COMMUNITY SERVICES
Making Your Dreams Come True
All about Credit
This brochure is all about dreams—your dreams. What are your dreams about your life after you graduate from school and go out into the working world?
When you grow up, what do you want your life to be like? Do you… Want to be married? Have children? Have a job? Buy a car? Own a house? Take vacations? Own a business?
In order to have those things, you must begin practicing good habits today.
As the saying goes, “First you make your habits and then your habits make you.”
What habits must you begin practicing today?
Yes, working hard at school so you get good grades. That is an excellent habit.
What else?
You must learn about credit and develop habits that will help maintain good credit.
What does the word “credit” mean?
In high school, we talk about doing an assignment for “extra credit” and taking a course and receiving “credits.”
After you leave school and go out into the working world, the word “credit” has a special adult meaning:
When a bank gives you “credit,” it trusts you to pay back the money it loans you.
The more a bank trusts you, the more money it will loan you and the lower the interest rate it will charge you.
So the more it trusts you to pay back the money it loans you, the better your credit.
You get good credit by having bank accounts—loans, checking accounts and savings accounts—and managing them well.
If you borrow money, you will have good credit if you make at least the minimum payment month in, month out before the due date.
Paying off a loan every month on the same day every month may sound boring, but, in fact, it is a habit that can help all those grown-up dreams you have come true.
We already said that the better your credit, the lower interest rate you will pay. What is this word “interest” mean?
Interest is a percentage of the amount you borrow which the bank adds on to the loan as a fee for giving you a loan.
If you borrow $400 for a year and the bank charges you 10 percent interest, the cost of the loan is $40. In one year, you must pay back the $400 plus the $40 of interest in order to keep the loan current. In this case, $40 is your fee for getting the loan. That is interest.
Why do you think people who make a habit of paying their loans regularly should get to pay a lower interest rate than those who do not?
Those who have paid their loans regularly in the past are those who will probably do so in the future. So the bank gives them credit that they will do so, and offers them a lower interest rate. It considers them to be more credit worthy.
When you apply for a loan at a bank, how can the bank tell whether you are credit worthy? Almost all banks and credit card companies provide payment information to three major national credit reporting agencies—Equifax, Experian and TransUnion.
Those three agencies rely on a company called Fair Isaac to develop what are called FICO scores. Just about everyone who has ever borrowed money or had a bank account of any kind has a FICO score. Credit FICO scores range from 350 for extremely bad credit up to 850 for extremely good credit.
Remember those grownup dreams of owning a house, a car, having children and taking vacations? If you make a habit of paying loans properly, you will have a FICO score on the high side.
If your FICO score is 750 or higher it is very unlikely you will ever be turned down for any loan and you will always pay the very least for insurance. If your score is near 350, you will often be turned down for loans and pay the very highest interest rates.
If you have a low FICO score, you will also pay the higher insurance premiums. The amount you pay for auto insurance, life insurance and health insurance will be higher if you have a low FICO score. This is how the system works.
If you have good credit and a relatively high FICO score, you can borrow to buy a home, a car or to send your children to college. And the amount of money you spend for insurance will be less. If you have a low FICO score, you will spend much more.
Five Steps to Establishing Good Credit
Unless you have already had a loan, there is a good chance you do not have any credit history. Here are five steps you can take, starting today, to get and maintain good credit.
Step 1. Start small and as soon as possible. Talk to your parents about getting a gas card with a small line of credit. Make sure you pay off the total amount you owe each month before the due date. You have to be responsible about it now if, years from now, you want to make your dreams come true.
Step 2. As soon as possible, open a checking account. Make sure you have enough money in your account to write one check each month to pay off the entire amount on the gas credit card.
Step 3. After you have made regular payments on the gas card for a number of months, you might be ready to get a credit card with a maximum credit ceiling of $100—perhaps from a department or specialty store. Keep the balance low and pay every penny you owe each month BEFORE THE DUE DATE! These are important habits. If you form them now, they will serve you well later on.
IMPORTANT: If you pay off the balance completely each month on credit cards, you will not have to pay even one cent in interest AND you will be establishing an excellent credit record.
Step 4. Open a savings account. You will start earning interest on the money you deposit. That is far better than paying interest!
Step 5. Get a piggy-back credit card. How do you do that? First of all, you need an adult with an excellent credit score. You fill out a piggy-back application for a new card in your name and using your social security number tied to an already existing card account this person has. You use the card wisely. The credit card bill for your purchases will come to the person you piggy-backed off of. You have to pay that person each month the full amount of what you purchased. By doing all this, you will be building your credit score. The person’s high FICO score will drive up yours.
Take the “Making Your Dreams Come True” Quiz
Circle the best answers for the five questions below.
Question # 1:
What is the adult meaning of the word “credit?”
A. What you get for doing an extra assignment?
B. The amount a bank will loan you based on past history of paying back loans?
C. The amount of your banking score?
D. The amount your teacher trusts you?
Question #2
What is the first rule of establishing credit?
A. Start out big
B. Start out small
C. Make late payments
D. Borrow more than you can pay back
Question #3
FICO scores fall between which two numbers?
A. 250 and 900?
B. 350 and 850?
C. 450 and 1000?
D. 150 and 350?
Question #4
What is step four of establishing good credit?
A. Open a gas card?
B. Open a credit card
C. Open a checking account
D. Open a savings account
Question #5
If you have a low FICO score you will pay more for all the following except?
A. Life insurance?
B. Auto insurance?
C. Borrowing money?
D. Driver’s license
