FINANCIAL AID - UNDERSTANDING CREDIT

UNDERSTANDING CREDIT

Presented by AFC and EFSI – Lending for Learning™

What goes through your mind when a friend asks you to loan them $50? Do you consider if your friend is responsible and will pay you back? Do you evaluate how he or she handles his or her own personal finances? While you may end up loaning your friend $50, with the faith and understanding that you will get it back, a bank is less likely to lend someone money unless it can verify that the potential borrower is able to pay back the loan. Banks do not loan money on faith alone.
The record of your “financial trustworthiness” is your credit rating. This is the most important factor financial institutions consider when you apply for any type of loan—whether for a car, a home or a credit card. Someone with a good credit rating will often be offered better terms and lower rates than someone without one, so it’s important for you to build a strong credit record for yourself.

How to build a strong credit record:

• Apply for and use a credit card for purchases, but control your spending.
• Avoid going over your credit limit.
• Borrow responsibly, and pay all debts on time.
• Review your credit report at least once every year.

Credit Reports

Your credit report is a record of your financial behavior over time. Be sure to review your credit report prior to making any major purchase. Know what is on your credit report and check it annually.

A credit report contains the following information:
• Your name, address, social security number, date of birth and employment.
• Detailed credit information on your current (open) and closed accounts.
• Public record information including bankruptcy, legal judgment, property lien or warrants.
• A list of creditors and agencies that have requested your credit report.
• Statements of dispute.

There are three major U.S. agencies that record your credit:

• Equifax, (800) 685-1111 or www.equifax.com.
• Trans Union, (800) 888-4213 or www.transunion.com.
• Experian, (888) 397-3742 or www.experian.com.

In most cases, you can receive a copy of your credit report from each of the three bureaus for free or for a nominal fee.

FICO Scores

A FICO score (developed by Fair Isaac & Company) attempts to condense a borrower’s credit history into a single number from 350 to 850 (the higher the number, the better).

Creditors use FICO scores to help determine whether to give a person a loan and what rate to charge. The credit scoring system awards points for each factor that helps predict who is most likely to repay a debt.

Factors that contribute to your FICO score are:
• The amount of time credit has been established.
• The amount of credit used versus the amount of credit available.
• The length of time at present residence.
• Employment history.

Factors that do NOT contribute to your FICO score are:
• Race, color, religion or national origin.
• Sex, marital status or age.
• Employment history, occupation, salary or where you live.

The relevant information that is considered in scoring is:
• Payment history (35%).
• Amounts owed (30%).
• Length of credit history (15%).
• New credit (10%).
• Types of credit used (10%).

You can improve your FICO scoreby making sure you do the following:
• Make payments on time.
• Pay down your debt and consider charging less.
• Keep balances low.
• Receive credit counseling if needed.
• Avoid bankruptcy.

Errors and Identity Theft

Identity theft is the deliberate assumption of another person’s identity by using their personal information, such as date of birth, mother’s maiden name and social security number. Identity theft is usually committed to gain access to the victim’s credit information in order to commit fraud. Most identity theft is committed by people we know, such as friends, family members and co-workers.

You need to protect yourself from identity theft. Make sure to check financial statements promptly and review your credit report annually. If you notice an error on your credit report, immediately notify the credit-reporting agency in writing. Be very careful with personal information. Say “NO” to offers of credit. To minimize the number of credit offers you receive, call the Consumer Credit Reporting Industry Opt-In/Opt-Out line at (888) 567-8688. Protect your mail and be sure to shred and destroy any information that contains personal information.

Financial Trouble

If you have trouble paying your bills, contact your creditors. Often the creditors will work out a plan to help you gain control of your finances. A reputable credit-counseling service, such as the National Foundation for Credit Counseling (NFCC) can be reached at (800) 388-2227 or www.nfcc.org, and can direct you to a free or low-cost service in your area. Whenever possible, use cash to make purchases to avoid further debt.

You may be in trouble if:
• You only make the minimum monthly payment.
• You have too many credit cards.
• You are at or over your credit limit.
• You use credit for necessities like food or gas or because you have no money.
• You receive letters and calls on delinquent debts.

If you need help:
• Contact your lenders immediately.
• Stop using credit.
• Consider loan consolidation to lower monthly payments.

Credit counseling resources:
• NFCC and its member agencies known as Consumer Credit Counseling Services (CCCS).
• To locate one near you, visit www.nfcc.org or call (800) 388-2227.

AFC and EFSI are the leading student loan originators for Brazos – a group of related not-for-profit companies dedicated to making educational dreams a reality. We offer a wide range of student loans with attractive discounts, including Diamond Benefits™, which can reduce the interest rate on your Stafford and PLUS loan by up to 2 percent from the first day of repayment. Please visit us at www.lendingforlearning.com/CollegeOutlook for more information.