In this lesson from the Financial Literacy curriculum we’re going to talk about Credit. After which, you can choose to be a slave or a master to your new ‘friend’
   Yes, we intend to overuse this image!

   Yes, we intend to overuse this image!

 

Your credit is a measure of your financial reputation, which often translates into how much money and at what interest rate financial institutions are willing to lend you. Credit takes time to build, requiring a history of financial transactions. These transactions are recorded in credit reports, which are maintained by three main credit agencies, including Experian, Equifax, and TransUnion.

Your report is available to you for free once every 12 months from each of these agencies. You should definitely take advantage of this. When you get your credit report there are certain things you need to look out for. You want to make sure your report reflects your actual financial history and is free from fraud. Fraud is when someone transacts using your credit without your authorization. Fraud may be more prevalent than you think. Global financial card fraud is over $11 billion and represents approximately $.05 per every $100 in transactions, according to a 2013 Nilson Report. If you identify fraud in your report, alert all three agencies immediately. They will help you take back control of your credit. In addition to looking for fraudulent transactions, search for inaccurate or missing information, such as accounts that don’t belong to you, wrong addresses, wrong employers or anything that doesn’t look right.

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Another important piece of information in your credit report is your credit score. Your score is essentially a measure for lending institutions to assess the likelihood that you will repay your debt. If a bank loans you $10,000, it gives them an idea as to how much they should trust you to pay them back the principal and interest. They don’t know you personally, so they use this objective measure to assess the risk. Credit scores range from 300-850. Roughly speaking, 800-850 is excellent, 730-799 is great, 680-729 is good, 580-679 is fair, 500-579 is poor, and 300-499 is very poor.


Chances are if you’re young, then you have no credit history and thus, you have no credit report or score. If that is the case, then there are ways for you to build your credit from scratch. Establish a relationship with your local bank by opening a savings account. 

Making frequent deposits will let the bank know that you aren’t spending all your money.

Knowing this, the bank will likely be more open to giving you credit, such as a credit card. If you are renting a place, you could also put utilities in your name. Consistently paying this on time will help you establish credit. You could also obtain a secured credit card. With a this card, your credit is guaranteed by an underlying asset that you own, such as a car. If you fail to pay the loan, the institution can confiscate your asset, sell it and pay off your debt. If you undertake this method, be sure the lender reports your payments to the credit agencies, as some do not. Note, that a secured credit card is different from a prepaid card. Lenders will not report prepaid cards to the agencies. Probably one of the better ways to establish credit is to get someone to cosign a loan for you. The cosigner, who typically has good credit, guarantees the loan repayment. If you miss a payment, then they will be on the hook. If the loan remains in good standing, your credit will benefit. Finally, do not keep applying for credit if you keep getting turned down. This looks bad and will only worsen your standing.

If you already have credit, there are actions you can take to improve it. Keep your loan balances manageable and well under the credit limits. The ratio to look at here is called the debt/credit ratio. It measures how much debt you’re taking on relative to the maximum amount of debt you can take on. You want this ratio to be as low as possible. Also, don’t exceed the limits on your credit card accounts. When you borrow, you want to make the lenders aware that just because you can borrow, doesn’t mean you will borrow or have to borrow. Pay all your bills on time and make sure you pay at least the minimum required on all accounts. Failure to do so will cause lenders to think you are struggling financially or that you are simply irresponsible. Keep the credit accounts that you’ve historically paid on time. This will let lenders know that you have a history of being financially responsible. Monitor your credit report regularly, checking for accuracy. Don’t let some fraudster ruin the what you’ve worked so hard to build. Don’t apply for a lot of credit or check your credit too much in a short amount of time. Too many credit inquiries will make lenders very nervous. Finally, don’t file for bankruptcy or let any debts go to collections. Negative marks on your credit report, such as late payments and bankruptcies can remain for 7-10 years.


There are many benefits to having good credit. Lenders will trust you more and that will translate into lower interest rates on loans and credit cards. People with higher scores are more likely to be approved for renting apartments or houses. Having good credit can even allow you to get your dream job. You need good credit to land a job with top secret security clearance in the government and higher level financial jobs. The reasoning is simple; people in financial difficulty are more likely to take bribes or steal in order to better their financial positions.

 

The take aways are as follows:

Your credit is critical to your financial well-being, so keep tabs on your credit report and score

Look for ways to improve your credit and avoid doing things that can damage it

Your future (in a debt and credit based economic system) is brighter if you have good credit

What you’re going to do with your new ‘friend’ is your business, but beware of what he keeps in his pocket. He’s soon going to tempt you to borrow one from him. Meet… ‘Credit Cards’ … an excellent idea to understand them before you use them!