Unit 6 Financial Literacy
What factors may contribute to the percent of a county's population with a credit file?
The different age groups and the percentage of adults who are employed contribute to the percentage of a county's population with a credit file.
net worth
total assets minus total liabilities
Examples of Assets and Liabilities
(house, investments, savings, car, etc.) , liabilities (mortgage, auto loan, student loans, credit cards, etc...) and net worth (total assets - total liability = net worth)
Other Ways to Build Credit in College
If you don't have any income in college, would be unable to pay the balance on a credit card, or simply can't get approved for one, there are other ways to build your credit in college without credit cards:
What role do the 3 credit bureaus play in your credit history and score?
All 3 credit bureaus maintain my credit history or report and use that to calculate my score.
Three Credit Bureaus
Experian, TransUnion, Equifax
Why might it be important to track your net worth?
It might be important to track your net worth because you can see if your financial situation is improving or not.
What types of information would be included on a credit report?
There is history about all of your accounts and payments across all your credit products. This could include your car loans, mortgage, etc.
What is a credit score?
a number assigned to a person that indicates to lenders their capacity to repay a loan. This is a number that helps lenders assess how well you have managed your financial obligations(payment history, using different types of credit, handling your debt by not going off the rail, length of your credit history, and new credit).
What is the relationship between an emergency fund and credit/loans?
An emergency fund is where you save money for unexpected expenses. Using credit/loans is when you borrow money for stuff, but you have to pay back monthly payments. For instance, you could save money in your emergency fund instead of using payday loans, which have high interest rates and usually cost people a lot of debt.
Benefit #7 of having a good credit score(Get a Cell Phone on Contract With No Security Deposit)
Another drawback of having a bad credit score is that cell phone service providers may not give you a contract. Instead, you'll have to choose one of those pay-as-you-go plans that have more expensive phones. At the least, you might have to pay extra on your contract until you've established yourself with the provider. People with good credit avoid paying a security deposit and may receive a discounted purchase price on the latest phones by signing a contract.
Benefit #3 of having a good credit score(More Negotiating Power)
A good credit score gives you leverage to negotiate a lower interest rate on a credit card or a new loan. If you need more bargaining power, you can take advantage of other attractive offers that you've received from other companies based on your credit score. However, if you have a low credit score, creditors are unlikely to budge on loan terms, and you won't have other credit offers or options.
Benefit #6 of having a good credit score(Better Car Insurance Rates)
Add auto insurers to the list of companies that will use a bad credit score against you. Insurance companies use information from your credit report and insurance history to develop your insurance risk score, so they often penalize people who have low credit scores with higher insurance premiums. With a good credit score, you'll typically pay less for insurance than similar applicants with lower credit scores.
Benefit #9 of having a good credit score(Bragging Rights)
Because of all the benefits, a good credit score is something to be proud of, especially if you've had to work hard to take your credit score from bad to good. And if you've never had to experience a bad credit score, keep doing what it takes to maintain your good score. It only takes a few missed payments to start getting off track.
DO Apply for a Credit Card at Your Bank
Besides a secured credit card or a retail or gas credit card, another option is applying for a credit card with a bank where you already have a checking or savings account. If you have a savings and checking account along with a history of not letting your balances go below the account minimums or getting overdraft fees, you might be more likely to get approved.
Benefit #2 of having a good credit score(better chance for credit card and loan approval)
Borrowers with a poor credit history typically avoid applying for a new credit card or loan because they've been turned down previously. Having an excellent credit score doesn't guarantee approval, because lenders still consider other factors such as your income and debt. However, a good credit score increases your chances of being approved for new credit. In other words, you can apply for a loan or credit card with confidence.
Explain how debt impacts a person's net worth.
Debt impacts a person's net worth because if you have less debt, you would have a higher net worth. On the other hand, if you have to pay a lot of debt, you would have a lower net worth.
Choose Responsible Roommates
If you decide to live in an off-campus apartment, choose responsible roommates you can trust. Since your name is on the lease and you're paying utilities together, it will hurt your credit if they're missing payments or not turning in the rent on time.
Become an Authorized User on Your Parents' Credit Cards
If you don't want to or can't open your own credit card account, consider asking your parents to add you as an authorized user on their cards. If they have good credit, you'll be piggybacking off their positive credit history, which can boost your score.
What 4 questions should you ask yourself before using credit to make a purchase?
Is the purchase really necessary? Do I have room in my budget to cover my monthly payments? Could I save money instead of borrowing money? Is borrowing the money worth it after paying the added interest?
DO Pay Off Your Balance Every Month(advice for students in college)
Just because you have a credit card doesn't mean you should live outside your means. You should only be charging everyday purchases you'd be making anyway, such as groceries, gas, cellphone bill, cable bill, or anything else you were already planning on buying. Create a budget based on your income and expenses and stick to it. Pay your balance off every month to avoid debt accruing, paying interest, and hurting your credit. In 2013, the average college graduate left school with $3,000 in credit card debt, according to CNN Money.
Pay Your Bills on Time
Just like with credit cards, this is imperative. Missed or late payments from your Internet, cable, or cellphone bill can damage your credit report. Even things like doctor bills, unpaid library fees, parking tickets, or school fees not covered by loans could get sent to collections and harm your credit.
Benefit #5 of having a good credit score(Easier Approval for Rental Houses and Apartments)
More landlords are using credit scores as part of their tenant screening process. A bad credit score, especially if it's caused by a previous eviction or outstanding rental balance, can severely damage your chances of getting into an apartment. A good credit score saves you the time and hassle of finding a landlord that will approve renters with damaged credit.
Your friend knows that 88.4% of adults nationally have a credit file and score and assumes that each of those people is using their credit card or a loan regularly. Why is your friend incorrect?
My friend is incorrect because we don't know if they use credit cards or loans regularly; we just know each of these adults have a credit history by using different types of credit.
DON'T Let Your Balances Grow
Regardless of the type of card you have, keep your balance something you can pay off every month to avoid paying interest and accruing debt. Thirty percent of your credit score is based on the amount owed, so those big balances are only going to hurt you in the end.
DON'T Open and Close Accounts Frequently(advice for students in college)
Take time to research benefits to each credit card so you're not tempted to jump around and open a new account. It's recommended that you keep your oldest credit card open to show a long length of account duration, which benefits your credit. Closing an account may shorten your credit history and reduce your available credit, both of which can lower your score.
DO Consider Other Types of Cards if You Can't Qualify for a Traditional Credit Card(advice for students in college)
The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, makes it harder for anyone under 21 to apply for credit without a co-signer or proof of a full-time income. However, there are other options for a credit card if you can't qualify for a traditional one or get a co-signer. A secured credit card is offered through banks and is associated with a savings account you have. You put a specific amount in a savings account associated with the card, and that amount is your credit limit. Often credit cards from a retail store or gas station have different restrictions, so they might be easier to acquire.
Benefit #1 of having a good credit score(Low Interest Rates on Credit Cards and Loans)
The interest rate is one of the costs you pay for borrowing money and, often, the interest rate you get is directly tied to your credit score. If you have a good credit score, you'll almost always qualify for the best interest rates, and you'll pay lower finance charges on credit card balances and loans. The less money you pay in interest, the faster you'll pay off the debt and the more money you have for other expenses.
Don't Co-Sign for Your Buddies
There are plenty of ways to be a good friend in college, but co-signing for anything should not be one of them. The second your friend misses a payment, your credit is negatively impacted. Regardless how responsible a friend is or how secure their job seems, you can't control if they stop paying down the road.
Benefit #8 of having a good credit score(Avoid Security Deposits on Utilities)
These deposits are sometimes $100 to $200 and a huge inconvenience when you're relocating. You may not be planning to move soon, but a natural disaster or an unforeseen circumstance could change your plans. A good credit score means you won't have to pay a security deposit when you establish utility service in your name or transfer service to another location.
DON'T Apply for Multiple Accounts at Once(advice for students in college)
This can lower your credit score since new credit inquiries make up 10% of your score. Instead, wait for a card with benefits and perks you can use, no annual fee, and a low interest rate.
DO Make Your Payments on Time(advice for students in college)
This is imperative, since 35% of your credit score is based on payment history. Consider setting up automatic payments to avoid a late payment. Set up an alarm on your phone, write it on your calendar, and enroll in text and e-mail reminders if available.
DON'T Let Your Card Sit in a Drawer(advice for students in college)
To build credit, you have to use your card. Simply having a credit card won't build your credit alone. You need to have a payment history, so make a small purchase every now and then and immediately pay it off.
DO Choose a Card That's Right for You(advice for students in college)
Used properly, credit cards can have a lot of benefits. Many offer some type of fraud protection, for example, unlike a debit card. Before you apply, research what is offered to know what's best for you.
Benefit #4 of having a good credit score(Get Approved for Higher Limits)
Your borrowing capacity is based on your income and your credit score. One of the benefits of having a good credit score is that banks are willing to let you borrow more money because you've demonstrated that you pay back what you borrow on time. You may still get approved for some loans with a bad credit score, but the amount will be more limited.
Start thinking about good credit in college.
Your credit report is going to determine a lot for you. The misconception is that you're only going to need good credit way down the road — such as when you're ready to buy a home, which can seem like an eternity away when you're in college. However, your credit can impact you right now, determining your interest rate for student loans. Plus, if you're thinking about consolidating your loans after graduation, a good credit report could land you a better interest rate. Employers can look at your credit report and score when deciding whether to hire you. And if you'll need a car to get to that job, you're going to need a good credit history to get an auto loan. That post-college apartment? Odds are your potential landlord is going to look at your credit report to see whether you'd make a responsible tenant. Or the landlord may require an additional security deposit if have no or poor credit. Besides those immediate needs for good credit, building a solid credit history early is going to give you a jump start down the road. According to FICO, 15% of your credit score is based on the length of your credit history. So the earlier you begin building your credit, the better off you'll be.