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The Importance of Good Credit

About Freddie Mac

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of fundsto mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages fromlenders and packages them into securities that are sold to investors. Since its creation, FreddieMac has helped financeone in six American homes.

About CreditSmart® Asian

CreditSmart Asian is a multilingual series to guide Asian American consumers on how to build and maintain bettercredit, understand the steps to buying a home and how to protect their investment.

Special Thanks

Special thanks to the following organizations for their collaboration in the development of the CreditSmart Asian: AsianAmericans for Equality, Boat People SOS, Chhaya CDC, Filipinos for Affirmative Action, Korean Churches forCommunity Development, Nakatomi & Associates, National Coalition for Asian Pacific American CommunityDevelopment (National CAPACD), National Congress of Vietnamese Americans, National Korean American Service &Education Consortium, Inc., and Quon Design.

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� Open bank accounts

� Apply for a credit card

� Keep records of repayment and income

� Use credit card responsibly over time

� Make payments before due date

� File income taxes

� Know your rights as a borrower

� Build your good credit rating

Freddie Mac: The Importance of Good Credit

Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Good Credit: A Gift for the Future . . . . . . . . . . . . . . . . . . . . . . . . . 4

Good Credit is Worth It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Building Good Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Keeping Credit Strong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

You Have Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Being Credit Wise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Good Credit: An Asset for Your Future . . . . . . . . . . . . . . . . . . . . . 26

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Table of Contents


Welcome,

or millions of families, homeownership is a route to creating wealth. It buildsfinancial security for the future.

As you begin the journey to homeownership, Freddie Mac is providing this infor-mation to help you successfully make your way through the process. We knowthe process may seem daunting, especially if you have limited English skills or ifyou don’t yet have credit established and don’t know how the system works. Wecreated this series of guidebooks to help you get started. The guidebooks coverthe importance of establishing your credit, the process of buying a home, includ-ing how to make the best financial choices for you and your family, and theresponsibilities of being a homeowner.

There are many other resources available to you, including community organizations, your local government housing agencies, real estate agents andlenders who understand and are willing to work with prospective homebuyerslike you. We strongly encourage you to seek out their professional services togather the facts so you can make the best decisions. You will face many choicesthroughout the process.

In this first guidebook, The Importance of Good Credit, you will learn the signifi-cance of establishing and maintaining a good credit history. Even if you don’thave a checking account or a credit card, you will learn how and where to begin.Yes, it takes time, but establishing your good credit history is worth it. Goodcredit is an asset that will fuel your future wealth by allowing you to secure a loanfor a car or for your business and to buy a home where your family can live andgrow together.

After reading this booklet, you should read our companion guidebooks, Steps toHomeownership and Homeowner Benefits and Responsibilities. Together, thesebooks are a valuable road map addressing the issues and questions most impor-tant to you.

From all of us at Freddie Mac, we wish you great success. With proper planning,time and hard work, you can realize your dream of homeownership.

Credit Smart® Asian: The Importance of Good Credit

Positive credit is an

asset that will fuel your

future wealth.

F

ou work hard. You strive to livewithin your means and to manage

your money and financial resourcesresponsibly. Saving for the future isvery important to you and your family.Now you are ready to give your familya valuable gift: a home, a place to liveand grow together and an importantasset for the future. Homeownershipmeans building a path to financialsecurity and stability for your familyand the future.

In the United States, most peoplemust borrow money from a lendinginstitution to purchase their home. Asyou begin the process of buying yourown home, you will discover theimportance of having good credit,especially when you try to get the bestfinancing option. Today, lenders con-sider many factors when decidingwhether to give you a home mortgageand what interest rate your mortgagewill be. Your credit history is one ofthe primary sources lenders use todetermine your likelihood to pay backa loan.


Your credit history is a report on howyou have paid bills or paid back moneyyou have borrowed. It includes yourloans, your credit card accounts withbanks, stores and other lenders, yourrecord of payments and your timeli-ness of payments. Your credit historywill only show how you paid bills orused credit if the lender reported yourpayment history to the credit reportingbureau.

If you do not have a credit history—perhaps because you do not use tradi-tional bank services or credit cards oryour payments were not reported to acredit bureau—or if you have imperfectcredit because of past problems, youmay face challenges when buying ahome.

Fortunately, you can learn how toestablish and build your good credithistory. Yes, it takes time. But by build-ing a good credit history now, you willbe well on your way to homeowner-ship and have the tools for buildingwealth. Also, a good credit history cansave you thousands of dollars in thefuture.

By building a good

credit history now, you

will be well on your

way to homeownership

and have the tools for

building wealth.

Y

WHY IS GOOD CREDIT IMPORTANT?

Good credit helps you realize your dreams. Buying a home, buying a car, leas-ing an apartment, getting a job—all these events may require a credit check.

Perhaps you want to make a major purchase with credit, such as a new com-puter or an appliance for your home? Or perhaps you want a loan so you cango to college or send your child to school? All these important life events aremade easier if you have good credit. Once you establish good credit, youreceive preferred rates on other transactions, such as lower premiums on autoand homeowner’s insurance.

Good Credit: A Gift for the Future


What Is Credit?Credit is the ability to borrow tomor-row’s money to pay for something youget today, such as a home, furniture orcar. It is a promise to repay a debt, andit reflects on your reputation. Creditmay be extended through credit cards,personal loans, car loans and homemortgages.

Two types of credit are revolving creditand installment credit.

1. Revolving credit allows you to bor-row up to a pre-established limitrepeatedly, as long as you keep theaccount in good standing. Revolvingcredit includes credit cards and homeequity lines of credit. For example, ifyou have a $1,000 limit on your revolv-ing line of credit, you can borrow $800,repay it, then borrow $900, repay itand continue the cycle as long as youwish. With your responsible use andrepayment, your bank may increasethe limit on your revolving line of creditfrom time to time.

2. Installment credit is a loan provided to a borrower by a lender tobe repaid over a specified term.Installment credit includes car loansand personal loans. For example, youmight borrow $20,000 to buy a car andreceive a 5-year loan term for repay-ment. Loans that are secured by anasset (for example, your car) usuallyhave a lower interest rate than unse-cured loans.

Interest Rates

Interest is a charge you pay to borrowmoney from your lender. The interestrate is usually expressed as a percent-age of the amount borrowed. Theinterest you pay is the cost of yourloan over the term of your loan. Theannual percentage rate, or APR, isthe total annual cost you pay (includingthe interest rate, points and fees) asthe borrower on your loan. Accordingto federal law, lenders must report theAPR to you for a home mortgage loan.The APR is a good tool for comparingrates on different loans.

SECURED VS. UNSECURED LOANS

Some loans are called“secured,” meaning they arebacked by collateral. Collateralis the value of an item of prop-erty, such as a car, a home or acash account. For example,home and car loans are guaran-teed by the item purchased. Inthe case of a secured creditcard, your purchases are guar-anteed by a deposit accountequal to your line of credit. Ifyou fail to repay a secured loan,your lender may take your col-lateral to satisfy the debt—byforeclosing on your home,repossessing your car ordeducting from your cashaccount.

Other loans, such as traditionalcredit cards or student loans forhigher education, are unsecuredby collateral. Even though youdo not have collateral guaran-teeing repayment, you still areobligated to satisfy your loanterms. Lenders may take legalaction to force repayment if youdefault on an unsecured loan.

Credit is the ability to borrow tomorrow’s money

to pay for something you get today.


Good debt is money

borrowed for an asset

that retains value, or

even builds value.

Can Debt Ever Be Good?You may prefer to pay for your pur-chases and bills with cash becauseyou do not want to incur debt. It mightseem strange to say there is such athing as good debt when you havespent much of your life trying not toborrow money. When it comes toestablishing your good credit, therereally is such a thing as good debt.There are also some types of debt youshould avoid. In general, banks andlenders look favorably upon good debtthat is managed well.

Good debt is money borrowed for anasset that retains value, or even buildsvalue (also called equity), or for some-thing that will improve your standard ofliving in a meaningful way—such as aloan for higher education that willenable you to get a higher-paying jobin the future. Examples of good debtinclude a home mortgage on your prin-cipal residence, a loan to help start orexpand your business, a car loan soyou have a vehicle to get to and fromwork or school, or a home equity loanto improve and add value to the resi-dence that you own.

Avoid borrowing money for incidentalitems that do not retain their value. Forexample, unless you can pay off thecredit card balance each month, avoidusing high-interest credit cards to payfor meals or clothing that you really donot need. With the realities of creditcards, an incidental $50 item of cloth-ing paid for with credit today and notrepaid immediately could cost manytimes its original purchase price whenit is finally repaid. And chances are, theitem of clothing will not last as long asthe debt!


DO I REALLY NEED THIS?

Today, there are many consumers in serious debt because of overuse ofcredit cards for nonessential purchases. To ensure you do not becomeone of them, it is important to evaluate each purchase carefully before youbuy it with credit. Ask yourself these questions:

� Do I really need this item?

� Do I need to buy it today, or can I wait to purchase it later with cash?

� What will this item really cost me after I pay it back over time?

� How long will it last?

� Decide what you can live without for now—especially knowing thatbeing responsible with your credit will help you realize your greaterdream of homeownership.

FORMS OF CREDIT TO AVOID

As a responsible consumer, you must be aware of tactics used by somecreditors that promote easy loans regardless of your ability to repay. Whilethey may seem attractive, these loans typically involve high interest rates,some form of collateral or even costly hidden fees. For example, avoidpawnshop loans and agreements with local rent-to-own stores, whichcharge you exorbitant interest rates via long-term rental agreements forfurniture or other household items. Also avoid payday and tax refundadvances, which may have high upfront fees.

Be sure you know all the terms of your loan before you sign any agree-ment. With a little research or a few phone calls, you may discover thatyou can do much better by borrowing money from a local bank or a tradi-tional lender.

Be sure you know all

the terms of your loan

before you sign any

agreement.

ow that you understand the basictypes of credit and interest, you

are ready to establish your good credithistory. It is a large part of your finan-cial reputation, and it is examinedwhen you apply for any loan in thefuture—such as for a new home orcar—and perhaps when you apply fora job.

With good credit, you will receivepreferable interest rates and pay lowerfees. Over time, you will see this foryourself. As your good credit historygrows, you will have an easier timegetting a loan approved, and you willreceive favorable rates and terms. Yourauto and home insurance premiumsmay even go down as your credit rat-ing goes up.

With good credit and early preparation,you can buy a home for your family—athing of value that builds equity. Equityis the difference between the value ofyour home (if you sold it today) andyour outstanding loan balance. Forexample, if you buy a home for$210,000 today and own it for fiveyears, the home likely will increase invalue. Your home may be worth$400,000. If you sold the home for$400,000 while owing only $200,000on your mortgage, you would have$200,000 in equity ($400,000 –$200,000 = $200,000).


Your home’s equity is a valuable toolfor building wealth for the future ofyour family. You can use the equity topurchase a larger home, or you canborrow against the equity to improveyour property. Your home’s equity mayeven fund your business, retirement oryour children’s education.

Other advantages of homeownershipinclude valuable tax benefits, such asbeing able to deduct your mortgageinterest payments on your annualincome tax return if you itemize yourtax deductions. Another advantage ishaving the same monthly mortgagepayment over the life of your loan (ifyou have a fixed-rate mortgage). Ifyou are a renter who has ever experi-enced an unexpected rent increase,you can easily see the value of this.

Believe it or not, there are also advan-tages to using credit cards for yourregular purchases (provided you payoff your balance each month). Carryinglarge amounts of cash to make pur-chases is dangerous. Cash cannot bereplaced if lost or stolen, while mostcredit cards offer some form of protec-tion if your card is reported stolen ormissing. When you use a credit card,you may receive some form of buyerprotection if you purchase an item thatis defective. Credit cards also offer away to track your purchases via yourmonthly statement—giving you aneffective way to track expenses foryour household or small business.

Good Credit Is Worth It

N

With good credit, you

will receive preferable

interest rates and pay

lower fees.


WHY DOES IT MATTER?

Good credit is a valuable asset. Consider this example of two families tryingto get a fixed-rate, 30-year home mortgage for $216,000:

� The first family, with a high credit score of 760, is pleased to receive a 6.5%interest rate.

� The second family, with a lower credit rating of 620, is offered a rate of8.09%.

� The 1.59% difference may not seem like a lot now, but it will cost the second family $2,796 a year more—$83,880 over the life of the loan—for their mortgage.

These interest rates and scores are for illustration only; actual mortgage rates depend on many vari-ables, including credit scoring.

6.5% Interest Rate8.09% Interest Rate

FICO® Score = 760 FICO® Score = 620

Higher Credit Score = Lower Interest

Lower Credit Score = Higher Interest

760-850 = 6.50% = $1,366

700-759 = 6.72% = $1,397

680-699 = 6.90% = $1,423

660-679 = 7.12% = $1,454

640-659 = 7.55% = $1,517

620-639 = 8.09% = $1,599

If your FICOscore is

Your interestrate is

Your monthlypayment is

These interest rates and scores are for illustration only; actual mortgage rates depend on many variables, including credit scoring.

Based on 30 year fixed-rate mortgage of $216,000

ow that you can see the value ofbuilding a strong credit history,

you are ready to begin building yourown good credit. But where do youbegin, especially if you have no creditnow? The good news is that you cando it. With patience and a little time,you will have a credit history to buildyour future upon.

The first step is to open a checking orsavings account if you have not doneso. Next, apply for a credit card. If youcannot open a bank account or have acredit card now, you must begin keep-ing track of all your financial obliga-tions. (Why? Some lenders are realiz-ing the value of serving new immi-grants and those with cash incomes.You can create a non-traditional credithistory by showing careful documenta-tion of your payment history.) Here aresome things you can do to start estab-lishing your good credit:

1. Open checking and savingsaccounts. (If you do not speakEnglish, look for a bank branch orcredit union with bilingual tellers whereyou will feel comfortable doing busi-ness.) Keeping all your money in cashin your home or place of business isdangerous, leaving you at risk for los-ing your money or having it stolen.Your cash is safer in the bank. In banksand credit unions, your deposits areinsured against loss. (Limits on insur-ance vary by institution and type ofaccount. Ask your financial institutionfor its deposit insurance information.) Ifyour money is in a bank, you can paybills, make withdrawals and check yourbalance regularly. Your bank also may


offer value-added services, such asfree or low-cost money transfers soyou can avoid expensive wire transferswhen sending money to family over-seas. If you pay your bills with checksyou can show a mortgage lender yourhistory of good payments even if thosepayments are not reported to a creditbureau. Also your deposits may earnvaluable interest.

2. Apply for a credit card. A goodplace to start is with a departmentstore where you shop regularly. Startwith a low balance, and pay your billon time every month. Another option isopening a secured credit card, which isguaranteed by a savings accountequal to the amount of your credit limit.Be careful to avoid upfront fees oncredit cards aimed at users with imper-fect credit or no credit. Other than anannual fee, there should be no chargeto help open a credit card account.Ask your lender to waive or reducefees, and shop around to find the low-est rates possible. Keep the number ofyour credit cards to a minimum of twoor three. Having too many credit cardscan penalize you when you apply for aloan. Pay your rent and utilities ontime. Even though these obligationsare not typically reported to a creditbureau (i.e., Equifax, Experian,TransUnion), if you can show that youpaid these bills, then you can show alender that you have a pattern of mak-ing payments on time and in full. If youdo not have established credit history,careful documentation of these pay-ments is important.

Building Good Credit

You can create a

non-traditional credit

history by showing

careful documentation

of your payment

history.

N


3. If you borrow money from a fami-ly member or friend, keep goodrecords of repayment. If you belongto a cultural savings club (for examplereferred to by Chinese Americans as“su-su” and by Korean Americans as“kye”), some lenders will accept a let-ter from the treasurer or the fundadministrator as documentation ofsupplemental funds and a good pay-ment history.

4. Keep your pay stubs. Lenders liketo see job stability, and you will need toprovide proof of employment. If you donot receive pay stubs, before youapply for credit ask your employer tofill out a VOE (verification of employ-ment) form.

5. If you are self-employed, keepdetailed records of your income andexpenses.

6. Apply for an open, 30-day creditaccount. For responsible users, thesecredit accounts are a useful tool. Allyour charges are due in full everymonth, and there is no interestcharged. In exchange for your annualfee you are provided with useful con-sumer benefits, such as purchase pro-tection and travel insurance.

7. Find a friend or family member tobe a co-signer. A co-signer may helpyou qualify for a credit card or loan, butremember that the friend or familymember will be responsible for yourloan balance if you default on youragreement to repay. (This is importantto keep in mind if you are asked to co-sign a loan for someone else.)

Income taxes If you have not begun to file incometaxes, you should begin doing so rightaway, regardless of your immigrationstatus. The Internal Revenue Service(IRS) offers an individual taxpayer iden-tification number (ITIN) for taxpayerswho do not have a Social Securitynumber (SSN). Even if you are notasked for copies of your tax returnsnow, when you buy a home you willneed them. A mortgage lender willneed to see this documentation of yourincome and income history to deter-mine whether you can repay the loan.

Chances are you will qualify for deduc-tions (such as for childcare or businessexpenses) you did not know existed.You even may qualify for a tax refund.Additionally, once you own your home,you will want to deduct your mortgageinterest on your tax return—one of theprimary advantages of being a home-owner! If you are unsure how to begin,consult the IRS, a tax professional or alocal community center for assistance.

JOINT ACCOUNTS—BUILDINGGOOD CREDIT TOGETHER

When you apply for credit jointlywith your spouse (or anotherfamily member), you both areresponsible for repayment, andyour credit history will be report-ed jointly. For this reason, it isimportant to discuss yourexpectations and goals clearlybefore opening any new loansor credit accounts. Both of youshould set, and agree to, abudget for the use of the creditcard or loan, since both of youare responsible for repayment.Remember, you are workingtogether toward your goal ofhomeownership.

ow that you have establishedcredit, you must work diligently to

keep it in good standing. Here aresome things that will jeopardize yourgood credit if you are not careful:

1. Late payments. All late paymentswill be noted on your credit report,even if you make up the payment later.You must pay your bill before the duedate. When making your payment, besure to allow for the time it takes yourpayment to arrive at your lender’soffice by mail. When in doubt, pay yourbill a few days early to be sure itarrives on time. If you miss your duedate, you could face costly late fees inaddition to the negative credit implica-tions.

2. Borrowing more than the creditlimit. If you use your credit card topurchase more than your credit limitallows, you are required to pay theoverage plus your normal minimumpayment. Additionally, you may berequired to pay a penalty fee forexceeding your credit limit. These feescan add up quickly. (If you need addi-tional credit on a regular basis, youshould ask your creditor to raise yourcredit limit. You also should reviewyour spending habits to see if there areany charges you can eliminate or payfor with cash.)


3. Insufficient funds to pay forchecks. In addition to incurring expen-sive bank fees, your returned checksdue to insufficient funds may bereported to a credit bureau and may bereflected on your credit rating. Be sureyou balance your checkbook, and besure you have enough cash in yourchecking account to pay for everycheck you write. To keep your balanceup-to-date, be sure to deduct fromyour check register all your ATM with-drawals, any fees charged for use ofATMs and any debit card transactions.

4. Defaulting on a loan. An unpaidloan balance reflects negatively onyour credit report. You should contactthe creditor to see if you can resolvethe situation. It is best to resolve thesituation, since the negative report willstay on your credit rating until youresolve it.

5. Unpaid liens (collection judgment)or child support. If you owe moneybecause of a legal judgment, it can bereported on your credit history. Resolvethese matters before you apply for ahome loan. Consult with an attorney oryour local legal aid society for assis-tance.

Keeping Your Credit Strong

Pay your bill a few

days early to be sure

it arrives on time.

N


6. Guaranteeing a loan for anotherperson that is not paid back. Anyloan you co-sign for another person isyour responsibility if your co-borrowerdefaults. Consider these conse-quences before you co-sign for afriend or relative.

7. Excessive credit inquiries. Whenyou are shopping for a car loan or ahome loan, be sure to comparisonshop within a short period of time suchas two weeks. If you apply for creditwith many lenders over a long periodof time, it can hurt your credit report.Many inquiries for credit with differentlenders over a long period of time maylook like you are being denied for cred-it or that you are looking for too muchcredit and will not be able to manage itall. You can also obtain your owncredit report and your credit score andcomparison shop using that informa-tion. Tell a lender that these are thefacts about you and tell the lender notto obtain a credit report about you atthis early comparison shopping stage.A lender will want to verify the creditinformation later once you are moreinterested in what they have to offer.

8. Too much debt. Banks and lendersconsider your total debt when decidingif you qualify for a mortgage loan.Although it depends on the mortgage,as a guide 28% of your gross month-ly income can be used for your princi-pal, interest, property taxes and insur-ance (PITI). Furthermore, your totalmonthly debt and PITI should notexceed 36% of your total grossmonthly income (before payroll deduc-tions). For example, if your monthlyincome is $2,000, then $720 is the tar-get amount. While this is only a guide-line, if your debt-to-income ratio isabove 36%, you need to increase yourincome or reduce the amount youowe—or both. Keep in mind that buy-ing a home is an important goal foryour entire family, and improving yourcredit and your overall financial pictureis worth the hard work.

9. Job/income instability. Lenderslook for borrowers’ employment orincome stability for at least two years.If you changed jobs several times inthe past two years (but remained in thesame job industry), or if you were inschool prior to working, be prepared toexplain your job history to yourprospective lender.

$2,000 X 36% = $720

Monthly income

Monthly debt& PITI not to

exceed 36% ofmonthly income

Debt-to-incomeratio target

amount

Debt-to-Income Ratio

If you miss your due date, you could face

costly late fees in addition to the negative

credit implications.

ith so many things to watch for, itis easy to be confused by credit

and loan applications. You may beunsure of the process and even moreconfused if you are turned down for aloan or a credit card. The good news isthat you have rights as a consumer atevery step of the process.

Under the Equal Credit OpportunityAct, you cannot be declined credit orgiven a different rate because of yourrace, gender, marital status, religion,age, national origin or the receipt ofpublic assistance. Public assistancemust be considered in the same man-ner as other forms of income. Underthis law, if you are declined credit, youhave the right to know why. (Ask for awritten explanation, or ask to speakwith someone on the telephone toexplain the reason your applicationwas turned down.)


Under the Fair Credit Reporting Act,you have the right to know what infor-mation credit bureaus are distributingabout you, and you are entitled to thatinformation being correct.

Under the Truth-in-Lending Act,lenders are required to provide youwith written disclosures about the costof credit and the terms of repaymentbefore you enter into the transaction.

Under the Fair Credit Billing Act, pro-cedures are provided for resolvingbilling errors on your credit cardaccount.

The bottom line is that you haveimportant rights as a borrower forevery loan transaction you enter. Knowyour rights and protect yourself frombecoming a victim of unscrupulouslending tactics.

You Have Rights

Know your rights and

protect yourself from

becoming a victim of

unscrupulous lending

tactics.

W


CREDIT CARD TERMSWhenever you apply for a new line of credit or answer an offer for a credit card,you should find a box listing the interest rate, grace period and annual fee,among other information. This box is required by law and should look somethinglike this:

0.00% for 12 months from date of account opening. After that, 10.99% variable.

Balance transfer APR; As long as first balance transfer is com-pleted within 12 months from date of account opening, 0.00% for 12 months from date of first balance transfer. After that, 10.99% variable. Cash advance APR: 22.99% variable. Default APR; 31.99% variable, see explanation below.

Your APRs may vary each billing period.The purchase and balance transfer rate equals the U.S. Prime Rate plus 2.99%. The cash advance rate equals the U.S. Prime rate plus 14.99% , with a minimum cash advance rate of 19.99%. The default rate equals the U.S. Prime Rate plus up to 23.99%.

Not less than 20 days if you pay your total new balance in full each billing period by the due date.

Average daily balance (including new purchases)

None.

$0.50

3% of the amount of each foreign currency purchase after its conversion into U.S. dollars.

3% of the amount of each cash advance, $5 minimum.

3% of the amount of each balance transfer, $5 minimum, $75 maximum. However, there is no fee with 0.00% APR balance transfer offer described above.

$15 on balances up to $100 up to $1000; and $39 on balances of $1000 and over.

$35

ANYBANK U.S.A. DISCLOSURES

Annual percentage rate (APR)for purchases

Other APRs

Variable rate information

Grace period for repayment of balances for purchases

Method of computing thebalance for purchases

Annual fees

Minimum finance charge

Transaction fee for purchasesmade in a foreign currency

Transaction fee for cash advances

Transaction fee for balance transfers

Late fee

Over the credit-line fee

APR: This line explains your annualpercentage rate, as well as any promo-tional period that may apply, such asthe length of time you may receive anintroductory reduced interest rate.

Other APRs: You may incur a differentinterest rate and fees for balancetransfers or cash advances. Theserates are often higher than your regularrate, so be sure you know your termsbefore you use these account features.

Variable rate information: In thiscase, the APR is tied to the U.S. PrimeRate. The U.S. Prime Rate is the pub-lished rate banks charge their top cor-porate lenders. Loans made by banksoften are priced above or below theprime rate. With this variable rate, yourloan rates are adjusted when the U.S.Prime Rate changes.

Grace period: On credit cardaccounts, this is the period of time(usually 20 to 25 days) when you canpay for your new purchases in fullwithout being charged interest (if thereis no previous balance).

Annual fees: You pay your lender thisfee simply for maintaining youraccount. This fee is added to any inter-est you owe, and it is due even if youhave no balance. This fee and any oth-ers the bank may charge for thisaccount are included in your APR.


Transaction fee for purchases madein a foreign currency: If you travel fre-quently, be aware of this extra feeassigned to your foreign purchases.Your lender charges this fee to convertforeign currency to U.S. dollars.

Transaction fee for cash advances:Cash advance fees are expensive. Ingeneral, it is not a good idea to useyour credit card for cash advances.You should have another source offunds, such as a savings account, setaside for emergencies.

Transaction fee for balance trans-fers: Balance transfer offers can beenticing, but you must read the disclo-sures to see what additional fees youmay be agreeing to pay. Keep in mindthat if a payment is received after thedue date (even if it is received withinthe “grace” period), discounted inter-ested rates will escalate, often to ahigher rate than you now pay.

Late fee: Late fees usually are chargedas a percentage of the balance owed.It is easy to see how important it is tomake your payments on time.

Over the credit-line fee: This is apenalty you pay to your lender forowing more than your credit limit. Beaware that when you are over yourlimit, you will owe your regular mini-mum payment, the total amount overyour limit and your over-the-limit fee.Keep careful track of your balance toavoid this costly scenario (see chart).

$3,000 $3,500 = $500

Your Credit Limit

Purchases onCredit Card

Over-the-limitAmount

Over-the-limit Fee*

Minimum Payment $100Over-the-limit amount $500Over-the-limit fee $35

Total due $635

*These figures are for illustration only; actual payments will vary depending on your credit limit and agreement.

Your monthly billing scenario could be:


CREDIT REPORTING BASICSOnce you apply for, and establish, your own credit, many lenders or creditorsreport your history of payments to one or more of the nation’s largest three creditbureaus—Equifax, Experian and TransUnion.

Your credit report may be accessed for many reasons. Lenders, credit card com-panies and department stores may check your file to determine if you are a goodrisk for additional credit. Additionally, your employer, landlord, insurance agentand cellular phone company, among others, may gain access to your credit file todetermine your creditworthiness.

It is important to make sure the items in your file are accurate. Here is a samplecredit report showing the information typically listed:

1 LEE, JOHN *2 9923,WOODBINE,CHICAGO,IL,60693*3 10,N,CAMINO,OAKLAND

TRANS UNION CREDIT REPORT

<FOR> <SUB NAME> <MKT SUB> <INFILE> <DATE> <TIME>(I) D248 ABC DEPT. STORE 06 CH 4/74 02/15/94 09:36 CT

<SUBJECT> <SSN> <BIRTH DATE>LEE,JOHN 001-01-0418 2/53

<TELEPHONE>555-4212

<CURRENTADDRESS> <DATE RPTD>9932 WOODBINE, #9B CHICAGO IL. 60693 11/93<FORMER ADDRESS>10 N. CAMINO, OAKLAND CA. 94583 2/92

< POSITION><CURRENT EMPLOYER AND ADDRESS> <INCOME> <VERF> <RPTD> <HIRE>MARRIOT HOTELS CONCIERGE8638 GRANT, ANYTOWN IL. 32500Y 1/94 1/94 1/91

S P E C I A L M E S S A G E S***TRANS-ALERT: INPUTADDRESS DOES NOT MATCH FILE ADDRESS******HAWK-ALERT:VERIFY INPUT…

CURRENTADDRESS IS COMMERCIAL

M O D E L P R O F I L E * * * A L E R T * * ****NEW DELPHI ALERT: SCORE +775:26,03,06,25 ***

C R E D I T S U M M A R YPR=1 COL=1 NEG=1 HSTNEG=1-5 TRD=2 RVL=1 INST=1 MTG=0 OPN=0 INQ=2

HIGH CRED CRED LIM BALANCE PAST DUE MNTHLY PAY AVAILABLEREVOLVING: $500 $1000 $100 $ $20 90%INSTALLMENT: $16.0K $ $12.4K $1974 $282TOTALS: 16.5 K $1000 $12.5K $1974 $302

P U B L I C R E C O R D SSOUCE DATE LIAB ECOA ASSETS PAID DOCKET#TYPE COURT LOC 1/94 PLAINTIFF/ATTORNEYZ 4932059 8/93 R 13.0K C $5000 93B38521CHAPTER 11 BANKRUPTCY CHICAGO,IL R. SMITH/D. WINSLOW

C O L L E C T I O N SSUBNAME SUBCODE ECOA OPENED CLOSED $PLACED CREDITOR MOPACCOUNT # VERFIFIED BALANCE REMARKSADVANCED COLY 999C0004 I 3/93 3.93F $2500 ABC BANK 09P12345 2/94A $1000 MAKING PAYMENTS

T R A D E SSUBNAME SUBCODE OPENED HIGHCRED TERMS MAXDELQ PAYPAT 1-12 MOPACCOUNT # VERIFIED CREDLIM PASTDUE AMT-MOP PAYPAT13-24ECOA COLLATRIL/LOANTYPE CLSD/PD BALANCE REMARKS MO 30/60/90

AMERICAN BK B 6661001 10/92 $16.0K 60M282 11/93 545543211111 I059876543210 2/94A $1974 $1974 05 1111111I NISSAN MAXIMA $12.4K *CONTACT SUBSCRIBER 19V 1/ 1/ 5

FILENES D 3847002 6/89 $500 MINQ20 1111111111111 R012212345678 1/94A $1000 1111111111111C /CREDIT CARD $100 48V 0/ 0/ 0

I N Q U I R I E SDATE SUBCODE SUBNAME DATE SUBCODE SUBNAME2/15/94 DCH248 ABC DEPT STORE : 1/7/94 NPH9999 TEST BANK

E N D O F C R E D I T R E P O R T — S E R V I C E D B Y :TRANS UNION CORPORATION 810-524-2222PO BOX 390, SPRINGFIELD, PA. 19064.

Lenders, credit

card companies and

department stores

may check your file

to determine if you

are a good risk for

additional credit.

In general, a credit report lists the following:1. Your name, address, SocialSecurity number (SSN) and date ofbirth. It also may list your current andprevious employers if you providedthat information on a credit application.

2. Your credit information, includingcurrent and past loans and creditaccounts, such as credit cards, stu-dent loans, car loans and previousmortgages on which your name andSSN appear. The information willinclude the date each loan or line ofcredit was opened, the current loanbalance and your recent payment his-tory, including any late or skipped pay-ments, collections or repossessions.

3. Information from public records,including past bankruptcies, foreclo-sures, tax liens, judgments from law-suits and past due child support.

4. A list of recent inquiries into yourcredit made by any lenders fromwhich you have applied for credit.

It is strongly recommended that youreview your credit report periodically.Once a year is ideal. The Fair CreditReporting Act entitles you to one freecredit file disclosure in a 12-monthperiod. Call (877) 322-8228 or visitwww.annualcreditreport.com to requestthis free annual disclosure.


Or you can order your report from anyone of the credit bureaus listed here:

Equifax(800) 685-1111 or www.equifax.com

Experian(888) 397-3742 or www.experian.com

TransUnion(800) 916-8800 orwww.transunion.com

WHY THREE?

Three credit bureaus. Threecredit reports. Three differentcredit scores. Why? It is truethat the information on yourcredit report may differ slightlyfrom one credit bureau toanother. This is because not allcreditors report their informationto the same credit bureaus. Forthis reason, it is a good idea toorder a report from each of thethree bureaus or to obtain acombined report that lists datafrom all three sources. (This typeof report may be called a three-in-one report or a “merged”credit report.) Learn more atwww.myfico.com.

Good credit helps you

realize your dreams.


What If Something Is Wrong?If you find an error in your credit report,you have the right to correct it. It iscrucial that you address the problemas soon as possible, since errors canaffect your ability to obtain a loan oraffect how much you will have to payto get a loan in the future.

There are procedures for alerting thecredit bureaus about mistakes on yourreport. On your report, you will finddetailed information on the steps youshould take to correct any errors. Writethe credit bureau to report the prob-lem, and keep a record of what yousend.

You can also call the credit reportingagency and they will instruct youregarding any additional steps youmust take to resolve your issue. Youmay be required to send copies ofstatements or payments to the agencyto explain your concern. Additionally,you may be asked to send an explana-tion of the matter in writing.

By law, a credit bureau must respondto your complaint within 30 days. If thebureau agrees with you, and the itemis determined to be inaccurate, yourcreditor must notify the other creditbureaus about the issue so they cancorrect your credit history.

If the credit bureau is unable to resolveyour complaint, you should contact thespecific creditor in question. Keepaccurate records of your contact and

conversations, and ask that they cor-rect their error and report their correc-tion to the credit bureaus. If theyrefuse, you have the right to place abrief explanation in your credit file.Limited to 100 words, your statementcan explain an unusual situation, suchas one in which you refused to pay abill because an item was defective ornot delivered. In this case, the negativeitem will still appear on your report, butyour explanation will accompany it.

Knowing the ScoreIn addition to your credit history andyour credit report, there is another waycredit reporting bureaus indicate yourcreditworthiness. Credit bureaus use acredit score which uses statisticaldata to evaluate information containedon your credit report. Your credit scoreis based on information from yourcredit report, and it helps determinethe interest rate, terms and fees asso-ciated with your loan. It is important toknow that factors such as income,age, race, religion, national origin, gen-der and marital status are not incorpo-rated into a credit score. A good creditscore is not related to a high income.People with modest incomes canestablish good credit, and people withhigher incomes still may need toestablish good credit.

Based on computerized models thatassign values to the factors listed onyour credit report, the process of creditscoring can be complex, but the basic

If you find an error

in your credit report,

you have the right to

correct it.

fact is this: the higher your score, thebetter. The better your credit report —the higher your credit score. If youhave a good credit score, you willreceive preferred interest rates andterms, and your approval process willbe faster and easier. You often willhave your choice of lenders and loanoffers, whereas a potential borrowerwith less than perfect credit may havefewer options.

The most common credit score usedtoday is called a FICO (Fair, Isaac &Co.) score. FICO scores are ranked ona scale from 300 to 900 points. Higherscores are associated with a bettercredit record and therefore are a lowerrisk to the lender.

When you apply for a loan, you shouldask your lender to explain how yourcredit score was factored into thelending decision and what effect a bet-ter score would have on your loanterms or interest rate. Note that creditscoring is just one tool a lender mayconsider when deciding whether toextend credit or what interest rate andfees to charge. If you have little or nocredit history, you may not haveenough information on file for a creditscore to be calculated. Keep in mindthat with time, diligence and responsi-ble use of credit, you will have a goodcredit history and a credit score to beproud of.


DENIED? WHAT NEXT?

If you are denied credit, do notgive up. First, ask for an expla-nation of why you were turneddown. You are entitled to this bylaw if you ask within 60 days ofbeing denied credit. If you wereturned down because of anerror in your credit report, reportthe error to the credit bureauright away. If the denial wasbecause of an unpaid obligationin your credit history, call yourcreditor to settle the past debt,or work out a payment plan. Ifthe denial was because of yourlimited credit history, ask yourlender if you can establish a"non-traditional” credit history.

“Non-Traditional” Credit History

A borrower will be most successful inshowing a lender that they have paidtheir debts on time as agreed if theycan show several months or a year ofconsecutive payments. These pay-ments can be documented with can-celled checks, copies of transmittals orpossibly a letter from the creditor.

Lenders may be willing to take a lookat a variety of types of payments. Forexample, lenders may look at utilitypayments, cell phone payments, regu-lar deposits into a savings account,regular transmittal of money out of thecountry to family members, paymentof rent even to a family member.

If you have a good

credit score, you will

receive preferred

interest rates and

terms, and your

approval process will

be faster and easier.


Identity TheftToday, it is vital that you protect yourpersonal information. With identity thefta very real possibility for all consumers,it is important that you and your familywork diligently to protect your personaldata. Examples of identity theftinclude:

� Using another person’s name orSSN to open or use a credit cardaccount.

� Opening a cellular phone or utilityaccount using another person’sname or identifying information.

� Obtaining a loan in another per-son’s name.

� Opening a bank account in anotherperson’s name.

Thankfully, if you are diligent andreview your bank and credit card state-ments regularly, you are likely to spotany suspected fraud early and get itresolved quickly. But the responsibilitylies mainly on you, the victim, to reportthe fraudulent activity.

Here are some steps you can take toavoid identity theft:

� Review all statements (bank, creditcard, insurance, mortgage, loans,telephone, etc.) every month. Thesedays, a simple glance at your bal-ance due is not enough. Pay carefulattention to any unusual activity orunfamiliar transactions.

� Know when your statements aredue. If your bill does not arrivewhen you expect it, call your creditcard company. Be aware of thepossibility that a thief has stolenyour mail, called your creditor andchanged your mailing address toconceal fraudulent activity.

� Never give out personal informa-tion, especially your SSN, byphone, via mail or online unless youare initiating the contact. There aremany scams that pretend they aredoing legitimate business and needyour personal information.

� Destroy (by shredding or tearing up)any paperwork that lists your per-sonal information, includingreceipts, forms, statements andloan or credit card offers.

� Mail your outgoing letters and billpayments at the post office, wherethey are less likely to be stolen thanif you leave them in your homemailbox for pickup.

� Keep your Social Security card athome, separate from your wallet, ina safe place.

� Only carry in your wallet your mainform of identification (such as yourdriver’s license) and a limited num-ber of bank or credit cards. Themore items you carry, the moreitems can be lost or stolen from you.

With identity theft a

very real possibility for

all consumers, it is

important that you

and your family work

diligently to protect your

personal data.

ow that you have credit of yourown, you must manage it wisely. It

is only with careful management andpersistence that you will establish andmaintain your good credit history and agood credit score. As you movetoward your goal of homeownership,here are some important tips to followwhen using credit to make purchases.

Don’t buy what you cannot afford.Each time you want to make a pur-chase with a credit card—no matterhow large or small the item—considerthat you are getting a loan to pay for it.Do you really want to pay 20% morefor the privilege of financing your trip toAsia or hosting a large gathering tocelebrate your child’s first birthday?That is exactly what you are doing ifyou cannot or do not pay your balancein full each month.

Pay your balance in full—beforeyour grace period ends. Justbecause you have credit does notmean you have to keep a revolvingbalance. If you have the means, payyour entire balance due. If you cannotpay your entire balance, try to pay asmuch as possible.

Pay more than the minimum pay-ment. If you only pay the minimumpayment on your credit card everymonth, it will take you years to payyour balance, and that is if you do notmake any additional purchases withthe credit card. Always pay more thanyour minimum payment.

Evaluate your needs versus yourwants. Practice delaying nonessentialpurchases for items you want until you


have enough cash to buy them. Usecredit only for items you really need. InAsian cultures, certain customs areimportant and are considered a need.Consider whether having your baby’sfirst birthday celebration for hundredsof people or hosting an elaborate wed-ding for hundreds of people (includingthe pre-wedding customs and ritualsassociated with an Asian wedding) is aneed or a want.

Be savvy about credit industry tac-tics. Credit card companies use manytechniques to get you to borrow moremoney than you need. Enticing promo-tions to open new accounts (“Applytoday and get a free tote bag!” “Opena new account and get 10% off yourfirst day’s purchases!”) and attractivein-store promotions offering “no inter-est and no payments for six months,”may sway you to open new accountsyou do not really need. Although yourobligation for payment of this debtstarts six months after your purchase,if you do not pay off the balance youmay face hefty finance charges whenyour promotional period ends.

Be wary of special offers. Once youestablish credit, you will be offeredmore credit. Be wary of offers for bal-ance transfers or for new accounts thatmay contain hidden fees. Be sure toread all the terms before you sign anynew credit agreement.

Be aware of fees, fees, fees. Fromfees for using convenience checks(often included with your monthly cred-it card statement) to cash advancefees, to charges for optional serviceslike credit insurance or credit monitor-

Being Credit Wise

It is only with careful

management and

persistence that you will

establish and maintain

your good credit history

and a good credit score.

N


ing, you may find yourself incurringfees on top of fees. Always weigh thecosts and benefits associated withthese types of special services andconsider whether you really needthem.

Remember your debt-to-incomeratio. In general, lenders like to seethat your monthly housing expensesdo not exceed 28% of your grossmonthly income, and that your totalmonthly debts and housing expensesdo not exceed 36% of your monthlyincome. As you work to establish yourgood credit, keep this ratio in mind,and keep your spending to a minimum.

The True Cost of Minimum PaymentsWhen you buy an item with credit, overtime you pay far more than the pur-chase price. Consider the followingexample.

Mr. Singh wants to buy a $2,000 per-sonal computer. His children will usethe computer for their schoolwork, andMr. Singh and his wife will use thecomputer to keep in touch with familyaround the world.

Mr. Singh decides to use his creditcard to pay for the new computer. Heknows the importance of paying his billon time, and he faithfully makes his$40 minimum payment each month.But at 18% interest, it will take Mr.Singh about 18 years and 5 months topay for that computer—and that is onlyif he never adds another purchase tohis credit card balance. Ultimately, Mr.Singh will have paid more than $3,500in interest alone. That means Mr. Singh

will spend more than 18 years andmore than $5,500 for what was a$2,000 computer, which most certainlywill be obsolete within a few years ofits purchase. By the time the computeris paid in full, Mr. Singh’s childrenmight have their own children.

While this purchase was made with thebest intentions, it was not a smartfinancial choice. Mr. Singh would haveserved his family better by saving$2,000 and paying cash for the com-puter. Or, if he had to use credit, heshould have made a plan to pay farmore than the minimum payment eachmonth.

By paying $100 per month and notadding any more purchases to his bal-ance, Mr. Singh would have paid forthe computer in only two years, incur-ring just $353 in interest.

$2,000 X 36% = $720

Monthly income

Monthly debt& PITI not to

exceed 36% ofmonthly income

Debt-to-incomeratio target

amount

Debt-to-Income Ratio

When you buy an item with credit, over time you

pay far more than the purchase price.

$2,000 Original Computer Cost

$2,000 Original Computer Cost

$100 monthly payments

paid over 2 years

$40 minimum monthly paymentspaid over 18 years

+$353 Interest

+$3,500 Interest

$2,000

$3,000

$4,000

$5,000

$6,000

NOTE: These rates and figures came from the online debt reduction planner/calculators at CNNMoney.com

True Cost of Minimum Payments

Total Cost = $5,500

Total Cost = $2,353

Getting the Credit You DeserveThere are many sources of credit intoday’s marketplace. As a savvy con-sumer and borrower, you have morechoices than ever before. Be sure toshop around for the best rates andservices when you are ready to applyfor a credit card account or a loan.

Your first stop should be the bank orcredit union where you do business.And you should not stop there. Checkat more than one lender before youmake a decision. If someone tells youthat “Your credit is so difficult that I’mthe only person who will work withyou” they are most likely not telling youthe truth. You also may be a memberof an affinity group, such as a commu-nity organization, that offers a creditcard. As you build your good creditand consider various options, you maywant to take advantage of credit cardsthat offer value-added services, suchas travel rewards or points you canredeem for merchandise. Just beaware of any fees associated with theextra services you receive. Also,always compare the interest rates thatyou pay for these value-added creditcards with the rates for credit cardsthat do not offer “free” benefits. Youmay pay more in fees and interest forthe free rewards than you would pay ifyou used cash to buy the trip or mer-chandise yourself.


Reading the Small PrintBefore you accept any credit agree-ment, you should understand every-thing on the disclosure. Pay carefulattention to any fees associated withextra services or convenience. Creditcards, lines of credit and loans mayinclude annual fees, late payment fees,cash advance fees, balance transferfees, currency exchange fees andcharges for periods when you are notusing the available credit. Ask ques-tions if you do not understand theterms, and do not accept the loan ifyou do not understand, or do notagree to, the terms.

Home Equity Lines of CreditOnce you own a home and have builtequity (meaning the home is valued ata higher dollar amount than what youowe on the mortgage), it is easy tothink of a home equity line of credit asif it were a credit card, but you mustremember that its repayment is guar-anteed by your home. Defaulting on ahome equity line of credit may put yourfamily home at risk of foreclosure. Ingeneral, good uses of a home equityloan or line of credit are to financeprojects that increase the value of yourhome, such as replacing an aging roofor repainting its exterior. Using a homeequity line of credit for personal pur-chases or non-critical expenses, suchas a family vacation, is not recom-mended.

Shop around for the

best rates and services

when you are ready to

apply for a credit card

or a loan.


If You Get Into TroubleTo maintain your good credit, you mustbe vigilant. If you have difficulty makingyour monthly payments on your loansor credit cards, you must be honestabout the problem and recognize yourneed for help. Here are some warningsigns:

� Not paying your bills on time, noteven your minimum payments

� Incurring frequent late fees

� Difficulty deciding which bills to payeach month

� Using credit cards for routine pur-chases that you normally wouldpay for with cash

� Spending more than 20% of yourmonthly income on credit card debtand other loans (not including amortgage)

� Borrowing money to make pay-ments on existing loan obligations

� Being at or near your credit limit

� Paying only the minimum due onyour accounts

� Putting off necessities, such asdoctor visits, because you don’thave the money

� Taking a second job just to affordyour basic expenses, such as foodand housing

If you recognize these warning signs,you must be honest with yourselfabout the problem, since it will only getworse with time. Contact your lendersand creditors and explain your situa-tion. You may be able to make repay-ment arrangements or restructure yourdebt. Keep detailed records of yourcommunications to protect yourself.Throughout your negotiations, do notmake promises to your lenders thatyou cannot keep. You must be realisticabout your financial picture.

It is best to avoid unscrupulous creditrepair companies. These companiesoften make promises they cannotkeep, charge you high fees and evenmay increase your debt. Instead, con-tact a non-profit, community-basedcredit counseling organization. A creditcounselor can provide confidentialbudget and debt reduction information,debt repayment programs and financialmanagement education.

BANKRUPTCY, FORECLOSURE,REPOSSESSION

When you have serious prob-lems paying your loan, you maybe subject to foreclosure orrepossession—meaning yourlender may take your car oryour home to partially or fullyrecover the cost of the loan. Youmay have to declare bankrupt-cy, which is a legal proceedingto alter or eliminate your obliga-tion to repay some or all of yourdebts. Different types, or chap-ters, of bankruptcy exist, butyou should know that recentchanges to bankruptcy lawsmay require more repayment,and the process is stricter thanbefore. Declaring bankruptcy isa serious action, only to be con-sidered when all other optionshave been exhausted. A recordof bankruptcy will remain onyour credit report for up to 10years.

t cannot be stressed stronglyenough: Good credit is an asset. It

is a valuable tool for building wealth foryou and your family for the long term.With good credit, you can make majorpurchases, you can buy or lease a car,you can get loans for higher educationand you can buy your family a home.When you take the time to establishand build good credit over time, youwill be able to make purchases secure-ly, unlike using cash, which cannot bereplaced if lost or stolen. As you builda credit history, you will be eligible forthe best rates and terms on otherloans and on things such as cellularphone service and car insurance.

Remember, you have rights as a borrower. You have the right to have an accurate credit report, and youhave the right for a creditor to treat youfairly, without consideration of yourrace, gender, marital status or countryof origin.

In turn, you must be a responsible userof credit. You must manage your creditcards, loans and other obligationswisely, paying your bills on time andrepaying your debts as promised.

Establishing and maintaining yourgood credit history is the first step tobuying your own home—a place whereyou and your family can grow together.Yes, it is hard work and possibly timeconsuming. But, ultimately, it is wellworth the effort.


Good Credit: An Asset for Your Future

Good credit…is a

valuable tool for

building wealth for

you and your family

for the long term.

I


Actual Cash Value: An amount equalto the replacement value of damagedproperty minus depreciation.

Adjustable-Rate Mortgage (ARM):Also known as a variable-rate loan, anARM usually offers a lower initial ratethan a fixed-rate loan. The interest ratecan change at a specified time, knownas an adjustment period, based on apublished index that tracks changes inthe current finance market. Indexesused for ARMs include the LIBORindex and the Treasury index. ARMsalso have caps, a maximum and mini-mum that the interest rate can changeat each adjustment period.

Adjustment Period: The time betweeninterest rate adjustments for an ARM.There is usually an initial adjustmentperiod, beginning from the start date ofthe loan and varying from 1 to 10years. After the first adjustment period,adjustment periods are usually 12months, which means that the interestrate can change every year.

Amortization: Paying off a loan overthe period of time and at the interestrate specified in a loan document. Theamortization of a loan includes in eachmortgage payment the payment ofinterest and a part of the amount bor-rowed.

Amortization Schedule: Provided bymortgage lenders, the schedule showshow, over the term of your mortgage,the principal portion of the mortgagepayment increases and the interestportion of the mortgage paymentdecreases.

Annual Percentage Rate (APR): Howmuch a loan costs annually. The APRincludes the interest rate, points, bro-ker fees and certain other creditcharges a borrower is required to pay.

Application Fee: The fee to cover pro-cessing costs that a mortgage lendercharges the borrower to apply for amortgage.

Appraisal: A professional analysisused to estimate the value of the prop-erty. This includes examples of sales ofsimilar properties.

Appraiser: A professional who con-ducts an analysis of the property,including examples of sales of similarproperties, to develop an estimatedvalue of the property. The analysis iscalled an appraisal.

Appreciation: An increase in the mar-ket value of a home due to changingmarket conditions and/or homeimprovements.

Arbitration: A process where disputesare settled by referring them to a fairand neutral third party (arbitrator). Thedisputing parties agree in advance toagree with the decision of the arbitra-tor. There is a hearing where both par-ties have an opportunity to be heard,after which the arbitrator makes adecision.

Asbestos: A toxic material that wasonce used in housing insulation andfireproofing. Because some forms ofasbestos have been linked to certainlung diseases, it is no longer used innew homes. However, some olderhomes may still have asbestos in thesematerials.

Asset: Something of value an individ-ual owns.

Assumption: A homebuyer’s agree-ment to take the primary responsibilityfor paying an existing mortgage from ahome seller.

Balloon Mortgage: A mortgage withmonthly payments based on a 30-yearamortization schedule, with the unpaidbalance due in a lump sum payment atthe end of a specific period of time(usually five or seven years). The mort-gage contains an option to “reset” theinterest rate to the current market rateand extend the due date if certain con-ditions are met.

Glossary

Bankruptcy: A legal declaration thatyou are unable to pay your debts.Bankruptcy can severely affect yourcredit record and your ability to borrowmoney.

Cap: A limit to how much anadjustable rate mortgage’s monthlypayment or interest rate can increase.A cap protects the borrower from largeincreases and may be a payment cap,an interest cap, a life-of-loan cap or anannual cap. A payment cap is a limiton the monthly payment. An interestcap is a limit on the amount of theinterest rate. A life-of-loan cap restrictsthe amount the interest rate canincrease over the entire term of theloan. An annual cap limits the amountthe interest rate can increase during a12-month period.

Capacity: Your ability to make yourmortgage payments on time. Thisdepends on your income and incomestability (job history and security), yourassets, your savings and the amountof your income that remains eachmonth after you have paid your hous-ing costs, debts and other obligations.

Closing (Closing Date): The comple-tion of the real estate transactionbetween buyer and seller. The buyersigns the mortgage documents, andthe closing costs are paid. It is alsoknown as the settlement date.

Closing Agent: A person who coordi-nates closing-related activities, such asrecording the closing documents anddisbursing funds.

Closing Costs: The costs to completethe real estate transaction. These costsare in addition to the price of the homeand are paid at closing. They includepoints, taxes, title insurance, financingcosts, items that must be prepaid orescrowed and other costs. Ask yourlender for a complete list of closingcost items.

Credit Bureau: A company that gath-ers information on consumers who usecredit. The company sells that infor-mation to credit lenders in the form ofa credit report.

Credit History: A record of credit con-sisting of a list of individual consumerdebts and a record of whether thesedebts were paid on time or as agreed.Credit institutions have created adetailed document of your credit histo-ry called a credit report.

Credit Report: A document used bythe credit industry to examine your useof credit. It provides information onmoney that you have borrowed fromcredit institutions and your paymenthistory.

Credit Score: A computer-generatednumber that summarizes your creditprofile and predicts the likelihood thatyou will repay future debts.

Creditworthy: Your ability to qualify forcredit and repay debts.

Debt: Money owed from one personor institution to another person or insti-tution.

Debt-to-Income Ratio: The percent-age of gross monthly income thatgoes toward paying your monthlyhousing expense, alimony, child sup-port, car payments and other install-ment debts, and payments on revolv-ing or open-ended accounts such ascredit cards.

Deed: A legal document transferringownership or title to a property.

Deed of Trust: A legal document inwhich the borrower transfers the title toa third party (trustee) to hold as securi-ty for the lender. When the loan is paidin full, the trustee transfers title back tothe borrower. If the borrower defaultson the loan, the trustee will sell theproperty and pay the lender the mort-gage debt.


Default: Failure to fulfill a legal obliga-tion. A default includes failure to pay afinancial obligation, but it also may bea failure to perform some action orservice that is non-monetary. Forexample, when leasing a car, the les-see usually is required to properlymaintain the car.

Depreciation: A decline in the value ofa home due to changing market condi-tions or lack of upkeep on the home.

Down Payment: A portion, usuallybetween 3% to 20%, of the price of ahome. This portion is not borrowedand is paid up front.

Earnest Money Deposit: The depositto show that you are committed tobuying the home. The deposit is notrefunded to you after the seller acceptsyour offer unless one of the sales con-tract contingencies is not fulfilled.

Equity: The value of your home abovethe total amount of liens against yourhome. If you owe $100,000 on yourhome, but it is worth $130,000, youhave $30,000 of equity.

Escrow: The holding of money ordocuments by a neutral third partybefore closing. It also can be anaccount held by the lender (or servicer)into which a homeowner pays moneyfor taxes and insurance.

Fixed-Rate Mortgage: A mortgagewith an interest rate that does notchange during the entire term of theloan.

Foreclosure: A legal action that endsall ownership rights in a home whenthe homeowner fails to make the mort-gage payments or is otherwise indefault under the terms of the mort-gage.

Glossary

Collateral: Property that is used assecurity for a debt. In the case of amortgage, the collateral is the houseand property.

Commitment Letter: A letter fromyour lender stating the amount of themortgage, the number of years torepay the mortgage (the term), theinterest rate, the loan origination fee,the annual percentage rate and themonthly charges.

Concession: Something given up oragreed to when negotiating the sale ofthe house. For example, the sellersmay agree to help pay for closingcosts.

Condominium: A unit in a multi-unitbuilding. The owner of a condominiumunit owns the unit itself and has theright, along with other owners, to usethe common areas. The owner doesnot own the common elements, suchas the exterior walls, floors, ceilings orstructural systems outside of the unit;the condominium association ownsthese. There are usually condominiumassociation fees for building mainte-nance, property upkeep, taxes andinsurance on the common areas, andthere are reserves for improvements.

Contingency: A plan for somethingthat may occur but is not likely. Forexample, your offer may be contingenton the home passing a home inspec-tion. If the home does not passinspection, you are protected.

Counter-offer: An offer made inresponse to a previous offer. Forexample, after the buyer presents hisor her first offer, the seller may make acounter-offer with a slightly higher saleprice.

Credit: Credit is the ability to borrowtomorrow’s money to pay for some-thing you get today. Credit is extendedbased on a lender’s good opinion of aperson’s financial situation and reliability.


Index: The published index of interestrates used to calculate the interest ratefor an ARM. The index is usually anaverage of the interest rates on a par-ticular type of security, such as theLIBOR.

Individual Retirement Account (IRA):A tax-deferred plan that can help youbuild money for retirement.

Inflation: An increase in prices.

Inquiry: A request for a copy of yourcredit report. An inquiry occurs everytime you fill out a credit application orrequest more credit. Too manyinquiries on a credit report can hurtyour credit score.

Interest: The cost you pay to borrowmoney. It is the payment you make toa lender for the money it has loaned toyou. Interest is usually expressed as apercentage of the amount borrowed.

Keogh Fund: A tax-deferred retire-ment savings plan for small businessowners or self-employed individualswho have earned income from theirtrade or business. Contributions to theKeogh plan are tax deductible.

Liability: A debt or other financial obli-gation.

Lien: A claim or charge on property forpayment of a debt. With a mortgage,the lender has the right to take the titleto your property if you do not make themortgage payments.

Loan Origination Fee: A fee paid toyour mortgage lender for processingthe mortgage application. This fee isusually in the form of points. One pointequals 1% of the mortgage amount.

Lock-In Rate: A written agreementguaranteeing a specific mortgageinterest rate for a certain amount oftime.

Low–Down Payment Feature: A fea-ture of some mortgages, usually fixed-rate mortgages, that helps you buy ahome with as little as a 3% down pay-ment.

Margin: A percentage added to theindex for an ARM to establish theinterest rate on each adjustment date.

Market Value: The current value ofyour home based on what a purchaserwould pay. Sometimes an appraisal isused to determine market value.

Mortgage: A loan using your home ascollateral. In some states the termmortgage also describes the docu-ment you sign (to grant the lender alien on your home). The term also mayindicate the amount of money you bor-row, with interest, to purchase yourhome. The amount of your mortgage isusually the purchase price of the homeminus your down payment.

Mortgage Broker: An independentfinance professional who specializes inbringing together borrowers andlenders to complete real estate mort-gages.

Mortgage Insurance or PrivateMortgage Insurance (MI or PMI):Insurance needed for mortgages withlow down payments (usually less than20% of the price of the home).

Mortgage Lender: The lender whoprovides funds for a mortgage.Lenders also manage the credit andfinancial information review, the prop-erty and the loan application processthrough closing.

Mortgage Rate: The cost or the inter-est rate you pay to borrow the moneyto buy your house.

Mutual Fund: A fund that pools themoney of its investors to buy a varietyof securities.

Gift Letter: A letter that a family mem-ber writes verifying that he or she hasgiven you a certain amount of moneyas a gift, and that you do not have torepay it. For some mortgages, you canuse this money toward a portion ofyour down payment.

Good-Faith Estimate: A written state-ment from the lender itemizing theapproximate costs and fees for themortgage.

Gross Monthly Income: The incomeyou earn in a month before taxes andother deductions. It also may includerental income, self-employmentincome, income from alimony, childsupport, public assistance payments,and retirement benefits.

Home Inspection: A professionalinspection of a home to determine thecondition of the property. The inspec-tion should include an evaluation of theplumbing, heating and cooling sys-tems, roof, wiring, foundation, and pestinfestation.

Homeowner’s Insurance: A policythat protects you and the lender fromfire or flood, which damages the struc-ture of the house; a liability, such as aninjury to a visitor to your home; ordamage to your personal property,such as your furniture, clothes or appli-ances

Housing Expense Ratio: The per-centage of your gross monthly incomethat goes toward paying for your hous-ing expenses.

HUD-1 Settlement Statement: A finallist of the costs of the mortgage trans-action. It states the sales price anddown payment, as well as the totalsettlement costs required from thebuyer and seller.

Property Appreciation: SeeAppreciation.

Radon: A toxic gas found in the soilbeneath a house that can contribute tocancer and other illnesses.

Rate Cap: The limit on the amount aninterest rate for an ARM can increase ordecrease during an adjustment period.

Ratified Sales Contract: A contractthat shows both you and the seller ofthe house have agreed to your offer.This offer may include sales contin-gencies, such as obtaining a mortgageof a certain type and rate, getting anacceptable inspection, making repairsand closing by a certain date.

Real Estate Professional: An individ-ual who provides services for buyingand selling homes. The seller pays thereal estate professional a percentageof the home sale price. Unless youspecifically have contracted with abuyer’s agent, the real estate profes-sional represents the interest of theseller. Real estate professionals maybe able to refer you to local lenders ormortgage brokers, but they generallyare not involved in the lendingprocess.

Refinance: The process of getting anew mortgage and using all or someportion of the proceeds to pay off theoriginal mortgage.

Replacement Cost: The cost toreplace damaged personal propertywithout a deduction for depreciation.

Securities: A financial form that showsthat the holder owns shares of a com-pany (stock) or has loaned money to acompany or government organization(bond).

Title: The right to, and the ownershipof, property. A title or deed sometimesis used as proof of ownership of land.


Title Insurance: Insurance that pro-tects lenders and homeowners againstlegal problems with the title.

Truth-in-Lending Act (TILA): A federallaw that requires disclosure of a truth-in-lending statement for consumerloans. The statement includes a sum-mary of the total cost of credit, such asthe APR and other specifics of theloan.

Underwriting: The process a lenderuses to determine loan approval. Itinvolves evaluating the property andthe borrower’s credit and ability to paythe mortgage.

Uniform Residential LoanApplication: A standard mortgageapplication your lender will ask you tocomplete. The form requests yourincome, assets, liabilities and adescription of the property you plan tobuy, among other things.

Warranty: A written guarantee of thequality of a product and the promise torepair or replace defective parts free ofcharge.

Glossary

Net Monthly Income: Your take-homepay after taxes. It is the amount ofmoney that you actually receive in yourpaycheck.

Offer: A formal bid from the homebuy-er to the home seller to purchase ahome.

Open House: When the seller’s realestate agent opens the seller’s houseto the public. You do not need a realestate agent to attend an open house.

Point: 1% of the amount of the mort-gage. For example, if a loan is madefor $50,000, one point equals $500.

Pre-Approval Letter: A letter from amortgage lender indicating that youqualify for a mortgage of a specificamount. It also shows a home sellerthat you are a serious buyer.

Predatory Lending: Abusive lendingpractices that include making mort-gage loans to people who do not havethe income to repay them, or repeat-edly refinancing loans, charging highpoints and fees each time and “pack-ing” credit insurance onto a loan.

Pre-Qualification Letter: A letter froma mortgage lender that states that youare pre-qualified to buy a home, but itdoes not commit the lender to a par-ticular mortgage amount.

Principal: The amount of money bor-rowed to buy your house, or theamount of the loan that has not yetbeen repaid to the lender. This doesnot include the interest you will pay toborrow that money. The principal bal-ance (sometimes called the outstand-ing or unpaid principal balance) is theamount owed on the loan minus theamount you have repaid.

Private Mortgage Insurance (PMI):See Mortgage Insurance.


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Full Page Organization - Freddie Mac · Installment credit includes car loans and personal loans....

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