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MY ESTABLISHING CREDIT


Your credit history is important when applying for a loan, but it’s also important to prospective employers, utility companies, landlords, and insurance companies in determining whether or not you have demonstrated financial responsibility. That is why it is important to understand credit and the impact it has on your ability to reach your current and future goals.

Printable Checklist

 


LENDING BASICS

Types of Credit

There are two general types of credit: Installment (car loan) and Non-Installment (credit card).

Installment Credit, also called closed-end credit, includes loans that require the borrower to repay the principle (original amount) and interest (lenders charge) in periodic payments, usually monthly, until the loan is paid. This type of credit is typically used to purchase collateral such as an auto or a home. A collateral loan can be less risky than other loans because the lender can repossess the collateral if payments are not made. This is also why collateral loans may have a lower interest rate than non-collateral loans.
Non Installment Credit, also called open-end credit or revolving credit, includes credit cards and lines of credit (non-collateral loans). Both have a predetermined credit limit and the borrower draws against available funds at their convenience as long as the outstanding balance does not exceed the limit. The borrower reduces the debt by making payments and can also add to it by borrowing or charging additional amounts without having to reapply for credit. Open-end credit accounts generally allow irregular or partial payments to be made subject to a predetermined minimum amount established by the lender. This minimum may be a specified dollar amount or a percentage of the outstanding balance. A non-collateral loan is more risky because there is no collateral for the lender to repossess if the borrower does not pay, so this type of loan tends to have higher interest rates.

 

Debt to Income Ratio
 
Your debt to income ratio and your credit score are both equally important when applying for credit. Your debt to income ratio calculates the amount of debt you have compared to your income. The calculation is based on a percentage; as you increase your debt it also increases the debt to income ratio (percentage). You can get an idea of your ratio by dividing your monthly debt by your monthly income. For example if your monthly debt is $500 and your monthly income is $2000, your debt to income ratio is 25%. Lenders have strict guidelines on debt to income ratios. Generally the higher the ratio the more likely you will have difficulty paying back your debt. The desired debt ratio varies depending on the lender and type of loan but generally you do not want to be any higher than 30%.

CREDIT BASICS

History

When a solid credit history is not established, creditors have no way of knowing whether or not you are a good credit risk. The following describes some of the factors that creditors consider to help determine if they should grant you credit:

 

Residence History: How often do you move? Do you rent or own your home? Stable resi¬dence often suggests reliability; owning your own home may carry more weight than renting.

 Employment History: Have you consistently held a job for long periods of time, or changed jobs frequently? Your commitment to a job is a solid indicator of whether or not you will be committed to repaying your loan.
Bank Account: Opening a checking account does not require a credit score; however, successfully managing the account without overdrawing can be a consideration if you are seeking credit from your financial institution.

Credit Report

A credit report is a record of your credit history. It’s important to review your credit report annually for discrepancies.

Credit Score: A number that is assigned to your credit report based on credit history.
Your identity: Name, address, full or partial Social Security number, date of birth, and employment information.
Your past and existing credit: Information about credit that you have, such as your credit card accounts, mortgages, car loans, and student loans. It may also include the terms of your credit, how much you owe your creditors, and your history of making payments. 
Your public record: Information about any court judgments against you, any tax liens against your property, or whether you have filed for bankruptcy or have items (such as unpaid medical bills or utility bills) which have been turned over to collection agencies. Some companies such as cell phone providers do not report to credit bureaus when you make your payments on time; however they do report when you don’t pay.
Inquiries: A list of companies or persons who recently requested a copy of your report. An inquiry is done anytime you apply for some type of credit or service i.e. credit card, cell phone provider, etc. A large number of inquiries can affect your credit score negatively.
 
 

Credit Score

The most common source for credit scores is called the FICO score. FICO stands for Fair Isaac Company, which is an organization that publishes credit scores based on data collected by the 3 largest credit reporting agencies: TransUnion, Equifax and Experian. The score values can range from 300-850; the higher the score the better. A higher score means the less likely an individual will become delinquent or default on a loan. Your credit report is important because lenders, insurers, employers, and others may obtain your credit report from credit bureaus to assess how you manage financial responsibilities. Your credit score may be a factor for:

Lenders - may use your credit report information to decide whether you can get a loan and the terms you get for a loan (i.e., the interest rate they will charge). 
Insurance companies - may use the information to decide whether you can get insurance and to set the rates you will pay. Employers- may use your credit report, to decide whether or not to hire you.
Telephone and utility companies - may use information in your credit report to decide whether to provide services to you.
Landlords - may use the information to determine whether or not to rent an apartment to you.

Credit Score Calculation

The score summarizes your credit history and helps lenders predict how likely it is that you will repay a loan and make payments on time. Lenders may use credit scores in deciding whether to grant you credit, the terms you are offered, or the rate you will pay on a loan. Information used to calculate your credit score can include:

The number and types of accounts reporting (credit cards, auto loans, mortgages, etc.)
Whether or not bills are paid on time
Available credit you currently have access to (the total of your credit card limits together)
Any collection action items
Amount of outstanding debt – total amount of what you owe
Age of accounts – how long they have they been opened

ESTABLISHING & PROTECTING CREDIT

Establish Your Credit

Obtaining credit for the first time often involves a co-signer, secured purchase with a large down payment (i.e. car loan), a savings secured loan or credit card. When establishing your credit with a credit card it is not necessary to carry balances to build credit. Regular use of a credit card and paying balances off helps establish your credit. It is important not to use a high percentage of your credit limits, even though you may pay them in full each month. Using a high portion of your limit may cause a decrease in your credit score.
Here are some tips to get you started:

Keep track of your accounts with FinanceWorks™ for budgeting and bill payment reminders.
Quickly build your savings with Everyday Savings.
Start building your credit with a TCU Visa® Platinum Credit Card or Secured Loan.
Make payments on time, pay balances off regularly.
Limit the number of cards you have and don’t use a high percentage of your credit limits. 
Be an informed borrower; know your debt to income ratio and credit score.
 

Protecting Your Credit

A high credit score reflects an investment of time and effort, which should be protected. Here are some ways to make sure that your credit stays intact:

Keep an eye on your account and credit card statements. Always be aware of any suspicious transactions and report them to your financial institution immediately.
Immediately report any lost or stolen cards to the proper companies. Don’t loan your cards to other individuals or give out your passwords or pin numbers.
Always pay your bills on time. Payment history can count for 35% of your credit score and chronic late payments can slash your score by up to 100 points.
Consider Payment Protection plans on qualifying loans to make your payment in the event your income is interrupted. Ask a TCU Representative for details.
Check your credit report annually. You are entitled to a free credit report from the three major credit agencies (Equifax, Experian and TransUnion) every year by calling 1-877-322-8228 or going to www.annualcreditreport.com and requesting your free reports. If you see anything that looks out of place, immediately report the discrepancy to the agency. This step is vital in ensuring your credit history is being reported correctly.

 

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