SECTION 10.2 HOW TO QUALIFY FOR CREDIT

Goals: Explain how lenders judge your creditworthiness. Describe factors that determine your credit

rating.

CREDITWORTHINESS

To get a loan, you must demonstrate your creditworthiness.

Creditworthiness is a measure of your reliability to repay a loan.

Lenders judge creditworthiness on the “3 C’s of credit”: Character – a measure of your sense of financial

responsibility Capacity to pay – a measure of your ability to

repay the loan Capital - the value of what you own, including

savings, investments, and property

CHARACTER, CAPACITY, COLLATERAL

What does the lender want to know before they loan you money?

Are you a reliable person? Does not move often Has had the same job for a period of time

Do you have a steady income that is likely to remain for a while?

Do you earn enough money to pay back the loan?

Do you have a good credit history (credit rating) of paying back other loans and bills?

THREE C’S OF CREDIT- CHARACTER Character- a measure of your sense of financial

responsibility. Lenders want to know if you are dependable. If you take

your obligations seriously. To do this they will look at your credit history. Credit history is a record of your past borrowing and

repayments. Always paying your bills on time is one of the most important

factors in being able to get credit in the future. Young people may get credit by asking an adult to cosign a

loan. Cosigning a loan means you agree to pay the loan if the other

person defaults. You are legally responsible and it can affect your future credit score if the person you cosign for does not pay.

Are you a reliable person? Does not move often Has had the same job for a period of time

THREE C’S OF CREDIT-CAPACITY & CAPITAL

2. Capacity- a measure of your financial ability to repay a loan. When you apply for a loan, lenders will require

you to state your other debts. They will calculate this as a percentage of your income to judge whether or not your income can support another payment.

3. Capital- is the value of what you own, including savings, investments, and property. The more capital you have the safer it is for a lender to give you a loan.

YOUR CREDIT RATING

Lenders get information from two places: Loan applications Credit Bureaus

Loan applications basically give lenders information regarding the applicants assets (capital) to liabilities (debts) to determine if another payment is possible.

YOUR CREDIT RATING

Credit bureaus- is a company that collects information about consumer’s credit history and sells it to lenders. They maintain records on virtually every adult

who has ever made payments on anything. They get their information from stores, banks,

utility companies, court records.

YOUR CREDIT RATING

When you apply to borrow money the lending institution will buy your credit record from a credit bureau. The lender will then analyze the information and give you a credit rating.

Credit rating is a measure of your creditworthiness.

HOW IS YOUR CREDIT RATING CALCULATED?

Based upon your credit report data, a computerized scoring system called FICO will give you a score between 300-850. (850 being the best)

The score is based upon the following factors from your credit report: 31% Payment history – late payment kept for 7 years! 30% Credit usage – measures total balances

compared to the total of your credit limits 15% Length of credit history 14% Type of credit used – mortgage, car, credit card

and retail cards 10% New accounts & inquiries

WAYS TO INCREASE YOUR CREDIT RATING!

Close any credit accounts that you do not use or use rarely. Having too many credit cards can actually hurt your credit rating.

Pay down all the credit balances but concentrate on paying down those that are “maxed” out first.

Use the credit that you have regularly, but limited amounts.

Pay all of your bills on time, even if they are not credit type bills (i.e. utilities)