4/5/2023 Intro to credit notes

The Business of Making the Banks Rich at Your Expense

Credit Intro Video: https://www.youtube.com/watch?v=HWPJUZItq5Q

Vocabulary
• Credit – Credit is a contractual agreement in which a borrower receives something of value now and agrees to
repay the lender at some date in the future, generally with interest.
• Loan – the act of giving money, property, or other material good to another person or company in exchange
for future payment of the amount borrowed plus interest.
• Lender – the institution that is lending a borrower money.
• Borrower – the person or institution borrowing money in the form of a loan.
• Down payment – the cash payment that is paid upfront used to reduce the amount of a loan.
• Secured loan – a loan secured with collateral that can be sold by the lender to recover all or part
of the loan should the borrower fail to pay.
• Unsecured loan - An unsecured loan is a loan that is issued and supported by the borrower's creditworthiness
ONLY, instead of some type of collateral.
• APR – Annual Percentage Rate – the rate of interest you will pay per year once compounded on the money
you borrowed.
• FICO score – this is your credit score as determined by credit agencies.
• Collateral – security for loan repayment

What is Credit?
Credit is NOT free money. It is BORROWED money. You are paying for whatever item you are purchasing
using credit. You are required to pay this loan back PLUS some interest. The interest is like a fee for the bank
loaning you the money to purchase the item. If you purchase a computer for $1,000 and the interest is $200 you
are actually paying $1,200 for the computer. So you are paying more than what the computer is worth.

There are different types of loans/credit

• Mortgage
• Auto Loan
• Student Loan
• Revolving Lines of Credit
• Credit Cards
• Home Equity Lines of Credit

Types of loans
• Secured Loans
• Unsecured Loans

Secured Loans are backed by some kind of collateral:

Secured loans less risky to the lender because they can take back what you are getting the loan for. For example
your car can be repossessed by the lender if you do not make the payments. If your loan is for a house –
mortgage – then the house can go into foreclosure. If you do not pay the loan then your credit score will be
negatively affected. Because the loan is less risky, the interests rate are generally lower than the rates for
unsecured loans & credit cards. Speaking of credit cards, a way to build back damaged credit would be to get a
secured credit card. This is when you will make a deposit into a bank/lending institution and they would give
you a credit limit, for example you deposit $250 and would get a $500 credit line. If you do not pay the CC’d
you would lose your deposit.

Unsecured loans
Unsecured loans do not require any collateral. If you get an unsecured loan it is based on how the lender sees
you as a borrower. (your creditworthiness). An unsecured loan is more risky for the lender so your interest rate
will be higher. If you do not pay back your loan then the lender will lose what was not paid for and your credit
score will be negatively affected.

Credit Myths

You do not need to have credit to buy a house, it is NOT IMPOSSIBLE. It just takes a lot more work in
providing documentation that you pay your bills on time and that you have the required income. You will need
to find a ‘no credit mortgage’ lender

Having no credit is NOT necessarily a bad thing. It means you do NOT have any debt. However, as we
discussed in class, no credit can hold you back from some things, such as renting an apartment, getting a good
interest rate on a large purchase such as a car.

A good credit score is a positive thing but as stated above you do not necessarily NEED a credit score – you do
NOT want to have BAD credit score. If you have a bad credit score you will be denied loans – which, even if
you are debt free (that’s great) you may at some point need to get a loan – and a bad score means you will pay
the price in interest payments. Also, while there are federal laws against race and gender discrimination in
hiring practices, you can be denied a job for having a poor credit score – think about it, if you have a bad score
it shows you are not responsible with your money, you are not trustworthy to pay back money, and you could be
compromised by corporate espionage. (ok – so now I am explaining more than I did in class – but its true!)

Talk about the FICO (credit score) numbers

Preferred credit scores are usually higher than 700
• Classified as good credit or excellent credit.
• More likely you are to get approved for credit
• More likely you are to have a lower APR
• More trustworthy you are to pay back your bill

Un-preferred credit scores are less than 699.

• These borrowers are higher risk to lenders
• Less likely to get approved for credit
• Less likely to pay back what you borrowed
• Or less likely to pay on time
• Less likely to get a low APR
• No credit
• No credit history exists for you
• You are higher risk to lenders due to no credit history
• Less likely to get approved for car loans, mortgages, most credit cards.
• Less likely to get a low APR
Scores lower than 550 – you have a lot of work to do improving your score before anyone will lend you money
at a reasonable interest rate

How does a credit score work?

Notice how every part of this measures how you handing using money you will OWE
Building your credit… It’s not confusing
Payment history – this is how well you pay back the money you borrowed (notice it has the highest value)
Amount owed – how much money do you owe and how much open credit lines do you have? You really want
to keep your credit utilization to less than 13% (7% is ideal) Examples: If you have a credit limit of $10,000
and you owe $8,000 you are borrowing 80% of what you are allowed. This can have adverse effects on your
credit score. If you have a credit limit of $10,000 and you owe $1,000 this is only 10% and is better for this
portion of your credit score
Length of credit: The longer your credit history the higher this portion of your FICO score will be. A
reminder would be not to cancel your first credit card. Even if you choose to get another one and use it instead,
don’t close the account with your oldest credit card. Closing a credit account can restart your credit history
date.
New Credit – Don’t apply for new credit unless you need it! The more you apply for the more inquires will
show up on your credit report (hard pull of the credit report) every time this happens, your credit score is
lowered. If you MUST apply, try to get pre-approved WITHOUT IMPACT to your credit score (soft pull of the
credit report)
Types of credit used – are you using revolving credit (credit cards) personal loans, do you have student loans,
car payments or a mortgage?

ALSO – you will not get a loan if you do not have an income to pay that loan back – example if you want to
purchase a $400,000 house but only make $25,000 a year---you probably are NOT going to get approved for a
loan even if your credit score is 850!
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Protect your credit

Remember all the stuff we learned about in the Identity Theft Unit???
• Remember to protect your credit by locking or freezing it- if you lose your card or are scammed REPORT
REPORT REPORT!!!! EVERYWHERE!!!

3 credit reporting agencies: Equifax, Experian and Transunion