Credit Score

Credit Score

The bank's ability to trust you with money.

Multiple Choice

What is the term meaning the bank's ability to trust you to pay back a loan?

• Credit Card

• Credit Agency

• Credit Score

• Credit Limit

Why is Credit Score important?

• It determines whether you will be approved for a loan.

• It determines how much credit you will be trusted with.

• Some jobs or landlords will check your credit score before accepting your application.

Multiple Choice

520 is considered a very good credit score.

• true

• false

Problem #1: Negative Marks on Credit Reports

Perhaps the most common problem are negative marks on your credit report. This can happen if you miss a payment. A missed payment stays on your credit report for 7 – 10 years so it is important to make all your monthly payments on time. If you have a lot of accounts to manage, a good strategy is to set up “auto-pay” which will automatically pay the bill from your checking account. If you find yourself in this situation, the best plan is to make a budget to help you make sure that you have enough money to cover your monthly bills. If you still cannot afford your monthly payments, call the companies you owe and try to work with them on re-working your payment plan. The worst thing you can do is to avoid the companies you owe, even if you want to

Problem 2: Defaulted Accounts

A defaulted account is when the company decides that you have made no attempt to pay back your loan. This would usually take place after 6 months of inactivity. Defaulted accounts leave bad marks on your credit report and can get you into legal trouble. Companies can take money out of your paycheck or other assets you owe. In the end, you’ll end up owing more than you owed in the first place. To avoid defaulted accounts, contact your collection agencies and come up with a plan to make your monthly payments something that you can afford.

Problem 3: Maxed Out Credit Limit

It does not look good if you are using a high percentage of your credit limit. For instance, if you have a credit card with a $1000 limit, immediately spending $1000 will lead to a high credit utilization ratio (in this case you are using 100%). A good credit utilization ratio is less than 30% so a person with a $1000 credit limit should try use $300 or less. If you find yourself in this situation, pay more than just the minimum payments due on your credit card so you can lower your credit utilization ratio quickly. Stop using your credit card until your ratio is under control.

Problem 4: No Credit History

If you never had a credit card or any kind of loan, you are what banks call “credit invisible” meaning they cannot know if you they can trust you with credit. This is not a huge problem to have at first, but it can lead to problems if you have long term goals like buying a house or taking out loans for college. If you have no credit history, start by applying for a small limit credit card with a bank and consistently make your payments until they raise your credit limit. If you are having a problem getting approved, try becoming an authorized user on credit card under the name of a responsible adult – parent, guardian, or relative. Have your activity reported to a credit agency so you can start building credit history in your name. 

Multiple Select

Which of the following are problems that can hurt your credit?

• Defaulted Accounts

• Being "Credit Invisible"

• Maxing Out Your Credit Limit

• Earning Too Much Money

• Negative Marks on Credit Reports

Multiple Choice

It's a great idea to avoid your bank if you owe them money. They probably won't find you.

• true

• false

Open Ended

What does "credit invisibility mean?"

Open Ended

What should you do if you max our your credit limit?

Open Ended

Directions: For each scenario, identify the problem that each person is facing. Then give a brief description of what the person can do to help their credit score improve.

Susan filed for bankruptcy which resulted in a serious negative mark on her credit report. Consequently, it has been difficult for her to obtain credit. What are some financial steps Susan can take to demonstrate that she’s learned from her financial mistakes and is ready to be a responsible borrower?

Open Ended

Carrie has decided she’s ready to buy her first home. However, she doesn’t have any established credit and is having trouble receiving approval for a mortgage due to her lack of credit history. What are some strategies Carrie can use to establish a credit history?

Open Ended

Jackie has maxed out all of her credit cards. Even though she manages to make her minimum payments each month, her accrued debt level has hurt her credit score. What can Jackie do to improve her credit utilization ratio?

Open Ended

Max fell behind on his payments and began ignoring the statements and phone calls from his creditors. Eventually the creditors turned his accounts over to a collection agency. Credit bureaus see collection accounts as a sign that Max isn’t a reliable borrower and his credit score will decrease because of it. What can Max do to rehabilitate his credit after an account has been turned over to a collection agency?