Educators Credit Union Credit Guide An introduction to credit and how it s used in your financial plan. Shopper. Buyer. Planner. Spender. For the teacher in you. 262.886.5900 ecu.com
Table of contents What is credit? 1 Credit score 101 2 The credit report 3 Managing credit 4 Getting credit 4 Protecting your credit 7 Bankruptcy and credit counseling 8
What is credit? Simply put, credit is the amount you can or are currently borrowing. The amount of credit you have is built from multiple factors, including credit score, annual income and your income to debt ratio. Your credit score is a number between 300 and 850. The greater the number, the better your score is. Someone with a score of 740 or higher is considered to have a good credit score. In the coming sections, we ll break down what factors determine your credit score. Income is another important element in what lenders are willing to borrow out. They want to make sure the person getting their money will be able to pay them back. If your current debt is too high compared to your income, lenders aren t likely to give you a loan. 1 Did you know? Through the What s Your Score? program, Educators Credit Union members can get a complimentary credit report. Educators employees sit down with members to review the report so they can learn how to maintain or increase their credit.
Credit score 101 Your financial history determines your credit score. The information that is used to calculate your credit score includes: Your credit accounts The number of accounts you have, the type of accounts, how long you ve had them, your credit limit or original loan amount. Inquiries How often you or a lender look at your credit report can impact your credit. There are soft inquiries and hard inquiries. Soft inquiries (e.g., the What s Your Score? report from Educators Credit Union) do not change your credit score. Hard inquiries (i.e., applying for a loan or credit card) do negatively impact your credit score. Payment history Paying on time or more than your minimum balance has a positive influence on your credit score. Late payments and accounts going into collection have an adverse impact on your credit score. Other information Having a past bankruptcy, foreclosure or wage garnishment reflects negatively on your credit score. Some of these instances will stay on your credit for years. 2
The credit report The credit report tells you what financial information makes up your credit score. Your entire credit history from your first loan to the last credit application you filed and much more are in your credit report. Aside from the information that makes up your credit score, the credit report also details your personal information (e.g., social security number, date of birth, marital status). Did you know? It s possible not to have a credit score. Teenagers and adults without a credit history will see an N/A show up on their credit report. To get a credit score, this person will likely need to get a credit card or be the primary payer on a bill. If you need to establish credit, come into any Educators Credit Union branch and ask to speak with a Member Finance Representative. Members under the age of 18 may need an adult with good credit to co-sign for a credit card with them. 3
Managing credit Getting credit As mentioned before, you do not start out with credit, and you have to build it up over time. There are several different ways to establish credit, but most require you to have a co-signer with a good credit history. You then build your credit from things like paying off your loans on time or even paying your utility bill. The most popular way to establish credit is by opening a credit card. 4
Credit cards Credit cards are like ongoing loans. A company agrees to give you a credit card and allows you to spend so much on it. In return, you agree to make monthly payments and pay interest on your purchases. Not all credit cards are created equally. Most have different interest rates, some have fees, some have bonuses or perks, and others can only be used at one store or locations. Here are some details about what you should consider when opening a credit card: Annual Percentage Rate (APR) APR is the amount of interest you pay on your credit card balance. A higher number means you pay more interest over time, whereas a lower number means you pay less interest over time. Ideal APRs are below 15%. Fees Credit cards can come with a handful of fees. The most common is a late payment fee, which is an extra charge on your monthly payment if you make it past its due date. Some cards have annual fees, a fee you pay each year just for having the card. Before starting a credit card, do some research and try to avoid these fees. Major credit cards vs. department store cards Financials like Educators Credit Union provide credit cards from the major credit card companies (Visa, Master Card, American Express, etc.) These cards usually come with reasonable interest rates, low fees and can be used anywhere credit cards are accepted. Now, most retailers offer their own credit cards. Using the cards in the store get you added bonuses, such as 5% off purchases, or eligibility in the store s discount program. Despite that benefit, these cards usually aren t as beneficial as a standard card you get from a financial institution or the credit card company. Most in-store credit cards come with high APRs, annual fees and the use of the card is restricted to that one store. While these cards can be a great benefit to your spending, it s best to consider if the pros outweigh the cons. When using these cards, always try to pay off the entire balance before it accumulates interest. This allows you to take advantage of discounts, but not be stuck paying piles of extra interest money later. 5
Loans The other major source of credit comes from loans. Loans are an agreement between you and a financial institution where the financial provides a bulk amount of money to you. Unlike credit cards, loans generally come in a bulk amount and are paid back over a set period. Once they are paid off, the loan disappears. The most common types of loans are auto and home loans. Again, it s best to look for low interest rates and minimal fees to avoid paying more than you have to. Did you know? Many card companies offer perks for using their credit cards. It s important to do your research about these programs before applying for a card as some offers try to tempt you into using a credit card with more fees and higher rates. However, some programs are great ways to be rewarded for building your credit history! 6
Protecting your credit Your credit is linked to you as a person, and everything that identifies you, like your social security number and birth date. Sometimes, other people obtain your personal information illegally and steal your identity. When this happens, it can lead to damage to your credit score. That s why it s important to monitor your credit report at all times. It s not just identity theft but also credit card theft. Thieves can get your credit card information and use it to make purchases on their behalf. Monitoring your credit Getting an annual credit report allows you to always be aware of what items are connected to you. The credit report details everything you are linked to by your name and other identifying information. Walking through this report with an experienced financial employee helps catch any discrepancies before it becomes an even bigger problem. Freezing your credit After becoming the victim of identity theft, it s sometimes necessary to place your information on a security freeze. This freeze locks your information so your credit report cannot be accessed. Most businesses will not open a credit account without first obtaining a credit report. Once they see the report is frozen, they will deny the person applying for a credit card. It s also important to always monitor your spending on your credit and debit cards. Look at your financial statements and make sure the purchases you make are the only ones showing up. If you notice something wrong, call the 800 number on the back of the card and notify the card provider. Did you know? The Educators Credit Union Ctrl app helps you monitor transactions made on your cards. The app will send you notifications when money is spent, let you limit sales to a global location and even allow your to turn your cards on and off when they aren t in use. 7
Bankruptcy and credit counseling Sometimes, a person accumulates so much debt it becomes too difficult for them to pay it off. In that case, the person may file for bankruptcy as a last resort. Filing for bankruptcy can be expensive. Since it s a legal process, the person filing will need to pay court and attorney fees. It also negatively impacts your credit report. A bankruptcy will stay on your report for ten years. Bankruptcy might not clear all of your monthly payments. You could still be required to pay spousal and child support, student loans, taxes, or fines. When filing bankruptcy, it s important to know the two options. Chapter 13 A Chapter 13 bankruptcy is a debt repayment plan. After filing, you generally don t lose any property or possessions. Chapter 7 A Chapter 7 bankruptcy liquidates all of your assets to pay your debts. This means losing your car, home, electronic equipment or anything else of value. You cannot file for Chapter 7 if your income is above the state s median and you can afford to pay 25 percent of your unsecured debt. 8
Counseling Credit counseling is a great alternative to filing bankruptcy or even just to reestablish credit. Counselors will take a look at your current situation and help develop a plan that works for you. Did you know? Educators is a partner of GreenPath financial wellness. Complimentary credit counseling is available through GreenPath for all members. More information on GreenPath can be found at www.greenpath.com or by calling 800.550.1961. 9