PFM Day1 CreditIntro - Harvard Law School · factors lenders consider when you apply for a loan....
Transcript of PFM Day1 CreditIntro - Harvard Law School · factors lenders consider when you apply for a loan....
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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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Find Your Credit Score
Once per year, the government entitles all consumers to a free credit report from each of the three major credit bureaus:
Find Your Credit Score
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
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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Credit Score is determined by:
http://www.myfico.com/crediteducation/whatsinyourscore.aspx
Payment History:DelinquenciesPublic records CollectionsBankruptciesForeclosuresLawsuitsLiensJudgments
Credit Score is determined by:
http://www.myfico.com/crediteducation/whatsinyourscore.aspx
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 Score is determined by:
http://www.myfico.com/crediteducation/whatsinyourscore.aspx
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.
Credit Score is determined by:
http://www.myfico.com/crediteducation/whatsinyourscore.aspx
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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Advantages of Good Credit
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.
Advantages of Good Credit
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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Advantages of Good Credit
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%
Advantages of Good Credit
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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Advantages of Good Credit
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.
Advantages of Good Credit
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