debt. Make sure your total debt is not too large. If a large portion of your income each month is already committed to paying off other credit, creditors may be hesitant to extend you additional credit.

3. Don’t have a lot of open credit. Excess open credit can result from having too many credit cards. While you may think having a lot of credit cards with high limits is a sign that you have good credit, creditors may look on your available credit as being a potential debt. In other words, creditors may believe too much open credit may lead you to overextend yourself in the future.

4. Showcase you are stable and responsible. Creditors look for signs of stability and responsibility. Numerous changes in address and/or employment may hurt your rating.

5. Only use a small amount of your total available credit. Creditors like to see that you use your credit with restraint – using some but not “maxing out” your cards.

If you do find yourself slipping into serious financial difficulty, take action immediately to fix the problem.

First, contact your creditors and see what you can do to get their help in resolving the problem. You can explain your situation and ask for a reduced or delayed payment plan. By reaching out to your creditors, you can let them know you are willing to pay the obligations. When you do this, be sure you don’t make promises you can’t keep. Most creditors will work with you if you give them a realistic payment plan and follow through as promised.

Then, seek outside help to solve your immediate financial difficulties and help you get on the right path to avoid future problems. Find a professional nonprofit credit counseling service to help you organize your current finances,

set up a realistic budget and better understand the wise use of credit.

• If you contact the National Foundation for Credit Counseling – www.nfcc.org or (800) 388-2227 – they can help you find the Consumer Credit Counseling Service (CCCS) closest to you.

• The CCCS is a nonprofit organization that offers confidential counseling and helps create a debt management plan for a small fee.

Beware of Certain Fee-Based Credit Repair ClinicsWhen you find yourself in credit-related trouble, it can feel overwhelming. Often you wish you could find one easy solution. That’s the moment when credit counseling companies may gain your interest. While there are nonprofit companies out there that exist to help you solve your credit problems, there are many others that are not legitimate or may charge high and unnecessary fees that appear to go toward fixing your problems, but in reality do little more than to run up additional bills.

A Pitfall to AvoidIf you are faced with extreme financial burdens and consider filing for bankruptcy, pursue this option only if you have no other choice. Remember, bankruptcies and charge-offs – when a creditor writes off the amount you owe because of your inability to pay – are viewed negatively on your credit reports.

Review credit basicsAnswer the following questions as a review on credit.*

1. Why is it important to maintain a good credit history?

a. Because your family will inherit it, and it’s important to plan for their future

b. Because anyone can access your credit history at any time to learn about you

c. Because good credit history can generally help you negotiate for a lower finance rate

d. Consumer protection laws state it is your responsibility to maintain good credit

2. What might happen if you fail to make several payments on purchases that you made a year ago?

a. The item(s) can be taken away from you, if the item(s) secured the credit obligation you took on when you bought the items

b. Negative information may be added to your credit report

c. You could be denied credit in the future

d. All of the above

3. How can you find what your credit history looks like?

a. Contact a credit reporting agency

b Ask a private investigator to find out all they can about you

c. Look yourself up on the Internet

d. Check your family’s credit history

4. Which of the following is not something a creditor will look at before granting you credit?

a. If you pay your bills on time

b. Where you live and your living arrangements

c. How many credit obligations you have

d. How much you owe on all your accounts

*Answers: 1. c, 2. d, 3. a, 4 . b, 5. a, 6. b, 7. b, 8. a, 9. b, 10. b

5. If you dispute information on your credit report, you can add a consumer statement explaining the circumstances.

a. True

b. False

6. If you can’t make your car payment, it’s best to wait until the next month to catch up on the payments.

a. True

b. False

7. If you are denied credit, the creditor is not legally required to explain why.

a. True

b. False

8. Students under 21 need to show they are able to make payments or have a co-signer before they can get a credit card.

a. True

b. False

9. Your credit report is available to anyone, regardless of the reason.

a. True

b. False

10. A creditor can deny you credit based on your marital status.

a. True

b. False

Consumer resourcesIf you’re having trouble repairing your credit, below are a few government resources that might be able to help:

Federal Trade Commission Information on Consumer Creditwww.ftc.gov/bcp/menus/consumer/credit.shtm

Federal Reserve Board’s Consumer Handbook to Credit Protection Lawswww.federalreserve.gov/creditcard/

National Credit Union Administration’s Credit Education Resourceswww.ncua.gov/Resources/CreditUnionDevelopment/ResourceConnection/FinancialEducation.aspx

U.S. Financial Literacy and Education Commissionwww.mymoney.gov/

U.S. Department of Treasurywww.controlyourcredit.gov/

There are state and federal laws that regulate credit cards and other forms of consumer credit. Here are a few helpful sites to learn more:

The Truth in Lending Act:Requires creditors to give you written disclosures of important terms of the credit agreement. www.fdic.gov/regulations/laws/rules/6500-200.html

Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009:Bans unfair rate increases and fee traps. www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)This law established The Bureau of Consumer Financial Protection (CFPB), an independent bureau within the Federal Reserve System. CFPB empowers consumers with the information needed to make informed financial decisions. www.consumerfinance.gov/

Wallet Wise © 2011 Ally Financial, Inc. Ally Bank is a member FDIC. Equal Housing Lender.