Credit Counseling & Repair

The National Economics DepartmentFinancial Freedom Campaign

NAACP

Agenda• What is Credit?• Pros & Cons• Types of Credit• Understanding Financial Institutions• Importance of Building Credit• Credit Building V.S. Non Credit Building• What is Predatory Lending• Understanding Credit Scores & Credit Reports

What is CREDIT?

Credit: Money you borrow and plan to repay.

It allows you to make a purchase without having to pay the entire price at once.

Interest: Is the cost of borrowing money.

Know the FACTSPros

Credit Costs $$$

Credit =Temptation

Easy to lose track

Cons

• Helpful for Emergencies

• Its Convenient

• Increased purchasing power

Types of CreditRevolving Credit: Allows you to borrow

money at any time up to a set limit. The most common types are credit cards.

Installment Credit: A loan that must be repaid over a specific period of time. This type of credit is common for larger purchases such as a home, car, or education.

Non-installment or Service Credit: Allows you to pay for a used service at a later date usually without an interest charge. (i.e. A utility bill)

Types of Credit Continued

• Secured Credit: Requires you to provide something of value to guarantee that you will repay your debt. It is usually used for installment loans. If you fail to repay, the lender takes your item as repayment

• Unsecured Credit: Does not require a guarantee (collateral)

Understanding Financial Institutions

• Financial Institutions: Establishments that provide services, such as investments, loans and deposits.

• Some offer Depository Services, which means that you are able to open a checking and savings account

• Federal Deposit Insurance Corporation (FDIC) & National Credit Union Share Insurance Fund (NCUSIF) = Government backed insurance for your funds

The Importance of Building Credit Its hard TO GET credit if you HAVE NOT

ALREADY ESTABLISHED a credit history.Without a history, Lenders can’t tell if you

are RESPONSIBLE with your money (by paying your bills on time, etc.) or not.

Building credit is NECCESSARY to proving your creditworthiness.

Ways To Build Your Credit• Apply for a secured

credit card– Your credit card limit will

match the amount you have deposited into an account.

• Use a co-signer– The co-signer’s good credit

will serve somewhat like an insurance for your credit behavior

• Use retailer programs– (i.e. Gas Station Cards, etc)

They are generally easier to qualify for and can help you to establish a credit record.

• Get a credit card with a reputable credit building institution– An institution that will

protect and help you to grow your money.

Credit Building LendingMission Credit Building Advantages

B a nk s

These for-profit financial institutions are the largest source of deposits and credit in the economy.

•Protects your money• The money you deposit in a bank is 100% insured (up to $250,000) by the

Federal Deposit Insurance Corporation (FDIC) which means if anything ever happens to the bank, your money will be returned to you

•Helps increase your money• Generally, when you open a deposit account with a bank, you earn money

called interest• Banks offer different interest rates on accounts, but the longer you keep

your money in your account, the more interest your account earns

•Offer helpful services• i.e. Special Savings Plans for College, or Special Rates on a Car loan, etc.

•Bank accounts make you think twice about how you spend your money

• Having to make a trip to the bank, write checks, or use the ATM becomes a conscious decision to spend

• Your money’s there when you need it, but by thinking about your purchase, you can save more, ultimately, by making wiser decisions

Credit Building LendingMission Credit Building Advantages

C r ed i t U ni o n

s

These nonprofit cooperative financial institutions exist to serve their members’ financial needs.

Credit Union benefits include the following:

• Typically offer free accounts with no minimum balance requirements.

• Interest rates on savings, certificates of deposit, and some checking accounts are often higher than those offered by banks.

• Also, interest charged for loans and credit are often lower. • In fact, some credit unions are regulated

such that the interest rate on loans and credit cards must not exceed a certain rate.

Non- Credit Building Lending

Mission Credit Products & Terms

A l t e r n a tiv e

F i n a n c e S e r v i c e s These for- profit businesses make

consumer and commercial loans. They focus on servicing customers

with poor credit histories

•Alternative Finance Services usually charge higher interest rates and more fees then Traditional Lenders.

•Loans are often short term

Common Examples:

Payday Loans Car Title LoansTax Refund Anticipation Loans

What is Predatory Lending?PREDATORY LENDERS: – DIRECT A BORROWER AWAY FROM LOANS WITH

MORE AFFORDABLE RATES. INSTEAD, THE APPLICANT IS OFFERED A LOAN WITH A HIGH INTEREST RATE, QUESTIONABLE FEES, OR UNNECESSARY CHARGES.

– PREDATORY LENDERS OFTEN TARGET LOW AND MODERATE INCOME PEOPLE, PEOPLE OF COLOR, AND THE ELDERLY

Predatory Lending Cont.Take the following steps to avoid predatory lenders• Turn away loan offers from anyone who calls you on the

telephone, comes to your door or send you emails without invitation.

• Be wary of high pressure sales pitches, such as claims that an offer is only good for a limited time

• Consult with a local nonprofit or consumer credit counseling agency whenever possible

• Avoid loans that include extras that you do not need• Try to read all document’s before signing• Investigate Interest

Ask yourself….• Is this purchase a need or a

want?

• Do I really need the item right now, or can I wait until I have the cash?

• How much do I have to pay to borrow this money?

• How will this credit payment affect my household budget each month?

• Will I still have this item when I finish paying for it?

• Should I go home and sleep on my decision before using my credit to make a purchase?

The Credit Score• A Credit Score: is used to predict how

likely an individual is to repay a new loan based on the financial institutions experience with consumers.– There are various computer models used. In

general the computer model assigns points to information on a credit report

• A FICO Score: The credit scores used by the credit bureaus are produced from a software developed by the Fair Isaac and Company.

U.S. Credit System

Public RecordsCreditors Collection Agencies

Credit Bureaus/Inquiries

Data Furnishers

TransUnion Equifax Experian

The FICO Score: Factors that influence credit

• 35% Payment History

• 30% Amounts Owed

• 15% Length of Credit History

• 10% New Credit

• 10% Type of Credit in Use

Racial Credit Score Disparities

Racial Disparities in Credit Scores• Fair Isaac: The percentage of individuals from

high minority areas with relatively low credit scores was twice as large as the share of individuals from other areas

• Federal Reserve: Fewer than 40% of consumers who lived in high-minority areas had credit scores over 701, while nearly 70% of consumers who lived in mostly white neighborhoods had scores over 701

• Harvard’s Joint Center for Housing: Median credit score for whites in 2001 was 738, but for Blacks it was 676 and Hispanics it was 670

• Freddie Mac: Blacks were three times as likely and Hispanics twice as likely to have FICO scores below 620 as whites

The Credit Report: Explored

• Credit Report: A record of how you have paid your credit card debt and other loans.

It reflects the following:– How much debt you have– If you’ve made your payments on time– Whether or not you’ve paid back your loans

The Credit Report: Explored Credit reports are

complied by national credit reporting agencies called credit bureaus

• There are three Credit Bureaus:– TransUnion– Equifax– Experian

Credit Report: ExploredNote:• There are multiple credit

scores available for you. • Different scoring models are

used with different institutions (Vantage Scoring System v. FICO Scoring system).

• The FICO score is the most commonly used one, as it is the one used by the three credit bureaus.

The Credit Report: Explored

Information typically included:

• Indentifying Information– Name, Address, Social

• Credit Information– Dates opened, credit limits

• Public Record Information– Bankruptcy, Foreclosures

• Inquiries– Others who looked at report

Common errors on the report

• Duplicate Information

• Uninvited Inquiries

• Items that should no longer be listed on your credit report

Want GOOD Credit???• Tip 1: Pay your bills on time

• Tip 2: Contact your lenders immediately if you foresee a payment problem

• Tip 3: Borrow at a minimum

• Tip 4: Do not overdraft accounts

• Tip 5: Understand loan terms/agreements before signing

Protecting Your Finances

Keep the original copies of your documents in a safe place.

Keep your important computer files safe.

Make copies of all of your important documents.

Keep a copy of your important papers in safe, or storage that is secure and outside of the home, in case of an emergency

Monitor your accounts regularly

Recognizing Credit Repair Scams• The company wants you to pay for credit repair services before they provide any

services.

• The company recommends that you do not contact any of the three major national credit reporting companies directly.

• The company tells you they can get rid of most or all the negative credit information in your credit report, even if that information is accurate and current.

• The company suggests that you try to invent a “new” credit identity — and then, a new credit report — by applying for an Employer Identification Number to use instead of your Social Security number.

• The company advises you to dispute all the information in your credit report, regardless of its accuracy or timeliness.

YOUR RIGHTS

• Each of the nationwide consumer reporting companies Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.

• It doesn’t cost anything to dispute mistakes or outdated items on your credit report.

• No one can legally remove accurate and timely negative information from a credit report

Where To Get Help• Annual Credit Report: www.annualcreditreport.com

• Experian: www.experian.com

• Equifax: www.equifax.com

• TransUnion: www.transunion.com

• National Foundation For Credit Counseling: www.nfcc.org

• Federal Trade Commission: Choosing a Credit Counselor www.ftc.gov

• Department of Justice: List of Credit Counseling Agencies- http://1.usa.gov/2P1Bq4

• Better Business Bureau: See if there are any alerts on the organization you are considering www.bbb.org

• Association of Independent Consumer Credit Counseling Agencies: www.aiccca.org