The Importance of

Good Credit

Michael Powell

Table of contents

iii

Table of content
Contents
Table of content ........................................................................................................................ iii
Introduction ................................................................................................................................v
Chapter 1: Credit Scores..............................................................................................................7
Overview ................................................................................................................................7
What is a credit score ..............................................................................................................7
What makes up a credit score ..................................................................................................7
How to improve your credit score ............................................................................................7
Chapter 2: establishing credit ......................................................................................................3
Overview ................................................................................................................................3
Types of credit ........................................................................................................................3
Steps to take to avoid abusive lending .....................................................................................3
Questions to ask when applying for credit ...............................................................................3
Fly Page Chapter 2 ......................................................................................................................5
Chapter 3: Maintaining good credit .............................................................................................7
Overview ................................................................................................................................7
A good credit score .................................................................................................................7
Debt-to-income ratio ...............................................................................................................7
Chapter 4: Credit cards .............................................................................................................. 10
Overview .............................................................................................................................. 10
TYPES OF CREDIT CARDS ............................................................................................... 10
Private Label ..................................................................................................................... 10
General Label .................................................................................................................... 10
Shopping for credit card ........................................................................................................ 10
QUESTIONS TO ASK WHEN SHOPPING FOR A CREDIT CARD ............................... 10
Cost of credit ......................................................................................................................... 10
Chapter 5: Managing credit challenges ...................................................................................... 13
Overview .............................................................................................................................. 13

Warning signs of credit abuse ................................................................................................ 13

Correcting credit errors.......................................................................................................... 13
iv
Title
CORRECTING CREDIT ERRORS .................................................................................. 13
CORRECTING CREDIT PROBLEMS ............................................................................. 13
Chapter 6: Identity Theft ........................................................................................................... 15
Overview .............................................................................................................................. 15
IDENTITY THEFT ............................................................................................................... 15
If you think your identity has been stolen, take the following steps: ................................... 15
Chapter 7: PRIME AND SUBPRIME LENDING ..................................................................... 17
Overview .............................................................................................................................. 17
THE PRICE OF SUBPRIME LENDING .............................................................................. 17
MOVING FROM SUBPRIME TO PRIME ........................................................................... 17
Index ......................................................................................................................................... 19

Introduction

Introduction

Chapter 1: Credit Scores

Overview
Credit scores and their impact
The factors that make up a credit score
Strategies to improve your credit score

What is a credit score

A credit score is a number that helps a lender predict how likely an individual is to repay a loan,
or make credit payments on time.
A credit score is a number that changes as the elements in a credit report change.
A credit score has broad use and impact. Your credit past is your credit future.

What makes up a credit score

10% types of credit in use

10% request for new credit
15% length of credit history
35% payment history
30% current total debt

What makes up credit

types of credit in use
10%
30%

10%
15%
35%

request for new credit

lenth of credit history
payment history
current total debt

How to improve your credit score

Pay bills on time

Get current and stay current
Dont open a lot of new accounts to rapidly
Correct mistakes
Shop for loan rates within a focused period of time
Keep balance low on revolving credit
Pay off debt
Check your credit report

Chapter 2: establishing credit

Overview

Types and sources of credit

Credit safeguards
Applying for credit
Questions to ask when applying for credit

Types of credit

Cash credit I.O.U

Sales credit single payment credit
Secured credit Installment credit
Revolving credit Credit cards

Steps to take to avoid abusive lending

Have you shopped around for the best deal?

Do you feel the lender pressured you to take the loan?
Do you understand the terms of the loan?

Questions to ask when applying for credit

What is the annual fee?

What is the annual percentage rate (APR)?
When are payments due?
What is the minimum payment required each month?
Is there a grace period?
Are there other fees associated with the credit, such as minimum finance charges?
What is the credit limit?
What are the penalties for late or missed payments?
What are the terms and conditions of the credit? What else is included in the fine
print?

Chapter 3: Maintaining good credit

Overview

Debt to income ratio

A good credit score
Credit safeguards for consumers
Credit reports, ratings and scores
Establishing a credit history

A good credit score

As demonstrated by this graph you can see what you want to have above 680 at the
least.

These are the people that will be looking at this score and what they decide from it.
Credit card companies
o Reject or except an application for a credit card
o Interest rate on the credit card
Loan officers
o Reject or except an application for a loan
o Interest rate on the loan
Employers
o To see if you are a responsible person and keep your finances in
check

Debt-to-income ratio
This is calculated by taking all debt minus home mortgage and dividing by total
yearly income.

51% or more of income Dangerous

39% to 50% of income - High
24% to 38% of income fair
16% to 23% of income good
15% or less of income Great

If you made $50,000 a year this is what they would look like.

Chart Title
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
great

Good

Fair
not in debt

high
Debt

Dangerous

Chapter 3

Chapter 4: Credit cards

Overview

Types of credit cards

Shopping for a credit card
Costs of credit

TYPES OF CREDIT CARDS

Private Label
Issued by a single source
Usually the advantage of these cards are things like
o Points or cash towards that single source
Interest rates are usually higher
Examples of source: Department Stores, Gasoline Companies, and clothing stores
General Label
Issued by a single source
Can be used in many places
Interest rates are usually lower that private label cards
Usually the advantage of these cards are things like
o Cash back
o Airline miles
Examples of source: Wells Fargo, Discover, and Master Card

Shopping for credit card

QUESTIONS TO ASK WHEN SHOPPING FOR A CREDIT CARD
Annual fee
Annual percentage rate (APR)
Minimum payment
o Per month
Grace period
o How many days between each payment
Finance charges
Card incentives

10

Title

Cost of credit

How much can credit cost? If you make only the minimum payment for an item, here are

Balance

APR

Minimum
payment

$500

15%

$1,000

15%

$2,500

Years to pay off

$20

Total you end up

paying with
interest
$600

$22

$1,552

6.3

2.4

15%
$55
$4,877
13.9
some examples of what you might actually pay and how long it will take you to pay it.
Paying only the minimum payments on your credit card may seem appealing, but if only
minimum payments are made, it can take years, and sometimes decades, to achieve full
repayment.
Paying the minimum amount due keeps your credit history clean, but it also costs you
more.

Balance

APR

Monthly
payment

$2,500

15%

$2,500
$2,500

15%
15%

$55
(minimum)
$80
$105

Total you end

up paying
with interest
$4,877

Interest
money
saved

$3,444
$3,084

$1,433
$1,793

Years to pay
off
13.9
5.1
3.1

Chapter 3

11

Chapter 5: Managing credit challenges

Overview

Warning signs of credit

abuse
Correcting credit errors
Resources and
assistance

Warning signs of credit abuse

Delinquent Payments
Default Notices
Repossessions
Collection Agencies
Judgment Lien
Garnishment

Correcting credit errors

You are allowed to get one free credit report every year for free. Take that opportunity to look
for credit errors. The site is www.annualcreditreport.com.
CORRECTING CREDIT ERRORS
1. Circle the incorrect items on your credit report.
2. Write a letter to the reporting agency, telling them which information you think is
inaccurate. Provide supporting documentation.
3. Send all materials by certified mail.
4. Send a similar letter to the creditor whose reports you disagree with.
5. The reporting agency will conduct an investigation.
6. If negative information is accurate, it can stay on your report for 7-10 years.

CORRECTING CREDIT PROBLEMS

Take responsibility for actions.
Communicate with creditors.
Debt Consolidation
Credit Counseling

12

Title

Chapter 6:

Identity Theft

Overview

What Identity theft is and how to deal with it

Strategies to protect your personal information
Steps to take if your identity has been stolen.

IDENTITY THEFT
Identity theft occurs when someone uses your personal identifying information to either
establish credit under your name or to take over an existing account that you established without
your authorization.
If you think your identity has been stolen, take the following steps:
Contact the three major credit bureaus (Equifax, Northern Credit Bureaus, and Trans
Union).
Close accounts.
Contact all creditors involved.
File a police report.
Keep a record of your contacts.

Chapter 3

13

Chapter 7: PRIME AND SUBPRIME LENDING

Overview

Prime and subprime lending definitions

Alternative institutions that provide higher-cost loans
Strategies to improve credit in order to qualify for prime loans.

Prime

Prime credit is typically available to an individual who has paid his or her outstanding
credit on time.

Subprime

A subprime loan is typically available to a person with either no credit history or a

damaged credit history and who is considered to be a high-risk borrower. Subprime loans
have higher-than-average interest rates.

THE PRICE OF SUBPRIME LENDING

How much does a subprime loan cost you? If you are making payments on a car, for example,
you could be paying significantly more just for getting a loan with a higher interest rate. This
added interest is significant over the life of the loan.
Prime or
subprime
Subprime
Prime

Interest rate on a
five your car
loan
7%
14%

Loan

Monthly
payment

Total cost of car

with interest

$20,000
$20,000

$396.02
$465.37

$23,761.20
$27,922.20

MOVING FROM SUBPRIME TO PRIME

If you currently have a lower credit score and want to be able to qualify for prime loans in the
future, you should take steps to improve your credit. The following steps can help.

Pay bills on time.

Correct mistakes.
Pay more than the minimum required.
Use credit sparingly.
Work with a reputable nonprofit credit counseling organization.
And many other scams.

14

Title

Chapter 3

15

Index
design, 3, 4, 5, 6, 9, 10, 11, 12

keep, 3, 4, 5, 6, 9, 10, 11, 12