Costs and Benefits of Using Credit

Credit Cards

How do credit cards work?

The credit card company issues you a line of credit. You then purchase stuff and have the choice to pay your balance either in full or make a minimum payment each month.

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What do you already know about credit cards?

Credit Score

The bank's ability to trust you with money.

Multiple Choice

Which is NOT a way to build your credit?

• Paying bills on time and in full
• Using credit cards responsibly
• Making payments late

• Putting utility bills in your name

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.

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What do you think the advantage is to paying your balance off in full each month?

You won't get charged interest if you pay your balance in full each month!

But what happens if you DON'T pay off your credit card every month? Let's watch a video to find out.

https://www.youtube.com/watch?v=_HfXfKLYV68

Let's Recap

In the video we see that there was a carryover balance of $1000 and then an additional $600 in purchases for that month. After a few calculations we find that even though you only borrowed $1600 you would still have to pay AN ADDITIONAL $18.35 in interest for that month.

Multiple Choice

520 is considered a very good credit score.

• true

• false

Multiple Choice

How many credit bureaus are there?

• 1
• 5
• 10
• 3

Pay the statement balance on your credit card in full each and every month!

Multiple Choice

A credit score in the 500s would be defined as...

• good

• poor

• excellent

• fair

Multiple Choice

What is considered a great credit score?

• Between 600 and 700
• Above 700
• Above 800
• Below 500

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.

Multiple Choice

Which is NOT a way to fix your credit ?

• Keep unused credit cards open

• Paying bills on time
• Negotiating with creditors
• Closing your credit accounts

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.

Multiple Choice

It is good to know your credit score prior to going to purchase a car, in order to avoid...

• multiple hard inquiries

• multiple soft inquires

• unnecessary hastle

• all of the above

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 Select

What impacts your credit score the most? (check all that apply)

• large balances

• late payments

• revolving debt

Multiple Choice

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

• true

• false

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What does "credit invisibility mean?"

Multiple Choice

One advantage of having a high credit score is...

• being able to loan money to others

• receiving better payment rates

• having the ability to buy excessively

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

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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?

Multiple Choice

You should never ______ a credit report.

• request

• review

• pay for

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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?

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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?

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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?