Building and Maintaining Good Credit
CHAPTER 6
Building and Maintaining Good Credit
Lecture outline
I.Explain reasons for using credit and its negatives.
A.What is credit?
1.Common uses of credit stretch from personal convenience and emergencies to consolidation of debts and assistance in obtaining an education.
2.Downsides to its use include the ease of obtaining it, the cost (APR), and inherent temptation to overspend.
B.How to guard against identity theft—be vigilant at all times.
Check statements; keep receipts; check credit reports regularly.
II.Establish your own debt limit.
A.Use Table 6.1 as a basis for looking at percentage of debt to disposable income, and at about 16 percent, time to stop!
Table 6.2 shows implications on monthly budget (disposable income) if too much has to go toward debt repayment.
B.Student loan payments made on time, paid electronically, and that have been consolidated can enhance a person’s credit standing, provide a lower rate of interest on a loan, and the interest is eligible for tax deduction.
C.Beware when becoming dual-income households!
III.Achieve a good credit reputation.
A.Applying for credit is not the same as approval.
1.Credit investigation.
2.Credit report from a credit bureau.
3.Credit score (= risk score), called a FICO score.
4.FICO uses complex, closely held secret statistical methods to calculate score; items impacting score are poor history of credit use and amounts owed.
5.Beware of closing old accounts.
6.Beware credit discrimination.
B.Credit reputation is built easily through on-time payments of all bills of all kinds at all times.
C. shows three credit bureaus.
1.Request a free credit report every four months by rotating the three.
2.If incorrect, correct immediately. It’s an individual’s responsibility.
D.Divorce impacts credit.
IV.Describe common sources of consumer credit.
No lack of institutions willing to lend money—interest rates will vary—be an informed consumer and user of credit.
V.Identify signs of overindebtedness and describe options available for debt relief.
A.Percentage of debt payments to take-home pay exceeds 20 percent.
1.Maxing credit cards.
2.Using one card to pay off another.
3.Paying late.
4.Add-ons.
5.Flipping.
6.Garnishment.
7.Visit by the repo man!
B.Debt-collection practices are regulated by federal law.
C.Most important to get out from under is budgeting and working with creditors.
D.Do not pay someone to supposedly help or “fix” your credit—it’s up to each individual.
E.Understand full implications of bankruptcy—many types of debts are not wiped out by declaring bankruptcy.