Credit and Debt




Using credit is a convenient way to manage many of your day-to-day financial responsibilities. You can use a credit card to make everyday purchases or use your credit to take out a loan for a large purchase. Before you can use credit, you can and should establish a good credit record. All credit card applications are required to have a special box that provides the most important information to the consumer.

Questions to Ask Yourself About Your Use of Credit and Debt:

  • Why do I use credit?
  • Can I discipline myself to control my spending when I use credit?
  • Do I feel comfortable with my level of debt?

 

Managing Your Credit
Using credit requires some discipline. Decide when and how you want to use credit. Get in the habit of paying off the total balance each month. If not, pay as much as you can afford. If you make a large purchase with credit and plan to pay over time, be aware of the true cost over the length of the loan.

Making Only Minimum Payments
With a $3,000 balance, making a minimum payment of $90 per month will take you 14 years to get out of debt and you will have paid $2,625 in interest. By increasing the payment to $120 a month, you will get out of debt in nine years, paying $1,636 in interest, saving $989 compared to the $90 minimum payment. You can determine the amount of time and interest paid on your specific debt using an online calculator at www.bankrate.com.

What Happens if You Miss a Payment?
All credit card agreements are different, but most will charge a fee for a late or missing payment. Also, in some cases, missing payments to one creditor will affect your other creditors through a process called “universal default.” In these situations, you may see an increase in interest rates and payment requirements for all of your cards, even if you have missed payments on only one of your credit cards.

Understanding Credit Scoring
As you begin to manage your credit or rebuild your credit history, understanding credit scoring is essential. Using credit scoring, lenders are able to determine, based on a range of numbers, an individual’s likelihood of credit risk, default, or delinquency.

Raising your score requires some work and cannot be accomplished without understanding how scoring is calculated. Without question, you can raise — or lower — your score based on the decisions you make, such as overextending credit, obtaining personal loans, or accumulating debts. But by following a few simple steps, and learning the factors used to calculate your score, you can greatly raise your score.

Calculating Your Credit Score
The most common scoring system, Fair Isaac Corporation (FICO), is used by nearly all creditors and credit bureaus; most creditors and credit bureaus either use the FICO scoring system or have a system based on the FICO model. Generally, we tend to think of credit scoring as one score, but, in fact, under FICO, there are three separate scores, one for each of the three credit bureaus. So, if you have pulled a recent credit report, you may have seen some variation — either a lower or higher score — on each of the credit reports. The reason for the different scores is that each credit bureau used slightly different models in calculating your score.
 

Credit Bureau Score Name Score Range

  • Equifax FICO 300-850
  • Experian Vantage Score 501-990
  • TransUnion Vantage Score 501-990


Understanding FICO Score
To explain how scores are calculated, listed below are factors used to calculate your credit score. The same factors are used in all three models.

300     Baseline Points
193     Payment History (35%)
165     Outstanding Debt (30%)
  82     Credit History (15%)
  55     Credit Inquiries (10%)
  55     Types of Credit (10%)
850     Total Points

Fair Credit Reporting Act
The Federal Fair Credit Reporting Act (FCRA) is designed to promote accuracy, fairness, and privacy of information on the files of every “Consumer Reporting Agency” (CRA), and now requires the three nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your free annual credit report online at www.annualcreditreport.com or by calling (877) 322-8228.

Contacting the Credit Bureaus
Call one or more of the major credit bureaus to receive information about how to request your credit report. If you have been denied credit, you are eligible to receive a free copy from the company that provided the report to the lender.

 

Credit Problems
After receiving and using your newly acquired credit card, the most typical problems people face are making payments on time making sure that they make adequate payments to maintain a positive credit history. To keep your credit rating from falling make sure that you:

  • Pay more than the minimum payment each billing period.
  • Make payments on time.

 

Credit Counseling
If you choose to use a credit counseling agency, ask these questions recommended by the National Foundation for Consumer Credit (NFCC):

  • Is this agency a nonprofit organization?
  • How much will these services cost, including “donations” required?
  • Are agency services confidential?
  • Will you design a plan tailored to fit my needs?
  • Are the counselors certified?
  • Are budget and credit education opportunities offered?
  • Will my funds be protected?
  • Is the agency accredited?