Do not distribute or. reproduce. Credit As An Asset. Build your path. to financial stability! Student Workbook

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Build your pat

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to financial stability!

to financial stability!

to financial stability!

Student Workbook

Credit As An Asset

For observational purposes only. Do not distribute or

reproduce. Contact BankOnLouisville@louisvilleky.gov

for more information about how to use this workbook.

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Acknowledgements

Bank On Louisville could not have launched this workbook without the help of several key partners.

Credit Builders Alliance led development of workbook content. Credit Builders Alliance is a non-profit

organization that creates innovative solutions to help community-based nonprofits serving low- and moderate- income individuals improve their capacity to help their clients build credit and financial access in order to increase their financial capability and stability.

CBA serves as a unique and vital bridge between its 400 nonprofit member organizations and the major credit bureaus. CBA’s core services — CBA Reporter and CBA Access — provide nonprofits with both the ability and critical technical assistance necessary to report loan data to the CRAs and to pull low-cost client credit reports for the purposes of financial education, outcome tracking, and underwriting. In addition to these core services— which are essential to helping individuals and families build credit histories and scores—CBA offers nonprofit practitioners hands-on credit building trainings, innovative tools, and forums for sharing with and learning from each other.

The Corporation for Enterprise Development also

supported the development of this workbook through a generous Assets and Opportunity Network technical assistance grant.

Finally, we thank the experts who contributed to the content, layout, and review of this guide:

Debbie Belt Tina Lentz

Sarah Chenven John Nevitt

Kathy Cooter Re’Donna Thompson

Sheila Etchen Erin Waddell Janet Fulton Caitlin Willenbrink

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Welcome

Who We Are

Bank On Louisville is an engine to collaboratively strengthen our community's economic well-being through improved access to mainstream financial education and services.

Bank On Louisville works with people who don’t use, don’t have, or cannot open an account with a

traditional financial institution. Our goal is to connect you with financial services and education that help you manage your money better and keep more of it by avoiding expensive services like check cashers and payday lenders.

What is Credit As An Asset?

Credit As An Asset is a workbook for people who want to gain new information and tools to build or rebuild a good credit history. This workbook will help you think about your relationship with credit and why credit is so important, and plan how you will make financial

products work for you to help increase your financial stability in the short-term and your financial security in the long-term.

Bank On Louisville is brought to you by Louisville Metro Government, Department of Community Services, Advocacy and Empowerment Division, in partnership with over 100 private, non-profit and government stakeholders.

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Section One: Getting Started……….5

Section Two: What is Credit?……….6

Section Three: Why Does Good Credit Matter?………...11

Section Four: Introduction to Credit Building……….13

Section Five: 5 Steps to Building Credit………...15

Resources………..32

Sample Dispute Letter………..33

Glossary of Credit Terms………..34

You’ll see the pathway pattern on the front cover and throughout this workbook. When you see a single piece that says Your Turn, like the one at right, you’ll be

practicing a new skill through a learning activity. When you see the entire pathway, like the one at left, stop, think about and respond to the questions you find. The pathway pattern is a reminder that achieving financial stability is a pathway with many steps. This workbook with learning activities, questions, and tips in it is a resource you can return to again and again as your move along your own

pathway to financial stability.

You’ll also see words in bold—these are important terms to know. Definitions of these words can be found in the Glossary. Credit As An Asset is a great next step to get on solid financial footing. Once you complete Credit As An Asset, you will decide other steps on your journey to achieving your financial goals.

Bank On Louisville can help you take those steps.

Your Turn

Table of Contents

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First and foremost, it’s important to think first about why credit matters. Your relationship to credit is personal and significant to you. It affects your access to financial products and services like credit cards and car loans, as well as how much you pay for them. Credit can also affect your ability to get a job, an apartment or a home mortgage, and even a cell phone contract or car insurance!

Good credit is key to becoming financially stable. Good credit sets the stage for long-term financial security through asset building. But before you start to address or build your credit, it’s smart to study up on the issues and options and choose what fits you best. Credit As An Asset will help you learn how to build your credit. It will help you think about your relationship with credit and commit to everyday credit building behaviors. When you think about how you relate to credit, you can set goals and plan for your financial future in the way that works best for you.

Where Do You Want to Go With Your Credit?

Why is good credit important to me?

How will having good credit get me where I want to go?

Check cre dit re port Pay dow n debt Imp rove cre dit sco re Find a c redit p roduct Purch ase an asset Pay off bill mo nthly

Section One: Getting Started

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The term credit can be confusing

because it has several different meanings.

Credit can mean a product like a loan or a credit card.

It also can mean your record of paying back your loans and credit card bills on-time — the record that is kept on your credit report and

measured by your credit score.

Lots of people think of credit as a bad thing. It’s true that if you use credit too much, it can lead to debt, and lots of it. However, credit is not the same thing as debt. Debt is the amount of money you have borrowed and must pay back, while credit is your ability to borrow

money or gain access to a purchase without paying for it up-front, in full.

Having more debt than you can repay is a liability. But credit can be a tool to help you get and stay ahead financially. Having good credit – also known as being creditworthy – is an advantage. Good credit is an asset, in the same way that a home, a savings account, or a college degree are assets.

Let’s examine some definitions to compare two meanings of “credit”:

credit products the credit industry

What do you think of when you hear the word credit?

What do you want to learn about credit?

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Good Credit is an Asset

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When you use credit, you are borrowing money. The money you borrow is called principal.

The person or business that loans you the money is called a lender or a creditor.

Creditors lend money to make money. You must pay the creditor a price to borrow the money.

The price you pay to borrow money is called interest. Interest is often quoted as the percentage of the loan that you pay each month while you are borrowing the principal. Interest rates can be fixed

or variable. Fixed means the rate will stay the same for as long as you have the loan. Variable means it may change.

Lenders calculate and explain the yearly cost of interest on a loan as an annual percentage rate (APR). Most creditors also charge fees for things like late payments, balance transfers, and cash advances.

Terms of the loan are the things you agree to when taking out a loan. These include interest rate, kind of interest rate, fees, length of the loan, where or when payments are due, and more.

There are two major types of credit:

installment loans revolving credit

With an installment loan, you are approved for a specific loan amount taken out for a specific period of time. You pay back the total amount of the loan over that period of time.

With revolving credit, you are approved for a credit limit. You can borrow any amount up to the credit limit. What you pay back each month varies depending on how much you have borrowed during the month. A credit card is a good example of revolving credit.

Credit can also be secured or unsecured. A secured loan means there is another asset—like your car or your house—pledged against the loan. This pledged asset is called collateral. If you do not pay the loan as you agreed to, the lender can collect the collateral.

For example, if you borrow money to purchase a car, the car you are buying will be used as the collateral for that loan. If you don’t pay it back the lender or creditor can take the car back. Unsecured means there is no asset or collateral. Student loans and credit cards are examples of

Credit Products

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Section Two: What is Credit?

The credit industry is driven by:

The three largest credit bureaus in the United States are Equifax, Experian, and TransUnion. However, there are also a number of other specialty credit bureaus that meet the needs of specialized creditors like landlords, insurers, employers, and even payday lenders.

Credit bureaus only collect and report information. They do not make credit decisions. Only creditors make decisions about whether to offer credit to consumers.

Both creditors and credit bureaus have to comply with the Fair Credit Reporting Act (FCRA) law passed in 1970.

The FCRA ensures that:

Creditors have to report consumer credit information accurately and consistently to the credit bureaus

Consumers have a right to see their credit report and dispute any information on it Creditors and credit bureaus must verify a consumer’s credit information if the

consumer disputes it, and must respond to any disputes within 30 days

A credit history or credit file is a record of how you use credit. Your credit history is made up of information that your creditors have reported to the credit bureaus, such as your payments on debts and whether those payments were on time.

A credit reportis a snapshot of your credit history at a certain point in time. Your credit report changes over time.

A credit scoreis a number calculated from the information on your credit report. Credit scores are used to determine whether a creditor will offer you a loan or other product, and how

The Credit Industry

Consumers (that’s you!) borrow money and use

credit products

Credit bureaus

collect consumers’ credit information

from creditors and store it on credit reports

report consumers’ credit information to

creditors in the form of credit scores

keep report consumers’ credit

information on credit reports

Creditors

use credit scores to determine which consumers they will loan money and

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Even if you have never taken out a loan or used a credit card, it’s possible to have a negative credit history. That’s because certain kinds of payments aren’t included in your credit history, such as:

Your on-time payments on rent, utilities, or bills

Your payments on payday loans, pawn shop loans, or rent-to-own items

These payments will usually only show up on your credit history if you don’t pay them and your creditor reports them as charged-off debt or sells them to a collections agency.

Here are a couple more things to remember about credit reports, scores, and history:

Your creditors may not provide information about you to all three credit bureaus. All credit reports have the same general information on them, but your credit reports may show information differently, or not show certain information at all, depending on the credit bureau providing the report, and on the kind of creditor that requested your report.

If you have no credit history, you will not have a credit report or a credit score. If you have less than three credit accounts listed on your credit report, or you

have only accounts that are in collections listed on your report, you are classified as having a thin credit history.

If you have no credit history or a thin credit history, creditors see you as a risk and are less likely to offer you a loan or credit product.

Section Two: What is Credit?

What are two things you heard or read in this section that surprised or interested you?

What information do you still wish you had?

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Section Two: What is Credit?

Definition: Credit Term:

_ A loan you pay the same monthly amount for over a

set period of time

_ A number calculated from the information on your

credit report that allows a creditor or other business to quickly decide whether or not to do business with you.

_ A person or business that loans you money _ An asset you pledge in order to borrow money _ A record of your credit history at the particular

moment in time at which the credit report is pulled

_ Money you borrow and can access up to a certain

credit limit

_ The money you owe

_ A company that collects consumer credit

information

_ Ability to borrow money with the promise to repay

it at a later date A. Collateral B. Credit Score C. Revolving Credit D. Debt E. Installment Loan F. Creditor G. Credit Bureau H. Credit Report I. Credit

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Section Three: Why Does Good Credit Matter?

Good credit increases cash flow and creates opportunities to save

With a good credit score, you can get better terms and lower interest rates on loans and credit products. So a good credit score can save you thousands of dollars over your lifetime. The money you save by not paying high interest and fees is money you can save for other assets, like paying for college.

People with good credit scores may pay $200,000 less over a lifetime for financial products and services than those with no or poor credit scores.

The tables below show sample loan terms for two asset purchases (a car and a home), depending on the customer’s credit score.

Your Turn Calculate how much someone with a good credit score could save over time.

What is the potential savings every month?

What is the potential savings over 5 years?

$10,000 auto loan: 5 year term

Score Interest Rate Monthly Payment

500 17% $249.00

620 11% $217.00

720 3% $182.00

What is the potential savings every month?

What is the potential savings over 30 years?

$100,000 mortgage: 30 year term

Score Interest Rate Monthly Payment

<620 N/A N/A

620 5.6% $1,153

760 4% $960

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Section Three: Why Does Good Credit Matter?

Good credit improves access to high-quality financial products

Credit and loan products are designed to help you meet your short-term financial

needs and to build assets by purchasing a home, earning a college degree, or starting a business, for example. Having a thin credit history, or none at all, can make it difficult for you to qualify for high-quality, affordable credit and loan products.

Good credit improves employment and housing options

You may be required to go through a credit check when applying for a job—good credit may increase your chances of employment.

1 in 4 Americans have gone through a credit check when applying for a job. According to a recent study, 1 in 10 are denied a job due to negative information on their credit reports!

A landlord will check your credit report for previous housing collections items and other indicators of how responsible you are at managing money. If you have a good credit history you may more and better rental options.

Good credit buffers economic shocks and smooths income

You may need credit to weather economic shocks such as unexpected expenses or a sudden loss of a job. In these instances, credit can help you stretch and smooth your income to meet your basic needs.

Without a good credit history, a bank or credit union may not offer you a small dollar loan or credit card in an emergency, and you may have to turn to high-cost payday lenders to obtain credit instead.

What are two ideas you heard in this section that you will hang on to?

What is one action you will consider taking now because of what you learned in this section?

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Section Four: Introduction to Credit Building

What are three words to describe your current relationship with your credit history, report, and score?

What are some challenges you have had with managing your credit? If you have not used credit, what is keeping you from doing so?

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What is credit building?

Credit building is the process of establishing and

maintaining a credit history. You build your credit when you make on-time, monthly payments on a financial product, such as a loan or a credit card, which your creditor then reports to the major credit bureaus. You build your credit when you have positive, active

lines of credit also called trade lines — on your credit report.

If you don’t have active trade lines, you won’t be able to build a good credit history or improve your credit score.

You should have at least one, and ideally three, active trade lines on your credit report that you are regularly paying on-time.

What is credit repair?

Credit building is not the same as credit repair, although they are related. Here are some ways you can repair your credit:

resolve errors on your credit report  pay off debt that is in collections

reduce active debt balances and prevent active debt balances from becoming delinquent

If you already have credit and debt, these two strategies are connected, but different. You will need to do both to improve your credit report and scores. If you have no credit (and

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Section Four: Introduction to Credit Building

What is an active trade line?

To build credit, trade lines on your credit report must be active: they must be used regularly and paid on-time, every time. Creditors report both installment credit (car loans, student loans, mortgages, etc.) and revolving credit (credit cards or lines of credit) to the credit bureaus.

To build credit with an installment loan, the loan must carry a balance and require a monthly payment. While paying off debt is a good thing, once you pay off an installment loan in full, it is no longer an active trade line and will not continue to build credit.

Revolving credit is a tool to continue building credit. In order to build credit with a revolving credit product, you must use it at least once every six months—ideally, though, you would use it once a month. You don’t have to keep an outstanding balance on the credit product—in fact, it’s better if you pay off the balance in full at the end of every month or statement cycle.

If you can, consider using a credit card to buy one tank of gas or groceries once a month and then pay it off in full at the end of the month. Don’t use the card more than you need to or for non-essential purchases.

When you make on-time payments on services like your utilities, cell phone and rent, those payments may be reported to the credit bureaus. If they are, they serve as alternative positive credit data and therefore help you build credit. Ask your utility company, phone company, or landlord if they report your payments to any credit bureaus.

What are two ideas you heard in this section that you will hang on to?

What is one action you will consider taking now because of what you learned in this section?

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In this section, we will explore five steps you can take to get started on your credit building journey:

1. Connect Credit Building to Your Goals 2. Understand Your Credit Profile

3. Get the Good Stuff Going! 4. Deal With Debt

5. Make Credit Building Count

Step 1: Connect Credit Building to Your Goals

Begin by thinking about your financial goals in general, using the questions in the chart below.

Section Five: Five Steps to Build Your Credit

What do I want my financial life to look and feel like...

In 5 days? In 5 months? In 5 years?

Some specific goals I want to achieve are:

What credit building goals will you set in order to achieve the financial life and goals you described?

How will a good credit history, reports, and scores help you reach your goals? Ch eck cre dit re port Pay down d ebt Imp rove cre dit sco re Find a c redit p roduct Purch as e an as se t Pay off bill mo nth ly

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Section Four: Introduction to Credit Building

Section Five: Five Steps to Build Your Credit

Step 2: Understand Your Credit Profile

Request Your Report

Credit reports and scores are key tools that you can use to work towards the goals you set. Review and understand what is on your credit report to determine what you should do to build your credit. As you begin to build credit, review your credit reports regularly to see the progress you’re making along the path to financial stability.

You can request one copy of your credit report from each of the three major credit bureaus, once a year. You can also get a copy of your report for free if you have been denied credit, or are unemployed, have been the victim of identity theft.

Here are three ways to request your credit reports from TransUnion, Equifax, and Experian:

 Visit www.annualcreditreport.com

Call 1-877-322-8228

 Send a written request to:

Annual Credit Report Request Service PO Box 105281

Atlanta, GA 30348-5821

Here are some other tips for when and how to request and review your credit reports.

If you are requesting your credit report for the first time ever or it has been a long time since you requested it, request and review it from all three of the major credit bureaus at the same time.

Review at least one of your credit reports if you have plans to apply for a job or make a major purchase in 6-12 months.

Once you have a handle on your credit reports, you should stagger and pull one report every 3-4 months to keep an eye out on credit regularly.

Other free sites like creditkarma.com and credit.com offer credit report information, and even access to certain credit scores. Although they are legitimate and can be good tools, they are not a substitute for traditional credit reports – and always beware of marketing that tries to sell you something you may not need.

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Step 2: Understand Your Credit Profile

Read Your Report

Although credit reports from each of the credit agencies may look different, they contain the same basic information. There are typically four main components:

1. Identifying information, such as

your name, Social Security Number, current and previous addresses, telephone number, birth date,

current and previous employers, and your spouse’s name if you are

married.

2. Your credit history, such as how much credit has been made available to you and your

history of paying it back. The report will also show gaps in your credit history: times when you were not using any credit products at all.

3. Negative information about you that is in public records, such as bankruptcies,

foreclosures, tax liens, and late child support payments. This information stays on your credit report for seven years or longer.

Chapter 7 bankruptcies stay on your credit report from 10 years. Tax liens stay on your credit report for seven more years after you pay them off. Civil lawsuits, judgments and arrests will stay on your credit history for seven years after they are recorded by the court.

1. A list of inquiries from creditors and other authorized parties who have requested and

received your credit report, including yourself. Most inquiries remain on your credit report for two years. An inquiry can be either “hard” or “soft.”

A hard inquiry happens when you apply for any type of credit, and will be listed on your credit reports. Hard inquiries may lower your credit score somewhat because someone who has recently applied for new credit is seen as a potentially riskier borrower.

A soft inquiry happens when you request to see your credit report, when one of your current creditors performs a routine check, or you receive credit offers without applying for them. Soft inquiries will not impact your credit score and will not show up on your credit reports.

Read your credit report carefully to look for errors in any of the above components.

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Section Five: Five Steps to Build Your Credit

Your Turn Use the sample credit report handout to answer the questions on this

page.

Whose credit report is this? What other personal information can you tell about them?

Has the person ever declared bankruptcy?

Has the person had an account in collections?

If yes, what is the account?

How many credit accounts does this person have open? Which ones are active?

What is the balance on each account?

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Section Five: Five Steps to Build Your Credit

Order your credit report from at least one credit bureau. Review it and use this form to check it and make sure all information listed on it is correct.

Experian TransUnion Equifax

Date you reviewed your report

Is your name correct? Check aliases they may have listed for you, too.

Is your social security number correct?

Is your address correct?

Are your previous addresses correct?

Is there anything listed in the public records section? If yes, is this information correct?

Do you have anything listed in the collections section? If yes, is this correct?

If something is listed in the collections section, has it been noted as closed in the accounts section?

Review each entry in the accounts section. Do they all belong to you?

Check the account name, account number, loan amount, and current balance. Are these correct?

Check payment pattern. Are there payments outstanding? Are there payments marked as late? Are these correct?

Do you need to dispute it?

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Section Five: Five Steps to Build Your Credit

Step 2: Understand Your Credit Profile — Dispute Errors

According to the Federal Trade Commission, 25% of all credit reports contain incorrect

information or errors. Some errors are harmless, such as misspelled names or addresses. But some errors may signal identity theft or have a serious impact on your access to affordable credit products, rental housing, employment, and more.

It’s important for you to check your reports to make sure the information on there is correct. If there is any incorrect information, dispute it!

To dispute information you believe is incorrect, you must do so in writing to the credit bureaus. There is a sample dispute letter on page 37 of this workbook. Here are some additional tips for disputing incorrect information on your credit report:

Be clear and concise. Use simple language to explain your dispute.

Tell your story! The more information that you provide the better. As long as it is relevant, include details in your own words that support your case.

Provide documentation. Provide a copy of the credit report that lists the information that you would like to dispute. Include copies of any other materials (cleared checks, receipts, statements) that help to support your case. Never send originals!

Send your dispute letter by certified mail to one or all of the major credit bureaus. Make and keep copies of your correspondence with all creditors, as well as the

disputes that you submit.

Follow up! Credit bureaus generally have 30-45 days to respond to your claim. If they do not respond within 30 days, call them, or send another letter. Use this simple chart to keep track of your disputes:

If you are the victim of identity theft or fraud, file a report of this crime with your local police department, and provide a copy of the policy report to each credit bureau. Disputed account

name/number

Date dispute sent Follow-up date Date resolved

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Section Five: Five Steps to Build Your Credit

Step 2: Understand Your Credit Profile

Un-derstand How Credit Scores Work

There is far more than just one credit score out there, but the ones most widely known and used are the FICO (Fair Isaac) score and VantageScore. All credit scores compare the information in your credit report to what is on the credit reports of thousands of other people. A credit score is the easiest way for most traditional lenders to determine who may qualify for their credit and at what rates.

FICO scores and VantageScores generally range from 300 to 850. A higher score means you are a lower credit risk. If you have a higher score, a creditor is more likely to offer you a loan. Lenders have different standards for how much risk they will accept. Here is a very general idea of what a lower or higher credit score means:

Other factors like your current income, how much debt you have, and how stable your employment has been, can also influence a creditor’s decision to offer you a loan.

Your scores vary depending on your recent credit activity. The credit bureaus only calculate your score when a lender requests to see it. So any score they calculate will be based on the information in your file at that credit bureau, at that moment in time only.

Most credit scores take the following factors into account:

More influential

Range FICO Score Meaning…

Subprime (Poor/Low) Under 620 No access or unfavorable rates and terms

Prime (Fair/Good) 620 – 780 Reasonable or good rates and terms

Super-prime (Excellent) 780+ Better or best rates and terms

History of regular, on-time payments

Debt balance/ credit utilization ratio: how much of your current available credit you are using

Length of your credit history Mix of credit types Hard inquiries Less influential

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Section Five: Five Steps to Build Your Credit

Your Turn

Use the following tool to determine if you are a good candidate for credit building right now, or should consider another action before you begin credit building.

Do any of the following appear on your credit report? If so, check the box.

3 or more open, active credit accounts

Recent late payments on current active debt (last 6-12 months) Debt balance/credit utilization ratio over 30%

Accounts in collections that may lead to judgments or garnishments Public records reflecting money judgments or garnishments

If you checked one or more boxes:

Go to Step Four: Deal with Debt to make sure that you are ready for credit building by

taking a closer look at your outstanding debt. Once you have assessed your budget and debt situation, revisit Step Three: Get the Good Stuff Going. You may still be a good candidate for credit building now or in the near future!

If you did not check any boxes:

Go to Step Three: Get the Good Stuff Going. You are a very good candidate for credit building now! Remember that you may have no credit or a thin credit file, so you may seem like a risky borrower to lenders. But stay focused on the positive: it is easier to build good credit than repair bad credit.

While FICO, VantageScore, and other credit scores treat these factors differently, there are a some credit best practices that will improve your credit score no matter what:

Make regular payments on time.

Keep debt balance/credit utilization ratio low — use 30% or less of your available credit. Don’t close old accounts in good standing if you don’t need to.

Maintain a mix of active trade lines — both installment and revolving

Don’t apply for a lot of credit in a short period of time unless that credit is for a specific asset like a car or a house.

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Section Five: Five Steps to Build Your Credit

Step 3: Get the Good Stuff Going!

Once you determine that credit building is the right next step for you, you need to plan how to get, and keep, your credit building strategy going! As you plan your credit building

strategy and choose a credit building product, ask yourself:

Many credit building products are starter products: small dollar loans that last for a few months or a year, or secured credit cards with low security deposit requirements. These products often have graduation features that let you transition into a more traditional credit product such as a mortgage or a no-fee, low-interest unsecured credit card, after you have used the starter product successfully.

Remember, some credit builder products, like a secured credit card, can be used to purchase items already in your budget such as gas or groceries.

Before you open a credit building card or loan, create a realistic budget and decide how much of your monthly budget you can devote to monthly payments.

Your Turn

Complete this sentence: The maximum monthly credit payment I can afford is ___________ dollars.

Complete this sentence: My ideal monthly credit payment is __________ dollars.

Do I need to activate existing open accounts, get delinquent accounts current, and/or add new active accounts?

What credit-building financial product can I afford? What credit-building financial product am I eligible for?

Are there financial products that are linked to money management tools, matched or incentivized savings opportunities, and/or ongoing credit building?

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Next, consider your strategy and select your product.

If you have credit accounts that are delinquent but not in collections (such as a loan you missed a payment on), make payments and become current on those accounts before you apply for new credit.

If you have credit accounts that are inactive (such as a credit card that you just don’t use), activate those accounts before applying for a new credit account.

If you have no or just one active credit account, identify and apply for a product that would be helpful to you.

Use this table to compare products and identify what kind of product to apply for if you have no or few active credit accounts.

Section Five: Five Steps to Build Your Credit

Your Turn

Product #1 Product #2 Product #3

Basic Information Creditor name Name of product Type of product (installment, revolving, etc.) Eligibility Requirements What kind of ID do I need to open the credit account? Do I need money to open the account? If so, how much? Do I need a minimum credit score to open the account?

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Section Five: Five Steps to Build Your Credit

Product #1 Product #2 Product #3

Affordability and other terms and requirements

What is the interest rate? Is it variable or fixed?

Are there other fees to open the

account?

Is there an annual fee to have the account? If yes, how much?

When is the monthly payment due?

What will my monthly payment likely be? How much will go to principal and how much to interest?

What are the late fees?

What is the product term (is it for one year? Is it ongoing? etc.)

Is there minimum limit on the credit amount available? A maximum?

Can I pay off the balance without any pre-payment

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Section Five: Five Steps to Build Your Credit

Product #1 Product #2 Product #3

Flexibility

When and how will I receive monthly statements? Can I negotiate statement dates?

Are there different options?

Graduation options

Are there other features that can help me graduate to another product?

Does this creditor have other products I can use that will be of value to me? If so, what are they?

Accessibility Do the creditor’s employees speak my language? Can I make transactions and payments online? Is there a grace period?

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Section Five: Five Steps to Build Your Credit

Step 4: Deal with Debt!

If you have a lot of active debt or debt in collections, we recommend that you address these issues first before you begin to build your credit. Make a plan to pay off your debt. Paying off your debt is a critical step in

working towards future credit building goals. Active debt is any outstanding balance you owe on a credit product that has not gone into collections. If you are already making payments on your active debt, you’re likely already building your credit!

Here are other tips for dealing with active debt:

If you use revolving credit products like a credit card, manage your debt there by avoiding using more than 30% of the total credit that’s available to you.

If you have a lot of debt from an installment credit product like a car loan, pay more than the minimum monthly payment to decrease that debt load. This will reduce your total interest owed.

If you don’t have enough money to make your payments on time, examine when your payments are due and when you receive income. Call your creditor to see if they can switch your payment date to a date closer to when you have income.

If you don’t have enough money to make a payment, call your creditors to explain what’s going on, and see if you can work out a short-term arrangement to decrease or skip your payment.

If and when you are able to pay off your credit, do not close old revolving credit

accounts even if you are not actively using them. In addition to being important to the length of your credit history, it might reduce your total credit utilization ratio.

Don’t ignore warnings or bills you can’t pay. If a creditor threatens to sue you, respond to any court documents.

If you have debt that is already in collections, it can never be “active” as defined above. Unlike making on-time payments on your active debt, paying off debt in collections may not improve your credit scores.

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Avoid establishing an ongoing payment relationship with a debt collection agency. When dealing with an account in collections, if possible, it’s best to try to settle it in one lump sum of 30-50% of the debt you owe, rather than create an ongoing payment plan.

When you make a lump sum payment, it will decrease your credit scores for a short time, and then the account activity will age and the negative impact on your scores will lessen over time. But if you establish a payment plan, the negative impact could be reactivated every month when your payments on the debt show up as recent activity on your credit report, which will spread out their negative impact over time.

Here’s a map to help you figure out some possible routes for negotiating a lump sum payment with a creditor:

Section Five: Five Steps to Build Your Credit

Save up your lump sum payment, and then call your creditor. Here are two examples of what to say: This is Ms. Smith. I recently became aware of a collection on my credit report, account 12345. I currently have $200 I can apply toward this debt. Will you accept that as payment in full on this account? This is Mr. Smith and I recently became aware of several collection accounts on my credit report. I am working with several collection agencies to settle these accounts. According to my records, I owe you $300. Will you accept $100 as

payment in full, or should I give that $100 to another collection agency?

If the creditor accepts your offer, request that they mail, fax, or e-mail you a receipt verifying that the debt has been settled in full after you make the payment.

If they reject the offer, ask, "What will you accept as a payment in full?"

If the creditor makes a counter-offer — such as “We can’t accept $200, but we would accept $250” — decide whether you can afford that or not. If you can, make the payment, and then request a receipt.

If they are unwilling to negotiate, try hanging up and redialing the creditor again. It may be possible to reach another representative willing to negotiate. If that doesn’t work, and you can afford to do so, pay the account in full and then request a receipt. Or, you can move onto another collection account and try negotiations with them.

After you settle collections accounts, it’s a good idea to send a letter to each of the credit bureaus to speed up their correcting the outstanding debt information.

In some cases, a payment plan may be the best option to avoid wage garnishment. In these cases, try to establish a payment plan with the original creditor and not the

collection agency. Also try to negotiate the total amount before negotiating the monthly payments. Be sure to get an agreement in writing before making the first payment, and get a receipt for each payment you make. And make all payments on time!

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Section Five: Five Steps to Build Your Credit

Use the tools below to make a plan to deal with your debt.

1. Using your credit report, make an inventory of active debt and debt in collections. Determine how much you owe each creditor and how much you owe in total.

2. Figure out how much you can afford to pay each month, and brainstorm other ways you can save money to pay off your debt.

3. Prioritize your repayments.

4. Organize and plan out your payments. We suggest using a calendar to keep track of due dates and when you made payments.

Your Turn Name of creditor Amount owed Minimum monthly payment Monthly payment due date In collections? Type of collateral pledged $ $ $ $ $ $ TOTALS $ $ Source of funds Anticipated amount

Amount I will put towards my debt

When will I get the funds? When will I use them for a payment?

Name of creditor Amount owed Monthly payment amount or total payoff amount I can make

Why is this payment important to me? Why does it make sense for me?

$ $

$ $

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Section Five: Five Steps to Build Your Credit

Credit building takes time and dedication. Make sure you check in on your progress over time, and then celebrate your successes, no matter how small!

Check your credit report and scores every three to six months.

Use the following tool to revisit your credit report and conduct a follow up credit report assessment to identify changes and progress as revealed by your credit report.

Step 5: Make Credit Building Count!

Your Turn

6 month follow up 12 month follow up

Date you reviewed your report

If you disputed anything on your previous report, did it get resolved?

What changed?

Is anything listed in the public records section?

What do you need to do to address records?

Do you have anything listed in collections?

What more do you need to do deal with accounts in collections?

Do you have active trade lines?

Are you paying these on-time?

If not, what more do you need to do to get your payments current and to make them on time moving forward?

Is your credit utilization ratio at 30% or less?

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Section Five: Five Steps to Build Your Credit

As you improve your credit, think about how to leverage your successes to achieve your goals. With an improved credit score, you could:

Apply for an affordable credit product you may need

Request that your car or home insurance company reduce your annual premiums Refinance expensive debt you currently have and get a lower interest rate

If you take any of these actions, do so responsibly, and think ahead about how they will affect your credit report and score. But whatever you do, remember:

Be confident!

Ask for exactly what you want, but be prepared to negotiate. Make your credit building efforts work for you!

Taking control of your credit is possible. With access to the right products, making on time monthly payments can be possible and can make all the difference in establishing or

reestablishing good credit scores. Once you start to build your credit, reviewing and leveraging improvements to your credit report and scores is not only empowering, it can save you money,

Experian TransUnion Equifax

Score name

What was my previous score (if any)?

Date pulled

What is my current score?

Date pulled

How much did it change?

If you want to track improvements on your credit score over time, remember that you will probably have to pay to view your score.

Also, while improvements evidenced on your credit report will most likely be reflected in a higher credit score, note which score you are accessing and make sure you are comparing like scores. Remember that a creditor or other business will likely not see the same score you see when they review your score.

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For another overview of how to access your free credit and how to dispute errors on it, visit

http://www.consumer.ftc.gov/articles/0155-free-credit-reports.

For more information, including a helpful video, on disputing credit report errors, visit

the Consumer Action website link here: http://www.consumer-action.org/modules/

articles/rebuilding_good_credit_leaders_guide1#Topic_03.

If you are the victim of identity theft or fraud, the Federal Trade Commission’s online guide

will help you learn more about how to deal with the problem: http://

www.consumer.ftc.gov/features/feature-0014-identity-theft.

For more information on what creditors and debt collectors can and cannot do if you owe

them money, visit Ask CFPB at http://www.consumerfinance.gov/AskCFPB.

Creditors have a certain amount of time to collect debt legally. After that they can no

longer pursue you for it (the statute of limitations will expire). However, if you make a payment you may be starting that statute of limitations over again. Again, this does not mean that you do not want or need to deal with your debt in collections, just that you should be aware of your rights as a consumer. Visit

http://www.nolo.com/legal-encyclopedia/statute-of-limitations-state-laws-chart-29941.html to learn more about

Kentucky’s debt collections.

Test your knowledge of credit scores with this simple 20-question quiz:

www.creditscorequiz.org

Read a report on the importance of credit history and successful saving: http://

americasaves.org/images/newsletters/creditscore.pdf

Explore alternative credit data reporting opportunities. Alternative credit data refers to

information, such as on-time rental payments, that is usually not on a traditional credit report. Alternative credit can be helpful to those that are new to the credit or those that may have poor credit and need to have positive information added to their report.

Currently many companies and landlords report poor payment history to the credit bureaus, particularly in cases where accounts go to collections, but very few reward

positive payment behavior by reporting on-time payments. Fortunately there is now a way for these renters to benefit from the same credit building opportunities afforded to

homeowners. Experian and TransUnion offer renters the opportunity to include on-time rent payments as valid trade lines on traditional consumer credit reports. This data is

reported either directly by landlords or by credible online rental payment processors – and it could be an opportunity for you to build credit without taking on additional debt or incurring the burden of an additional monthly expense. For more information about credit building through rental payment reporting, contact BankOnLouisville@louisvilleky.gov.

Resources

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Today’s date Your Full Name

Current Address

Current Phone Number

Attention: credit bureau name and address

Dear credit bureau,

This letter is a request to correct inaccurate information contained in my credit file. The item(s)

listed below is/are (insert appropriate word(s): inaccurate, incorrect, incomplete, erroneous,

misleading, and outdated). I have enclosed a copy of the credit report your organization provided

to me on (insert date of report here) and highlighted item(s) in question.

Line Item: name of creditor, account number or line item number

Item Description:write this exactly as it is found on your credit report

Requested Correction:Describe exactly what you want the credit bureau to do. If you want an item

deleted, say so and explain why. If you want an item corrected or updated, provide the correct information such as names, dates, amounts and so forth and any evidence to support your claim.

In accordance with the federal Fair Credit Reporting Act (FCRA), I respectfully request you investigate my claim and, if after your investigation, you find my claim to be valid and accurate, I

request that you immediately (delete, update, correct) the item.

Furthermore, I request that you supply a corrected copy of my credit profile to me and all

creditors who have received a copy within the last 6 months, or the last 2 years for employment purposes. Additionally, please provide me with the name, address, and telephone number of each credit grantor or other subscriber that you provided a copy of my credit report too within the past six months.

If your investigation shows the information to be accurate, I respectfully request that you

forward to me a description of the procedure used to determine the accuracy and completeness of the item in question within 30 days of the completion of your re-investigation as required by the Fair Credit Reporting Act.

I thank you for your consideration and cooperation. If you have any questions concerning this

matter I can be reached at (daytime phone number including area code).

Sincerely,

Signature

Your full printed name

Sample Dispute Letter

For other sample dispute letters, plus letters for other requests such as to stop calls from a collections agency,

visit the Federal Trade Commission’s website:

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Glossary

Annual percentage rate (APR) — A measure of the cost of credit, expressed as a yearly interest rate. Usually, the lower the APR, the better for you. Be sure to check the fine print in credit card offers for time limits. Your APR could be much higher after the offer's

introductory period ends.

Collateral — Property that is used to secure a loan or other credit that can be subject to seizure on default. For example, Judy uses her car as collateral for a $10,000 loan. If she is unable to repay the loan, the bank can take away her car.

Collections — When payment on a debt is past due and the creditor sells the debt to a collections agency, the debt is described as being “in collections.”

Collections agency — Companies that

regularly collect debts owed to others. They either own the debts (purchased from

creditors, such as car dealers) or they assist companies in collecting debt from their customers.

Credit — The ability to borrow money with the promise to repay it at a later date. Credit is not free. It allows you to buy things when you don't have cash immediately available, but you will be charged interest and fees for using credit.

Credit building — The act of making on-time monthly payments on a financial product such as an installment loan or a credit card that is reported by the creditor to the major credit bureaus.

Credit bureau — See credit reporting agency.

Credit file — See credit history.

Credit history — A record of all of your credit-based transactions. If you have ever applied

Credit repair — A strategy for improving one’s credit score and history by resolving errors, paying off historical accounts in collections, and reducing open and active debt loads and preventing them from becoming delinquent.

Credit report — A report detailing your credit history. A credit report is a record of how you have paid your debts. It tells creditors and other businesses who you are, how much debt you have, whether you have made payments on time, whether there is negative information about you in public records, and what type of credit you are looking for. All lenders use a credit report to determine your credit history and evaluate your record of repaying credit.

Credit reporting agency — a company that collects and packages consumer credit information from creditors and then sells it back to them and others for a variety of uses as authorized by the Fair Credit Reporting Act

(FCRA).

Credit score — A number typically calculated from the information on your credit report that allows a creditor or other business to quickly decide whether or not to do business with you. Like a test score, the higher the score, the better your credit. A good credit score will help you take out loans more easily and even get better interest rates. All three credit reporting companies (Equifax,

Experian, TransUnion) use the system VantageScore to determine credit scores.

Creditworthy or creditworthiness — Having an acceptable credit history and therefore suitable to receive credit.

Definitions are adapted from the New York City Office of Financial Empowerment’s Money Dictionary. You can find more terms related

Here is a list of some terms that you may have seen throughout this book, and which you will hear a lot as you build your credit.

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Creditor — A person or organization (such as a bank) that lends you money on terms that they set. Also called lender.

Debt — An obligation to repay an amount you owe, also known as loans or liabilities.

Default — Failure to meet the terms of an agreement. For example, Cindy and ZZ Bank have a loan agreement in which Cindy pays $50 for five years for borrowing $2,000 from ZZ Bank. Cindy doesn't repay ZZ Bank and, therefore, has defaulted on her loan.

Delinquent — Being late for a payment on a loan or other liability. If a payment is due on the 1st day of the month, and you don’t pay it until the 10th, the account is said to be

delinquent or in delinquency until you have made the payment. Some loans have grace periods to allow for late payments up to a certain point without causing delinquency. The terms of your loan will spell out what, if any, late fee you’ll have to pay on a

delinquent payment. Serious or prolonged delinquency can lead to default.

Fair Credit Reporting Act — A consumer protection law that imposes obligations on (1) credit bureaus (and similar agencies) that maintain consumer credit histories; (2)

lenders and other businesses that buy reports from credit bureaus; and (3) parties who furnish consumer information to credit bureaus. The FCRA limits the sale of credit reports by credit bureaus by requiring the purchaser to have a legitimate business need for the data, allows consumers to learn the information in credit bureau files (including one free credit report annually), and specifies the procedure for challenging errors in credit report data.

Fixed interest — A predetermined and

unchanging rate. For example, a 3% fixed rate

throughout the time you have the loan. Compare to variable interest.

Installment loan — A loan that is repaid over a set amount of time with a set number of scheduled payments

Lender — See creditor.

Liability — Amounts you owe to creditors/ lenders, such as a car loan or credit card debt.

Lien — The legal right of a creditor to keep or sell the collateral property of a debtor who fails to meet the terms of a loan.

Line of credit — An amount of credit extended to a borrower. See trade line.

Interest — The amount a borrower pays to a lender for use of the lender’s money. Interest rates can be fixed or variable.

Principal — The original amount of money borrowed. For example, George borrows $1,000 from XYZ Bank. At the end of the month he needs to repay them $1,200. $1,000 is the principal amount and $200 is the

interest and/or fees for borrowing the loan.

Revolving — Credit or a loan where the borrower has the flexibility to decide how often they want to draw on the credit and at what time intervals.

Secured — A loan that is backed by property, such as a house or car. In some instances, secured loans can also be backed by cash. Compare to unsecured.

Terms — Conditions and requirements

included in a loan agreement that specify the loan amount, term, interest rate, and other enforceable conditions agreed to by the borrower and the lender.

Trade line — Also called line of credit.

Unsecured — A loan that is not backed by collateral. Compare to secured.

Variable interest — An interest rate that may change during the life of a loan. Compare to

Glossary

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Figure

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Related subjects :