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It Make$ Cents!on 10 February 2015
Transcript of Credit
Keeping the Sky the Limit by Having your Credit Under it
Credit is when something is purchased with money that isn't yours to be paid back at a later date... Credit Cards and Loans are two examples of credit services
What is Credit?
So what's the cost of these borrowed money services? The Balance remaining at the end of the pay period is charged a hefty interest rate
The Hidden Costs
Hidden Costs like Activation Fees, Annual Fees, and Late Penalties all add up and can literally add thousands to your repayment outside of interest rates on loaned money
+Very helpful during emergencies
The Benefits of Credit Cards
+Some Cards have reward programs like cash back on purchases
+Proper use will build up your credit score
+Complete records of what you purchase can help with budgeting
+Can add organization to your budgeting and spending
Picking a Credit Card
You need to ask yourself several questions before applying for a credit card..
What is the card's interest rate?
What is the grace period before you have to make a payment?
Why is this card better than others?
Do you need to take out this line of credit?
Taking out too many credit cards and loans can hurt your score
Credit cards can get as low as 9% but you're more likely to start with a card with 15-25% interest or higher
Does it have cash back? Rewards? Annual fees? Membership advantages?
The 2009 CARD act requires a 21 day period to payback without interest charges, but cards can vary from there
Using a Credit Card
Before you apply for a credit card you need to understand the appropriate and responsible ways to use a credit card
Certain purchases are worth using credit, but for other purchases you may be setting yourself up for long-term problems
Will you be able to pay off all or most of the purchase at the end of the month?
Are you pushing your credit limit? Frequently maxing out your credit limit will negatively affect your score
Do you NEED to make this purchase?
So you've accumulated some credit debt
It can happen to even those who carefully track when and why they use their credit cards
The key is to quickly pay off the money you owe and avoid falling behind your payments
Examples of Repaying that
Payment: You have several options for repaying the money you borrowed. By always making sure to pay off more than the minimum payment you will get out of debt quicker and with a better score... Just look at these examples
Monthly Minimum payment:
Number of months to repay
Total Interest payment
If you were to make these monthly minimum payments on a $2,000 credit card loan at 19% interest, here is what your final bill would really look like
By only paying $40 a month it will take 4 times longer and cost you more than $1,500 than had you paid back $100 a month. You'd be paying almost as much as the loan you borrowed just to have been borrowed the money!
The average UW-La Crosse student graduates with $24,000 of debt...
Let's say you have this $24,000 debt in Stafford loans (6.8%) with a 10 year term.
-You'll have a monthly payment of roughly $276
-Assuming you make all these payments for the 10 years, you'll end up paying $9,143 in interest
-This $24,000 loan will in total cost you $33,143!
If you instead pay back $400 a month the costs will be...
-It will only take you 6.2 years, your total interest will be $5,413. bringing your total cost to $29,413 (and you'll have 3.8 years of debt free living!)
A credit report is a snapshot of your financial and borrowing history. It shows current and potential lenders whether you are a good risk to be lent money or not.
What's in your credit report?
Social Security Number
Date of Birth
Your FICO (Fair Issac Corp.) score is created by 3 different companies, Equifax, Experian, and TransUnion, and is a result of the combination of factors that were previously mentioned. Depending on what your credit history looks like you are given a number. There is no definitive cut-off for a good score, but typically below 600 is seen as poor, 600-720 is good, and 720-850 is excellent.
The higher your score means you are less of a risk, and therefore will receive better interest rates and are much more likely to be approved.
The Break Down
Accessing Your Report
You're allowed to see your report once a year for free from each of the 3 companies. It's best to stagger when you access them throughout the year.
If you want to see the actual score they require that you sign up for a trial membership at each site. Make sure to cancel this membership IMMEDIATELY after you see your score.
www.annualcreditreport.com is the ONLY site that allows you to see your report for free.
Active management is a key to building a good score!
Building Your Credit Score
There are numerous benefits to a good score
Benefits of a Good Score
Financial Aid Office:
2103 Centennial Hall
Things that affect your Score
Inquiries from applications for new credit
Number of Credit Cards
New Activity on accounts that were inactive
Newly listed public records (Bankruptcies, court judgements, and tax liens)
Newly listed collection company records
Changes in account status such as a missed payment
Why the score is affected
Missed payments in your history show that you don't always keep up with your debts and may have future troubles again.
When your report shows multiple applications for new credit or using credit lines that were inactive, it is seen as a sign of being financially unstable.
If you find errors on your credit report, you want to contact that agency and correct the dispute as soon as possible!
To dispute an error you can contact the agency with the error online, over the phone, or through the mail and ask that the discrepancy be removed.
Errors can cause you to be denied for a loan or credit application and can hurt your score until you get it resolved.
The Bad News
If you have negative information on your report that is yours, it will be there for 7 years.
After 7 years you can contact the agencies and have the information removed from your report and increase your score!
The less stable, the higher the risk, and the more likely you are to have a high interest rate or be flat out denied
Start building your credit early
Starting with a secured credit card is a safe way to begin building your score up. A secured card is tied in with a bank account as collateral and reduces the risk on the lenders part.
Pay your bills on time
Showing that you are responsible with the money you borrow will make banks trust you more, and increase your score
Even one missed payment will ding your score
Reduce debt-to-limit ratio
The Debt-to-Limit ratio is the total debt you have compared to the amount your credit card allows you to have. If you are constantly close to 1:1 ratio, your score will drop
Keep your oldest lines of credit
Credit agencies like to see that you are able to maintain accounts for long periods of time as it is a sign of stability
Pay off your debts early
You won't face any penalties for paying off debts early, and the money you save in interest is money in your pocket!
Don't let your score slide
A score that takes a lifetime to build can be destroyed much quicker. Defaulting on loans and debts, bankruptcy, and other negative actions will hurt your score, and rebuilding a score doesn't happen over night.
Make good purchasing decisions, both on credit cards and with loans, and understand the repercussions of being unable to handle the responsibility
Hesitate to increase credit limits
Just because you are offered a credit limit increase doesn't mean you need it. Unless you never max out your cards and are stable you are only increasing your risk of getting into trouble
Don't become idle and lose track of where you stand. Stay on top of your financial life and enjoy the benefits for your life.
As we've discussed, a good score is more likely to get you approved for credit, but it can do more than that for you...
-Better rates on loans and credit cards. Doesn't 9% APR sound much better than 25%?
-When applying for housing or an apartment the landlord will check your credit history to see if you miss payments
-When applying for jobs employers check credit scores and use it to see if the potential employee is responsible or inconsistent
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If you are a person who struggles with credit and managing your personal finances you can contact many services that will help you fix your problems, such as....