Credit Notes

What are the C’s of credit?

capacity, character, capital/collateral

What does capacity deal with?

income, expenses

What does character deal with?

credit history and stability

What does capital/collateral deal with?

assets

What do credit reporting agencies do?

Gather information and report financial information in the form of credit reports

What are 3 major credit reporting agencies?

TransUnion, Equifax, Experian

What does credit reports include?

credit score, credit history, and current financial information

What is credit score?

a number ranging between 300-850 (like a report card)

300-629: bad

630-689: fair

690-719: good

720-850: excellent

What is a credit report?

A detailed document with past and present financial information, which includes the score on it (like highschool transcript)

How do credit scoring systems work?

• Use the 3 C’s of credit and your credit history to assign a number value that determines creditworthiness

  • number may be different between credit reporting agencies

What is FICO: Fair Isaac Company?

the most common credit scoring system, used by the three main credit reporting agencies

Tips on establishing good credit

• get a job

• open a savings account

• pay bills on time

• use a credit card

• use different types of credit

Pros of Credit

• immediate use of product

• convenient

• can be used for emergencies

  • establishes proof of financial responsibility

Cons of Credit

• borrowed money costs more

• reduces future income

• easy to overspend

  • consequences of misuse

Consequences of bad credit

• bad credit score

• higher interest rates on loans

• turned down for loans

  • higher car insurance rate

Sales credit

goods or services in exchange for your promise to pay later (no charges if paid as promised and no credit limit)

regular charge account

promise to fully pay in 30 days

Revolving credit

Charge up to a credit limit during a 30 day period. At the end of the month you can pay in full, partial, or the minimum

What happens when you pay in full?

no finance charges

What happens when you do partial payment?

interest charges on the balance

What happens when you do minimum payment?

Usually around 2% of the balance (also finance charges on remaining balance)

What is revolving credit also known as?

“open ended” —> you can carry a balance forever

Installment credit

used for larger items (cars, furniture). Make payments every month in equal amounts until the loan is paid off

• goods can be repossessed if you default on payment

What is installment also known as?

“closed-end” because it must be paid off by a specific date

Cash credit

money is given in exchange for a promise to pay later

secured loan

borrower must pledge collateral that can be repossessed if you default on payment

unsecured loan

loan is based on your promise to pay later along with signature

same as cash

Period of time where payment is not expected and no interest is charged. Once the due date, the entire balance is expected. (or else the loan rolls into a hihg-interest installment loan)