Credit Module

Credit Reading

WHAT IS CREDIT?
In the financial world, credit refers to an arrangement that defers payment for borrowed
money or purchased items until later. In other words, you get money or stuff now, and you
agree to pay it back at a later time. When you buy or borrow on credit, you generally end up
paying back more than the original amount in interest. How much interest you pay depends
on your credit history (your record of paying bills such as rent and utilities and handling credit
in the past). The percentage of the debt that you are charged on top of the original amount is
called interest and it is determined by a percentage called an interest rate.

Learning how credit works is the key to building an outstanding credit history.

CREDIT CARDS
When you use a credit card, it’s the same as a loan. The credit card company is lending you
money and charging you fees (interest) to borrow that money. For instance, let’s say you
borrow $1,000 and your interest rate is 25%. If you don’t pay the loan off until a year later, you
would owe $1,250.

It is all about convenience. Credit cards are convenient and most businesses accept them.
If you do not have a credit history, the credit cards for which you are initially approved will
charge higher interest rates and higher fees; they will have lower spending limits. They have
no way of knowing how trustworthy you are since there is no past information about whether
or not you pay back your loans. That is why it is important to remain free of credit card debt,
otherwise known as “carrying a balance” on your credit card.

Credit cards can be convenient tools for charging clothes and groceries, as long as you pay the
bills in full each month. The best way to manage a credit card is to be the company’s worst
customer. Many Americans carry balances on their credit cards from month to month, and
that is how the companies make money. If you pay your credit card bills in full each month
by properly planning and budgeting for your purchases, you will benefit yourself by building a
credit history and not paying interest.

Credit cards can be a useful financial tool or they can be a debt trap. Use credit cards only to
your advantage. That means avoiding credit card debt like the plague! Second, use credit cards
to build your credit rating. You can only do that by charging money on your credit card and
paying it off in full every month.

START WITH A DEBIT CARD

Credit cards used improperly will have a negative impact on your finances. Before you get a
credit card, start off with a low-cost debit card.

A debit card helps you learn how to manage “plastic money” safely. And unlike a credit card,
everyone with a bank account qualifies for a debit card. You are not required to show proof of
income, provide a social security number, or submit to a credit check. Debit cards are accepted
almost everywhere a credit card is accepted.

Debit cards use the money stored in your checking account so before you use a debit card you
should have a positive cash balance in your account. It is impossible to incur late fees (which
credit card users often face) because it is like spending cash. Some financial institutions do not

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approve purchases if the purchase total is greater than the money you have in the account. If
you attempt to do so, your card will be “declined” at the point of purchase. With such financial
institutions you do not need to worry about over-the-limit (overdraft) charges. Other financial
institutions do allow you to spend a bit over the amount you have available and will charge you
a fee. This is not unlike bouncing a check and you should avoid doing this by keeping an eye on
your account balance and doing proper budgeting. These fees can be very high, often over $20,
and some banks will charge it for every day that the account is overdrawn.

Some financial institutions offer a line of credit, often around $500 if you spend your entire
checking account balance - at which point the account will be similar to a credit card until that
balance (and interest) is paid. This may also incur a fee but is typically lower than an overdraft
fee. You will need to verify which type of card and the checking account features your financial
institution provides you.

CREDIT HISTORY
Your credit standing is like a school report card. It grades you on how well you pay back money
you borrow. Three organizations (called credit bureaus) rate your credit each month and assign
you a grade, which is called a “credit score.” Lenders report the details of all your loans to
the credit bureaus. If you always pay back things you borrow, you get an A. If you pay your
NO CREDIT HISTORY?
lenders late, you get a C. And if you don’t ever pay them back, you get an F. Your credit score If you don’t have a credit history yet:
determines how easy it will be for you to borrow funds. First, save 6 months’ worth of your
bills, have a working budget, and
have the ability to control your
CREDIT REPORTS
spending. Then get a credit card, use
In today’s age, building and maintaining good credit can make or break your future. Simply it each month, and pay it back in full
defined, good credit means you keep all your financial agreements in good faith, you honor each and every month.
your commitments, and you pay all your bills on time.

Before you get a car loan, student loan, or buy a home, the first thing a lender looks at is your
credit report. Prospective lenders review your credit report to determine if they will lend you
any money and, if so, at what interest rate. Maintaining an admirable credit history aids many
aspects of life.

Your credit history, or credit report, is a detailed account of all information about your credit
situation: how much you owe, how you pay your bills, and whether your payments have ever
been delinquent. Credit bureaus track and analyze this information to calculate your credit
score. Credit scores are expressed in numbers between 300 and 850; the higher your score,
the better your credit. A good credit score helps you obtain loans, rent apartments, get jobs,
and qualify for lower interest rates (and therefore lower payments). Building and maintaining
good credit will save you a significant amount of money over your lifetime. Building good
credit can be one of the easiest things you can do. We will discuss how you can begin building
your credit even now as a college student.

WHAT IS A CREDIT BUREAU?

A credit bureau collects and stores credit information on consumers. There are three main
credit bureaus: Equifax, Experian, and TransUnion. Each keeps its own records and individual
credit scores.
Credit
10% New
Your credit score is a report card of your credit history for the past 7-10 years. The grading
system they use is called a FICO (Fair Isaac Corporation) score. History 10%
35%

Let’s explore what the FICO score evaluates. These five data categories influence your credit 15%
score, to varying degrees: types of credit, new credit, credit history, amounts owed, and
payment history. Owed
30%
Credit bureaus look at all five areas when scoring your credit, but the payment history and
amounts currently owed have the biggest impact. Keeping your balances low and paying your

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bills on time are the two most important steps toward maintaining good credit! Following is a
more comprehensive list of strategies for building and maintaining a great credit score.

THE BOTTOM LINE

Without an excellent credit rating, you pose a higher risk to lenders, which will increase your
interest rate and closing costs. A lower score can also lead to not qualifying for a loan.

Let’s take a look at what happens when you buy a car. If you have good credit, you will receive
a lower interest rate and with bad credit, your interest rate increases. In the example shown,
you would end up paying $4,200 more over the five-year term of the loan with bad credit.

STEPS FOR GETTING AN “A” CREDIT RATING

Pay your bills on time
Set up automatic bill pay through your financial institution. Make it easy.

Keep debt low

Low debt helps keep your credit score high and avoids needless interest payments.

Build, repair, or maintain a good credit score

You must prove to the credit bureaus that you have the ability to pay back money you borrow.
Build up your available credit over time and keep your debt load to a minimum.
CURRENTLY IN DEBT?
Keep inquiries to a minimum If you’re already in credit card debt,
you will need some added dedication
Do not have your credit report run too often- and be aware and conscientious about things to get yourself out of the hole, which
that might impact your credit rating. is possible. The key to getting out of
credit card debt is to prioritize
Have health and auto insurance payments. Pay just the minimum
payment on all credit cards except
One of the biggest causes of bankruptcy is medical bills; avoid that problem by making sure the one with the highest interest rate.
you have enough coverage. Put all your extra money towards
paying the highest-rate credit card
Check your credit once a month off first. Once the high-rate card is
paid off, begin paying off the one with
Look for signs of identity theft if sudden changes occur. the next highest- rate. Keep up the
plan until all your cards are paid off.
Do not cancel your credit cards. Following this payment structure will
Keep them open with a zero balance. Credit bureaus will give you a higher rating when they save you a lot in interest.
see you have the ability to access more money. You can also dispute the negative
items on your credit report by
Use your credit actively and pay everything off in full every month contacting each lender directly by
Credit bureaus often punish people who do not use their credit. phone or mail. The credit bureau has
30 days to verify the information or it
drops off your report. You can expect
Build up to $25,000-$40,000 of available credit on various credit cards some of the items to drop off, but
Maintain a zero balance on each one at the end of each month. Do not do this if you cannot others will not.
control your spending.

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