Money MattersFinancial Literacy Series

Provided in partnership with SunTrust Bank

What Is Credit?Credit is money you borrow to pay for things. It is

usually referred to as a loan. You make a promise to pay back the money you borrowed plus some extra. The extra amount is part of the cost of borrowing money, known as interest.

If you use credit carefully, it can be useful to you. If you are not careful in the way you use credit, it can cause problems!

“Good Credit” means that you make your loan payments on time to repay the money you owe. If you have a good credit record, it will be easier to borrow money in the future.

Why Is Credit Important?It can be useful in time of emergencies.It is sometimes more convenient than

carrying large amounts of cash.It allows you to make a large purchase, such

as a car or a house, and pay for it over time.It can affect your ability to obtain

employment, housing and insurance, depending on how you manage it.

What Can Happen If You have “Bad” Credit?

What Can Happen If You Have “Bad” Credit?

Be declined for a loanBe turned down for employmentHave higher interest rates on your loansBe turned down for auto insuranceBe turned down to rent a home/apartment

Which situations below would be a good reason to request credit?

A) To purchase a car

B) To take your friends out to dinner

C) To pay for college

D) To purchase a new cell phone

How Is Credit Determined?You Credit Score, also known as a FICO

Score is a three-digit number rating that helps determine your Credit Risk. While there are many uses for your credit score, the most popular reason is to determine your creditworthiness. A higher credit score indicates less risk to the lender.

What are the Credit Score Ranges?There are 3 Credit Reporting Agencies; Equifax, Experian and

TransUnion. Credit Scores range from a low of 350 to a high of 850. The higher your score, the better rate and term you will be offered.

A credit score of 720 or above is considered excellent. You will typically be rewarded with the lowest interest rate offered.

A credit score of 680-719 is considered good. You will still be rewarded with lower rates and better terms.

A credit score of 620-679 is considered average. You will find lenders that will be able to offer you options, however you will begin to notice that your rates may be higher and your terms may be less favorable.

A credit score of 619 or under is considered poor. You will begin to find that lenders will decline your request for credit. If you are approved for credit, your interest rate will be significantly higher than normal.

How is your Credit Score Calculated?Your credit score is based on a formula

created by the Fair Isaac Company. While their exact calculation is not known, it is broken into 5 Major Categories:

Payment History is 35% of your scoreAmount Currently Owed is 30%Length of Credit History is 15%Newly Established Credit is 10%Type of Credit Used is 10%

Types of LoansConsumer Installment LoanA consumer installment loan is used to pay for

personal expenses for you and your family. Consumer Installment Loans typically have a fixed number of payments with a step interest rate and set monthly payment amount.

Examples are:Auto LoanUnsecured LoanStudent Loan

Types of LoansCredit Cards

Credit cards give you the ongoing ability to borrow money for household, family and other personal expense. Credit cards should be used primarily for emergencies. Having a credit card does not mean you have the money to pay for a purchase! You need to be able to pay your monthly credit card bill, as well as have a plan to pay the balance off in full.

Types of LoansHome LoansHome Loans are secured by your home. There are three

main types of home loans: 

Purchase Home Loan: This is used for the purpose of buying a home.

Refinancing Home Loan: This is used to take advantage of a lower rate or to

reduce your payments.Home Equity Loan:

This is typically used for home improvements; however it can be used for many other reasons, such as paying for college, or putting in a pool!

What Decision Would You Make?You are a loan officer with ABC South bank.

You have a client, Mr. James, who would like to request a personal loan. He would like to borrow $6,000 to pay off his 2 credit cards.

Mr. James works at Smith Plumbing. He has worked there for 7 years and his annual income is $33,500. He has lived at 126 Mable St for 4 years. 

When you pull Mr. James’s credit report, this is what you see:

What Decision Would YOU Make?Equifax Credit Report

Report Dated: January 24 2013

Client Full Name: Thomas K. James

Employer of Record: Smith Plumbing

Address of Record:126 Mable St.Greenville SC 29611

Collections Reported: None on fileTrade Lines Reporting:Creditor Open

Date:Credit Limit:

Balance Owed:

Past Due:30/60/90/120/+

Minimum Payment:

BankOne R1

02/1999

$11,000 $3,032 0/0/0/0 $61.00

Every Bank R1

05/1995

$8,000 $2,856 0/0/0/0 $55.00

Chase Mortgage M1

11/2008

$109,000 $78,356 0/0/0/0 $713.00

Bank of America I1

04/2007

$21,900 $0 0/0/0/0 $0.00

SunTrust I1

05/2001

$19,700 $0 0/0/0/0 $0.00

Number of Inquiries:1

Percent of credit in use:30.99%

Equifax Credit Score: 795

What Decision Would YOU Make?Using your Credit Report handout, answer

the following questions:

What is Mr. James’s Credit Score? Is that an Excellent, Good, Average or Poor score?

  Has Mr. James ever had a past due monthly payment?  Has Mr. James has been responsible with his credit? What

would you base that on?  Would you approve Mr. James’s loan request? Why or Why

not?

What Decision Would You Make?Scenario #2You are a loan officer with ABC South bank.

You have a client, Mrs. Loomis, who would like to request a personal loan. She would like to borrow $2,500 to go on vacation. 

Mrs. Loomis works at Johnson Enterprises as a receptionist. She has been there for 6 months. She is full time and makes $8.50 an hour, which is $17,680 per year. 

When you pull Mrs. Loomis’s credit report, this is what you see:

What Decision Would You Make?Scenario #2

Equifax Credit Report Report Dated: January 24 2013

Client Full Name: Sue Jane Loomis

Employer of Record: Johnson EnterpriseSmith TireDollar TreeCity of Greenville

Address of Record:9 Dillon RdGreenville SC 29607

Collections Reported: Greenville Hospital System: Past Due/Collection Item Balance Due $1,759 12/2012 Verizon Wireless: Past Due/Collection Item Balance Due $915 12/2012 Chase Bank: Past Due/Collection Item Balance Due $1,256 11/2012

Trade Lines Reporting:Creditor Open

Date:Credit Limit: Balance

Owed:Past Due:30/60/90/120/+

Minimum Payment:

EveryBank R4

02/2012

$1,000 $972 3/2/0/0 $50.00

Chase Bank R9

05/2011

$1,000 $1,256 5/2/1/1 $55.00

Number of Inquires:6

Percent of Credit in Use:111.4%

Equifax Credit Score: 519

What Decision Would YOU Make?Scenario #2Using your Credit Report handout, answer

the following questions:

What is Mrs. Loomis’s Credit Score? Is that an Excellent, Good, Average or Poor score? 

Has Mrs. Loomis ever had a past due monthly payment? 

Has Mrs. Loomis has been responsible with her credit? What would you base that on? 

Would you approve Mrs. Loomis’s loan request? Why or Why not?

The True Cost of Alternate Financial Solutions

Rent to Own Services Rent-to-own service let you use an item for a period of time

by making monthly or weekly payments. If you want to purchase the item, the store will set up a plan for you to rent it until you pay enough to own it.

The store is the legal owner of the item until you make the final payment. If you miss a payment, the store can take the item back. If this happens, you will not own the item, and you will not get your money back.

Rent-to-own agreements are technically not loans, so no interest is charged. However, the difference between the cash price and your total payments is like the interest you pay on a loan. Generally, using rent-to-own services is more expensive than getting a consumer installment loan to buy the item outright.

The True Cost of Alternate Financial Solutions

Pay-Day Loan Service Pay-day loans are usually made to people who need money

right away and plan to pay it back with their next paycheck.

Pay-day loans should be used only for emergencies If you cannot fully repay the loan within a few pay periods, you should consider a longer term loan from a financial institution.

If you do not have the money to pay the loan within the agreed-upon time period, the lender will renew the loan and charge you additional fees. This increases the total amount you owe.

The True Cost of Alternate Financial Solutions

Refund Anticipation Loan ServicesRefund anticipation loans are short-term loans secured by

your income tax refund. Although the business preparing your income tax return will give you the money, you are actually receiving a loan from a bank or finance company.

Because you do not have to pay any fees associated with obtaining a refund anticipation loan at the time you receive the money, you may not realize how much this loan is really costing you. When you electronically fine (e-file) you tax return and request direct deposit, your refund is often deposited in your bank account within 2 weeks. Sometimes refund anticipation loans take just as long, yet cost you substantially more money.

Where Do I Go From Here?Often, this is the point where many students

begin to ask how they can insure that they build strong, healthy credit. There are MANY resources available to you!

www.livesolid.com www.annualcreditreport.com

www.bbb.com Your Bank

Remember, it is never to early or too late to build a strong financial foundation!