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CreditSmart Module 1: Your Credit and Why It Is Important Table of Contents Welcome to Freddie Mac s CreditSmart Initiative... 5 Program Structure... 5 Using the Instructor Guides... 6 Lesson Concepts and Icons... 7 How to Access the WBT... 7 Tips for Instructors... 8 Workshop Preparation Tips... 8 Before the Workshop Begins... 8 Adult Learning Tips... 9 Instructor Training... 9 Introduction to Module 1: Your Credit and Why It Is Important... 10 Module Overview... 10 Glossary... 10 Topic 1: What Is Credit?... 11 Overview... 11 Why Is Credit Important?... 11 Start the Discussion... 12 Topic 2: Your Credit History... 15 Overview... 15 Your Credit History... 15 Start the Discussion... 16 Knowledge Check... 17 Topic 3: Why a Good Credit History Is Important... 18 Overview... 18 The Importance of a Good Credit History... 18 Start the Discussion... 18 Activity... 20 Topic 4: Benefits of Good Credit... 21 Overview... 21 Good Credit... 21 Start the Discussion... 21 Activity... 23 Topic 5: How to Establish a Good Credit History... 24 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 3

Overview... 24 Establish a Good Credit History... 24 Start the Discussion... 24 Activity... 26 Knowledge Check... 26 Module Conclusion... 27 Module Summary... 27 Appendix A: Glossary... 28 4 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Welcome to Freddie Mac s CreditSmart Initiative This consumer financial education and outreach initiative is designed to help consumers build and maintain better credit, make sound financial decisions, and understand the steps to successful long-term homeownership. In this guide, you ll find everything you need to lead participants through real-life scenarios, group discussions and activities that will encourage them to apply these lessons to their daily lives. By sharing the CreditSmart resources with others, you ll help them increase their financial understanding, gain life-long money management skills, and show them how to avoid costly mistakes. Program Structure The CreditSmart Curriculum includes 12 complete financial education modules that can be completed in two ways self-paced online or in a classroom setting. Module Title 1 Your Credit and Why It Is Important 2 Managing Your Money 3 Goal Setting 4 Banking Services: An Important Step 5 Establishing and Maintaining Credit 6 Understanding Credit Scoring 7 Thinking Like a Lender 8 Avoiding Credit Traps 9 Restoring Your Credit 10 Planning For Your Future 11 Becoming a Homeowner 12 Preserving Homeownership: Protecting Your Home Investment 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 5

Welcome to Freddie Mac s CreditSmart Initiative, Continued Using the Instructor Guides The Instructor s Guide can be used alone or as an adjunct to the Web-Based Training (WBT) program. Even if participants choose not to experience the program online, gaining familiarity with the WBT will help you present the material more effectively. The most up- to-date content can always be found online at www.freddiemac.com/creditsmart/consumer_training.html. Each of the twelve CreditSmart modules has its own Instructor Guide which follows the organization of the Web-Based Training (WBT) available online and includes much of the same content. Each Instructor Guide includes: A glossary of all the relevant terms introduced in the topic A module introduction which includes An overview Learning objectives Sample discussion questions to start the lesson The Basics a list of bullet points outlining the key concepts of the lesson A module summary of all the key concepts in the lesson Activities, knowledge checks, and discussion questions where applicable 6 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Lesson Concepts and Icons Each lesson of a module will present several key concepts. These concepts are introduced to your participants in a variety of ways described in the table below. Activity Discussion Knowledge Check An activity usually involves class participation, whether it is a game, exercise, or worksheet completion. Typically after an activity you will have the opportunity to lead a discussion. Discussions allow you to introduce key concepts while involving your participants in the conversation and making the information relevant to them. Sample discussion questions are included in each lesson to help you guide the discussion. Throughout all the lessons in this module, there are short knowledge checks designed to start discussions or quickly test participants knowledge of certain concepts. How to Access the WBT The CreditSmart Web-Based Training (WBT) is available free of charge in both English and Spanish and can be accessed online at www.freddiemac.com/creditsmart/consumer_training.html. 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 7

Tips for Instructors The following tips and suggestions will help to ensure the successful delivery of the CreditSmart curriculum. Workshop Preparation Tips Select handouts and exercises for the selected topic in advance to help enhance your presentation and discussion with participants. Determine if you will need other instructional materials such as overhead transparencies, slides, flip charts, handouts, and videos. Arrive at the workshop location early to set up. Decide how the room should be set up (e.g., classroom style, lecture). Make sure that all of the necessary equipment, such as a computer and projector is available and working. Provide a sign-in sheet and allow space (e.g., side table, counter, etc.) for handouts and resource materials. Set up refreshments, if provided. Provide adequate signs directing participants to the workshop location. Greet and welcome participants individually as they arrive. Begin the workshop promptly. Distribute and collect evaluation forms before the end of each workshop. Confirm that all participants have signed the sign-in sheet to ensure credit for attending the workshop. Before the Workshop Begins Welcome participants and introduce yourself. Review logistics (session length, restroom location, breaks, etc.). Provide a brief history of the CreditSmart curriculum, which you can find at www.freddiemac.com/creditsmart. Provide an overview of workshop material 8 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Tips for Instructors, Continued Adult Learning Tips Adults learn in different ways; therefore, you will want to use different techniques, vary your presentation style, and be sensitive to how your students are responding. Relate the content to what your students already know. Doing so will make your workshop more effective and will help to ensure participants retain more information. Be sensitive to those with special needs and/or learning disabilities. Use ice breakers, activities, exercises, and/or videos to break up the flow of your presentation. Supply handouts and local and/or national articles that highlight the topic being presented. Poll the audience to gauge participants level of knowledge the topic being presented. Research available community credit counseling resources in advance to ensure that consumers have access to appropriate referrals, as necessary. Instructor Training Freddie Mac provides CreditSmart instructor training for anyone who is interested in teaching the CreditSmart curriculum. Select one of the options below: Contact Freddie Mac by emailing: creditsmart_training@freddiemac.com. Attend a CreditSmart Train-the-Trainer workshop hosted by Freddie Mac. This instructor training series includes a comprehensive review of the CreditSmart curriculum, plus instruction on best practices in conducting effective classroom training. Visit http://www.freddiemac.com/creditsmartfor more information. 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 9

Introduction to Module 1: Your Credit and Why It Is Important Module Overview This module will provide participants with an introduction to credit. Participants will learn about the importance of good credit and how to establish a good credit history. Learning Objectives After completing this module, participants should be able to: Describe credit Define terms related to credit Explain the value of a good credit record Module Topics: Your Credit and Why It Is Important What Is Credit? Your Credit History Why a Good Credit History Is Important Benefits of Good Credit How to Establish a Good Credit History Some of these topics include activities to help simulate real-world scenarios with your participants. Glossary A Glossary is included in Appendix A of this guide, and contains definitions and descriptions of terms and phrases related to this module. A Glossary is also included in the Participant Presentation. Encourage your participants to use the Glossary during and after the class to become more familiar with the terminology. 10 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 1: What Is Credit? Overview In this topic, participants will learn what credit is and why it is important. Why Is Credit Important? The Basics Credit is the ability to borrow money. Credit is extended through several means, including credit cards, personal car loans, and home mortgages. Credit is a privilege, not a right. To increase confidence of lenders and to improve our chances of obtaining credit at reasonable terms, we need to determine our financial stability and security. Using credit can help you reach your goals, but remember, credit has both benefits and risks. 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 11

Topic 1: What Is Credit?, Continued Start the Discussion To start the discussion with your participants, ask some open-ended questions or invite them to discuss some ways to manage their money. Here are some examples to get you started: How can having credit benefit you? Do you know your creditworthiness? Your Credit and Why It Is Important Continued on next page 12 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 1: What Is Credit?, Continued Start the Discussion (continued) Instructor note: Define the following terms: Term Credit Definiton What Is Credit? Credit is the concept of using tomorrow's money to pay for something you get today. Credit is a promise to repay a debt for goods and services. Credit may be extended via several means, including credit cards, personal loans, car loans, and home mortgages. Debt Loan What is owed to a person or institution for obtaining merchandise or services without immediately paying for them. Usually, a debt is acquired through a loan or the use of credit. Money you borrow from a financial institution with a written promise to pay it back later. With a loan, financial institutions will charge you fees and interest to borrow the money. Continued on next page 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 13

Topic 1: What Is Credit?, Continued Start the Discussion (continued) Term Mortgage Lender Terms Interest Rates Definiton A mortgage is a document that is signed by a borrower when a home loan is obtained and gives the lender the right to take possession of the property if the borrower fails to make loan payments. Lender is the term used for the person or entity that is providing credit or a loan to a borrower at specific terms and conditions. The term lender can generally be used interchangeably with the term creditor. The provisions, conditions, and requirements pertaining to the loan as stated in the loan agreement. Interest rates are commonly thought of as the cost of borrowing money. The interest rate is expressed as a percentage. The amount of interest that is paid each year is determined by multiplying the amount of the loan by the percentage. 14 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 2: Your Credit History Overview In this topic, participants will learn about the credit report and credit history, and the impact both have on one s ability to obtain credit. Your Credit History The Basics Your credit history shows how you have managed your finances and repaid your debts over time. Your personal credit report begins the first time you apply for credit. The most important component of your credit report is whether you make your payments on time. Any time that your credit report shows a late payment, a red flag is raised and you may be denied credit or pay more to get it. Your Credit History 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 15

Topic 2: Your Credit History, Continued Start the Discussion To start the discussion with your participants, ask some open-ended questions about credit and credit history. Here are some examples to get you started: What is a credit report? What is credit history? What impact does paying your credit card late have on your credit report? Instructor note: Define the following terms: Term Credit history Credit report Late payment Definition A credit history is a record of credit use. It is comprised of a list of individual consumer debts and an indication as to whether or not these debts were paid back in a timely fashion or "as agreed." Credit institutions have developed a complex recording system of documenting your credit history. This is called a credit report. A credit report provides a history of your use of credit. Specifically, it's a file maintained by a credit reporting agency that contains information about a person, such as where the individual works and lives; information reported to the credit reporting agency by creditors regarding money borrowed and payments made; and public record information, such as whether the person has filed for bankruptcy. A late payment is the term used for loan or credit payments that do not reach the lender or creditor on or before the payment due date. The indication of late payments on a credit report is very damaging to an individual's credit report. 16 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 2: Your Credit History, Continued Knowledge Check Instructor note: Now that participants have learned more about credit, ask them to turn to page 7 of their participant presentation to match each term to the correct definition. Once they have finished, review the correct answers. What provides a listing of the information in your credit history that begins the first time you apply for credit? o Correct answer: Credit Report What shows how you ve managed your finances and repaid your debts over time? o Correct answer: Credit History What gives you the ability to borrow tomorrow s money to pay for something you get today under an agreement to pay it back? o Correct answer: Credit Knowledge Check 1 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 17

Topic 3: Why a Good Credit History Is Important Overview This topic discusses the importance of a good credit history. Participants will learn about how a good credit history impacts the cost of obtaining credit. The Importance of a Good Credit History The Basics A good credit history increases the confidence of those in a position to loan you money. Lenders are more likely to extend credit again when they see you have paid back your loan when and how you agreed. The better your credit, the lower the cost of obtaining credit. If your credit history is not strong, you will probably pay higher interest rates and fees. Start the Discussion To start the discussion with your participants, ask some open-ended questions about the importance of a good credit history. Here are some examples to get you started: What is the difference between credit and creditor? What are some examples of fees associated with credit? What are some of the benefits of having good credit? Why a Good Credit History Is Important Continued on next page 18 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 3: Why a Good Credit History Is Important, Continued Start the Discussion (continued) Instructor note: Define the following terms: Why a Good Credit History Is Important, (cont.) Term A Loans B or C Loans Creditors Definition An "A" loan is the credit industry term used to describe a loan that reflects the best possible interest rate, terms, and conditions. Consumers need to demonstrate good credit in order to secure an "A" loan. A "B" or "C" loan is the credit industry term used to describe a loan that reflects less than the best possible interest rate, terms, and conditions. Consumers with negative or derogatory credit may be offered "B" or "C" loans. These loans always impose a higher interest rate and fees. Creditor is the term used for the person or entity that is providing credit or a loan to a borrower at specific terms and conditions. The term creditor can generally be used interchangeably with the term lender. Continued on next page 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 19

Topic 3: Why a Good Credit History Is Important, Continued Start the Discussion (continued) Term Credit Score Fees Savings Definition A credit score is a numerical value determined by a statistical model based upon past credit behaviors, which predicts the likelihood of future loan default. Fees are the money a financial institution charges, such as a monthly maintenance fee, for providing various services. An account where you keep money for safekeeping or as an investment that earns interest. Activity Instructor note: Review the example below of the cost of a poor credit history with participants. Why a Good Credit History Is Important, (cont.) 20 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 4: Benefits of Good Credit Overview In this topic, participants will learn about the benefits of good credit and the risks they should watch out for. Good Credit The Basics Good credit will help you achieve both short-term and long- term goals. Having the ability to borrow money when you need it can give you flexibility and help you meet your goals. Trust is a key factor. Lenders are only going to loan you money if they trust you to pay them back. If you understand how credit works, use it wisely and avoid having too much debt. Start the Discussion To start the discussion with your participants, ask some open-ended questions or invite them to discuss some of the benefits of good credit: How would you describe good credit? Bad credit? How has having good credit helped you? What are the risks of using credit cards or taking out a loan? How can you minimize these risks? Continued on next page 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 21

Topic 4: Benefits of Good Credit, Continued Start the Discussion (continued) Benefits of Good Credit Benefits of Good Credit, (cont.) 22 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 4: Benefits of Good Credit, Continued Activity Instructor note: Divide the class into two groups one group will list real-world examples of credit risks and the other will list examples of credit benefits. Give the class five minutes to create their lists. When they are finished, write their examples on a whiteboard or chalkboard, or a large piece of paper, then lead a discussion by focusing on the key points below. Benefits: Risks: Having good credit makes it easier to rent an apartment and get service from local utility companies. Good credit also gives the option of buying things now and paying the money back over time, rather than having to wait. With good credit, it is easier to buy what you want, when you want it. You have the financial flexibility to make major purchases that take more money than you have on hand. To avoid debt problems, never let your credit card debt exceed 20% of your yearly net income. Also, keep your credit card debt low enough so that your required payments are not more than 10% of your monthly income. Credit makes it too easy to spend it can become a struggle to pay it back, and if you pay a few things late, you can lose money on late fees too. Not making loan payments can really hurt your credit record. You can miss out on qualifying for an apartment or a mortgage, and you can even get turned down for a job. A low credit rating makes it tougher for you to get loans or credit the next time. Even if you are able to borrow, you will have to pay a higher interest rate. 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 23

Topic 5: How to Establish a Good Credit History Overview In this topic, participants will learn some of the basics of how to establish credit and a good credit history. Establish a Good Credit History The Basics The key to establishing a good credit history is honoring your promise to repay loans or credit cards as agreed. Failure to establish and maintain good credit will make it difficult and costly for you to borrow money for the things that you need for yourself and your family. Start the Discussion To start the discussion with your participants, ask some open-ended questions or invite them to discuss some establish credit and a good credit history. Here are some examples to get you started: What are some ways to build credit? Other than taking out a loan or getting a credit card, what are other ways to build credit? How to Establish a Good Credit History Continued on next page 24 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Topic 5: How to Establish a Good Credit History, Continued Start the Discussion (continued) How to Establish a Good Credit History, (cont.) Instructor note: Define the following term: Term Net income Definition Net income is the amount of money paid to an employee after taxes and other deductions have been subtracted. Net income is commonly referred to as "take home pay." 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 25

Topic 5: How to Establish a Good Credit History, Continued Activity Instructor note: Discuss the following key points on how to build credit: Open your own bank accounts and manage them well. Never spend more than you have in your bank accounts. Get a gas/store credit card and always pay your bills on time. Take out a small loan and repay it monthly in full and on time. Get a secured credit card linked to a savings account. Knowledge Check Instructor note: Now that participants have learned more about how to establish a good credit history, have answer whether or not the following question is true or false. Knowledge Check 2 26 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Module Conclusion Module Summary Summarize this module by reviewing the key points below with your participants. Key points from Module 1: Your Credit and Why It Is Important: Module 1 Summary 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 27

Appendix A: Glossary Term A loans B or C loans Credit Creditor Credit history Credit report Credit score Definition An "A" loan is the credit industry term used to describe a loan that reflects the best possible interest rate, terms, and conditions. Consumers need to demonstrate good credit in order to secure an "A" loan. A "B" or "C" loan is the credit industry term used to describe a loan that reflects less than the best possible interest rate, terms, and conditions. Consumers with negative or derogatory credit may be offered "B" or "C" loans. These loans always impose a higher interest rate and fees. Credit is the concept of using tomorrow's money to pay for something you get today. Credit is a promise to repay a debt for goods and services. Credit may be extended via several means, including credit cards, personal loans, car loans, and home mortgages. Creditor is the term used for the person or entity that is providing credit or a loan to a borrower at specific terms and conditions. The term creditor can generally be used interchangeably with the term lender. A credit history is a record of credit use. It is comprised of a list of individual consumer debts and an indication as to whether or not these debts were paid back in a timely fashion or "as agreed." Credit institutions have developed a complex recording system of documenting your credit history. This is called a credit report. A credit report provides a history of your use of credit. Specifically, it's a file maintained by a credit reporting agency that contains information about a person, such as where the individual works and lives; information reported to the credit reporting agency by creditors regarding money borrowed and payments made; and public record information, such as whether the person has filed for bankruptcy. A credit score is a numerical value determined by a statistical model based upon past credit behaviors, which predicts the likelihood of future loan default. Continued on next page 28 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important

Appendix A: Glossary, Continued Term Debts Fees Interest rate Lender Loan Late payment Mortgage Net income Savings Term Definition What is owed to a person or institution for obtaining merchandise or services without immediately paying for them. Usually, a debt is acquired through a loan or the use of credit. Fees are the money a financial institution charges, such as a monthly maintenance fee, for providing various services. Interest rates are commonly thought of as the cost of borrowing money. The interest rate is expressed as a percentage. The amount of interest that is paid each year is determined by multiplying the amount of the loan by the percentage. Lender is the term used for the person or entity that is providing credit or a loan to a borrower at specific terms and conditions. The term lender can generally be used interchangeably with the term creditor. Money you borrow from a financial institution with a written promise to pay it back later. With a loan, financial institutions will charge you fees and interest to borrow the money. A late payment is the term used for loan or credit payments that do not reach the lender or creditor on or before the payment due date. The indication of late payments on a credit report is very damaging to an individual's credit report. A mortgage is a document that is signed by a borrower when a home loan is obtained and gives the lender the right to take possession of the property if the borrower fails to make loan payments. Net income is the amount of money paid to an employee after taxes and other deductions have been subtracted. Net income is commonly referred to as "take home pay." An account where you keep money for safekeeping or as an investment that earns interest. The provisions, conditions, and requirements pertaining to the loan as stated in the loan agreement. 2013 Freddie Mac CreditSmart Instructor s Guide Module 1: Your Credit and Why It Is Important 29