Your Parents Can’t Fix Everything

Your credit history

• Begins now—when you choose and use credit cards

• Includes your missteps for as long as 7 years

Your credit history makes up your credit score

• Timely payments (35%)• Total debt (30%)• Length of history (15%)• New credit (10%)• Kinds of other debt (10%)

Credit scores are given as numbers between 300 and 850. Higher is better.

• Your credit score can influence the interest rate you will be charged on– Credit cards, car loans, student loans, mortgages

• Your credit score can also influence whether you can even get– A credit card, car loan, student loan, mortgage– Life insurance– Employment– Lease

The single most important component of your credit score is whether you make

payments on time

• Your parents can make a payment for you.• Your parents cannot make a late payment not late.

• A late payment stays on your credit history and impacts your credit score for as long as 7 years.

Most credit card companies use the FICO credit score from the Fair Isaacs Corporation

• www.myFICO.com• Credit Education Documents• Understanding Your FICO Score

Choosing a credit card

Credit card companies advertise options that get your attention, but are not usually helpful for selecting a card based on financial benefit to you. These incentives may be a choice of

• The picture on the card• The payment due date• “Affinity” (to a school or charity)• Rewards such as airline miles, free delivery,

cash back

Fees and interest charges

• Credit card companies make money from the fees and interest they charge.

• You should choose a credit card based on the amount and kinds of fees and the interest rate(s).

Fees are fixed amounts due at a specified time or because of an event• Annual fee• Cash-advance fee• Late-payment fee• Over-the credit-limit fee• Set-up fee• Return-item fee

Interest is charged monthly on the unpaid balance

• You must be quoted the periodic (monthly) rate

• You must also be quoted the APR (annual percentage rate) equivalent

• Rates may be different for purchases, for cash advances

• Rates can change

Credit card companies also charge the business you make a purchase from. Currently this charge is about 2 percent of the amount you purchase. For comparison, this is twice the rate of administering Social Security.

Look for the disclosure (Schumer) box on credit card solicitations or application forms. Under federal law this

disclosure box must include certain key information.

• www.federalreserve.gov– Publications• Consumer Information Brochures

– 5 Tips for Getting the Most from Your Credit Card– 5 Tips for Improving Your Credit Score– Choosing a Credit Card

» Survey of credit card plans

Using your credit card

• Avoiding fees

• Minimizing interest

Don’t exceed your credit limit (avoid the over-the-limit fee)

• Know what your unpaid balance is before you charge more

• Know what amount will be put through to your credit card account (what is “blocking”?)

• Know what you may need to charge before you can make your next payment (budget)

• Know what you are statistically like to need to charge… (realistic budget)

Know where the money to pay the monthly credit card bill is going to come from—interest runs on an unpaid balance.

Know how the moneyis going to get to you andhow you are going to get it to the credit card company—

avoid return-item (bounced check) fee,late-payment fees, andinterest

If you pay the bill in full and on time,

• There will be no unpaid balance• So, no interest• So, no fees

If you pay at least the minimum payment (but not the full unpaid balance),

• There will be no fee,• But interest will run on the unpaid balance• AND ON ANY NEW PURCHASES YOU MAKE

FROM THE TIME OF THE PURCHASE

If either you do not pay at all or if you pay something (even the full amount) LATE,

• There will be a late payment fee• Interest will run on the unpaid balance• AND ON ANY NEW PURCHASES YOU MAKE

FROM THE TIME OF PURCHASE

LATE means payment RECEIVED after the due date.

• When you mailed the payment does not matter.

• You could call and ask for the fee to be waived in extraordinary circumstances, but– This might happen once in a decade and– Expect your interest rate to be raised

Your bank, other credit cards, other financial relationships are intertwined.• This can be good. You can pay bills online

from your bank account so you won’t have to worry about mail being received late.

• Mostly this can be bad. If you make any payment to any creditor late, your credit card company are likely to increase your interest rate.

So, how are you doing? What is your credit history? What is your credit score?

• Three companies track credit historyEquifax, Experian, TransUnion

• You can get a free credit report from each of the three once a year

• You cannot get a free credit score

There is only one source for the free credit report to which you are legally entitled under federal law.

www.annualcreditreport.com

• Other source that advertise free credit reports require you to pay for something else such as your credit score, monitoring in order to get the “free” credit report.

Useful links

• www.ftc.gov (Federal Trade Commission)– Select Credit & Loans under “Quick Finder”

• www.controlyourcredit.gov (US Treasury)

• www.ace.uiuc.edu/cfe/ccs/– (University of Illinois Extension)