Financing My Future GOOD CREDIT CHALLENGE

STUDENT ACTIVITY BOOK

UNDERSTAND YOUR CREDIT SCORE

Credit is a way of life -- unless you’re one of the lucky few with all the cold hard cash. Your credit score is essentially a report card of your financial health that lenders look at when you want to borrow money. It provides a quick glance that forecasts whether you’re likely to default within the next two years. Here’s the insider scoop on what those numbers mean.

Who Looks At Your Credit Score Pretty much any time you want to borrow money, your credit score is going to come under scrutiny. We expect a conversation about our credit history for transactions involving home loans and credit cards. In addition to what we might normally consider “traditional lenders” (banks, credit card companies, mortgage lenders, car financing companies, etc.), more and more companies are finding permissible purposes to access your credit file.

• Employers can do an investigative report to see if you have a criminal record or other transgressions that might speak ill of your character. If the job for which you are applying would entail significant responsibilities when it comes to handling corporate funds, a potential employer can deny you employment based on your credit history.

• Landlords and potential landlords are also allowed to check your credit history; they can deny you a rental if they aren’t comfortable with you as a credit risk.

• Insurers also use your credit report as a determining factor on your risk as a driver and homeowner, which absolutely affects your insurance premiums.

• Utilities, cable companies, and ISPs have gotten in on the action, too. They argue that they’re fronting you the first months’ worth of service -- extending you credit, basically. This allows them to check your report and score to see whether you’ll be a good risk -- and possibly deny you service or charge you premiums if your credit scores are too low.

UNDERSTAND YOUR CREDIT SCORE

It’s All in the NumbersMost credit agencies use the FICO formula for computing credit scores. This method assigns each consumer a credit rating between 300 and 850, with the average score falling round 720. If you fall in the range of 720 to 850, you’re considered the cream of the crop to potential lenders. You’ll get the best rates on home mortgages and credit cards, and you’re in a great position to do a little comparison shopping. The next range is 675 to 719, and though you’re not in the top tier, you should still be able to get a loan -- you just may pay a bit more interest. If your score lands between 620 and 674, this is considered below average and you’re not going to have as many options. You still may qualify for a loan or a credit card, but expect to drop a chunk of change on interest. And if you dip below 620, you’ll find yourself amongst the ranks of sub-prime borrowers, meaning you’re the riskiest candidate for a loan. If you can find a lender willing to invest in you, you’ll pay a hefty interest rate for the privilege of getting a loan.

760-850 EXCELLENT700-759 VERY GOOD723 MEDIAN FICO SCORE660-699 GOOD687 AVERAGE FICO SCORE620-659 NOT GOOD580-619 POOR500-579 VERY POOR

CREDIT SCORE TIERS

MORTGAGE RATE, PAYMENT & INTEREST EXAMPLES BY CREDIT SCORE TIER

FICO SCORE

APR

MONTHLY PAYMENT

TOTAL INTEREST PAID

760-850 3.585% $908 $126,738

700-759 3.807% $933 $135,776

680-699 3.984% $953 $143,075

660-679 4.198% $978 $152,008

640-659 4.628% $1,029 $170,310

620-639 5.174% $1,095 $194,204

UNDERSTAND YOUR CREDIT SCORE

What Your Credit Score is Based On

Credit scores are computed by looking at five areas of your borrowing history:

2. Credit – Debt Ratio (30%)The major factors here are the number of existing accounts you have open and available to draw credit from, and the amount you owe across those accounts. For installment loans, such as car loans or mortgages, the FICO model will look at how much you owe relative to the initial loan amount. Lower ratios are good. It’s also important to keep a fairly low ratio between the amount available to you and the amount you owe for revolving debt accounts (credit cards, lines of credit, etc.).

Suppose you have four credit cards, each with a $2,000 credit limit, for a total of $8,000 available to you. If you only owe $200 on each card, it shows that even though you have lots of credit available to you, you’re only using a small amount. You owe $800 out of a possible $8,000, for a balance/available credit ratio of 10%. But if all of those accounts are close to being maxed out, that’s bad news -- it may indicate too heavy a reliance on credit, and an increased risk that you’ll miss payments down the line.

1. Payment History (35%)As you might expect, this is the most important category. It takes into account your current standing with the debts you owe, as well as your past history. Having a good payment history, with no late payments for any accounts, is your best scenario.

35% Payment History

30% Credit-Debt

Ratio

Recent Credit Search

Types of

Credit

Length of Credit History

10%

10%

15%

UNDERSTAND YOUR CREDIT SCORE

3. Length of credit history (15%) The things that matter here are the total length of your credit history and the average length of time your existing accounts have been open. That’s why opening too many accounts too quickly can hurt you. It will lower the average length of time your existing accounts have been open, dropping your score.

4. Recent credit search (10%) New credit isn’t necessarily a bad thing, but as we mentioned before, getting lots of new credit in a short period of time will hurt your score. If you’re trying to establish credit, or reestablish credit after some problems, go slow. Try to wait six months or more between opening new accounts, and only open a few new ones in any two-year period.

5. Types of credit (10%) FICO scoring models look for a healthy mix between installment debt, revolving debt, store charge accounts, etc.

Where to Get Your Score There are three major credit bureaus, Experian, TransUnion, and Equifax, and while each have their own names for their particular credit scores, they all use the FICO as the accepted method. Since the FICO score is used by various corporations in different industries, the algorithm to determine the score has a slight adjustment for each type of credit. This means that within the same time period you could possibly have a higher credit score for credit cards versus your mortgage credit score.

Under the Fair Credit Reporting Act, you are legally entitled to one free credit report per 12 month calendar year from each of the three bureaus which can be accessed from AnnualCreditReport.com. Note: This is only your credit report, but you can access your credit scores as an affordable add-on feature or banks and credit card companies also often have offers to access your free credit report.

More Resourceswww.creditkarma.comwww.creditkarma.com/tools/credit-score-simulatorwww.fool.com/personal-finance/credit/secrets-of-your-credit-score.aspx

STUDENT LOAN SCAVENGER HUNT

Don’t sweat it honey; if you don’t have need you can still get the money!

Don’t worry about being late; you can pay when you graduate!

No need for sorrow; you parents can borrow!

Don’t sweat a bead; this is based on financial need!

It’s a good sign with a fixed interest rate of 4.29!

The 5% interest rate is low and you don’t make payments as you go!

LEARN THE FACTS ABOUT STUDENT LOANS

For many students, borrowing money through student loans is a way to make their college dreams come true. But unlike other types of financial aid, loans have to be repaid with interest. The federal and state governments, colleges and private organizations all provide college loans to students and parents. Learn the facts about loans and you can borrow wisely.

Start by understanding some important definitions:

DEFER: Some federal loans let you defer — or delay — paying the loan back until after you graduate.

INTEREST RATE: The interest rate is the cost of borrowing money, and is usually a percentage of the loan that is added to the amount you borrow. The higher your interest rate, the more you’ll owe over time.

NEED-BASED: Aid that is need-based is awarded to students who are determined to have financial need; that is, the amount they are able to pay for college is less than the cost of attending the college. The federal government offers need-based loans to students. Eligibility for these loans is determined by the Free Application for Federal Student Aid (FAFSA).

SUBSIDIZED: Some federal loans are subsidized, which means the government pays the interest on the loan while you’re in college. Learn more about the rules for subsidized loans on ed.gov.

There are three main sources of student loans:

• The federal government lends almost half of the money college students borrow each year.

• State agencies offer college loans. (Some of these have very specific requirements.)

• Private organizations like banks, other financial institutions, foundations and colleges may offer loans to students.

TYPES OF LOANS

Taking out a loan means paying regular charges called interest. You can save money by choosing a loan with a low interest rate. A subsidized loan is your best option. With these loans, the federal government pays the interest charges for you while you’re in college. Here are the types of student loans. Not all students are eligible for every loan.

1. FEDERAL PERKINS LOANS: Colleges may award these loans to students with the highest financial need, using federal government money. The 5 percent fixed interest rate is low, and you don’t make any loan payments while in college. You can borrow a total of $27,500.

2. FEDERAL DIRECT SUBSIDIZED LOANS: These need-based loans have a low interest rate of 4.29 percent, and the government pays the interest charges while you’re in college. This interest rate is fixed, which means it will not change over time. You can borrow up to $3,500 your freshman year, and this limit increases to $4,500 for your sophomore year, and $5,500 each for your junior and your senior year.

3. FEDERAL DIRECT UNSUBSIDIZED LOANS: These non-need-based government loans also have a fixed interest rate of 4.29 percent. But they allow you to borrow more money than a Direct Subsidized Loan alone. You can pay the interest while you’re in college or add it to the amount of your loan. The second option means you’ll end up paying more money over time.

4. FEDERAL DIRECT PLUS LOANS: These non-need-based government loans allow parents (and graduate students) to borrow the total cost of attending college, minus any other aid received. They have a 6.84 percent fixed interest rate.

5. PRIVATE (ALTERNATIVE) AND STATE LOANS: These loans from banks, colleges, private organizations and state government agencies usually are not need based or subsidized. They may require good credit, which often means an adult with good credit must cosign the loan. Interest rates on these loans are often higher than on federal loans, and the rates may rise over time. These loans may also have terms that are not as favorable as those of federal loans.

TYPES OF LOANS

(Loans disbursed after 7/1/ 2015)

Direct Subsidized Loan

Direct Unsubsidized Loan

Direct Unsubsidized Loan

Perkins

Direct PLUS Loan

State and Private Loans

Yes

No

No

Yes

No

No

Yes

No

No

Yes

No

No

Federal Government

Federal Government

Federal Government

Federal Government

Federal Government

Banks, Colleges, Foundations, State

Agencies

Student - Undergraduate

Student - Undergraduate

Student - Graduate/Professional

Student

Parent (or Graduate/Professional Student)

Usually Student with Creditworthy

Cosigner

4.29% (fixed)

4.29% (fixed)

5.84% (fixed)

5% (fixed)

6.84% (fixed)

Usually Higher than Federal Rates;

Variable

NEED-BASED? SUBSIDIZED? SPONSOR BORROWERLOAN INTEREST RATE

BEFORE YOU BORROw…

1. Meet all financial aid priority deadlines and special requirements at each college you want to attend. Meeting the deadlines to submit financial aid forms is important because some funds are limited and run out.

2. After Jan. 1 of your senior year, complete the Free Application for Federal Student Aid (FAFSA) even if you don’t expect to qualify for grants for students with financial need. Even if you don’t qualify for a subsidized loan, the application will qualify you for other loans.

3. If your chosen colleges require the CSS/Financial Aid PROFILE® or other financial aid forms, fill these out and submit them.

4. Carefully review the award notifications you receive and contact the campus financial aid office if you have questions. Use the online Compare Your Aid Awards tool to discover which financial aid award gives you the best financial options.

5. Select a financial aid package that works for you and your family. If it includes a loan, remember that you are not obligated to borrow the full loan amount the package offers.

6. Complete the paperwork to accept the financial aid package, including signing the associated promissory note (a contract that specifies the terms and conditions of the loan). Someone at your college’s financial aid office can help you understand the paperwork.

THINGS YOU NEED TO KNOW ABOUT CREDIT CARDS

Learn credit card basics before you apply for an account so you can have a solid understanding of the fundamentals and avoid financial pitfalls.

1. There are lots of different types of cards to choose from. There are several varieties of credit cards: general purpose cards can be used anywhere or private label cards that can only be used at the issuing store or service station. Most general purpose cards are unsecured, meaning the issuer extends a credit line based mainly on your credit history. Secured cards are backed by funds you put in a deposit account that the creditor can claim if you default.

2. You must understand your card’s interest rates. Credit card interest rates can range dramatically, from 0 percent for limited-time balance transfer to as high as 30 percent. Who receives the best (lowest) rates? Consumers with positive and proven credit histories.

3. Comparing cards is vital. Banks, credit unions, retailers, and credit card companies all issue credit cards. (Visa and MasterCard are companies that help process payments; they don’t issue cards.) The best way to apply for an account is to locate the card with the best rates and terms by researching options online. This targeted search approach can protect your credit rating from too many unnecessary inquiries.

4. The contract is binding. Read the agreement carefully, because once you sign, you form a legal contract and consent to the terms set by the issuer. These include:

• Credit line/limit - The total amount you may charge, including interest and fees.

• Annual percentage rate (APR) - The interest charged on carried-over balances. It usually stipulates a higher rate for paying late, charging beyond your limit, balance transfers, and cash advances, too.

• Interest calculation method - Most calculate interest charges by averaging the daily account balance, then multiplying that figure by the periodic rate (APR divided by the number of days in a year).

• Fixed or variable APR - Fixed rate APRs have consistent interest rates. Variable rate APRs are tied to an index (often the prime lending rate, which is set by the Federal Reserve) and thus fluctuates.

• Grace period - The grace period is the number of days (generally between 20 and 30) you have to pay in full before interest accrues.

• Fees - Ordinary fees include those for cash advances, balance transfers, paying late, exceeding your credit limit, and sometimes an annual fee. Avoid cards with nonstandard fees, which Manning lists as application charges, not using the card, calling the creditor if they don’t have an 800 number, online account management, and terminating the account.

5. You can pay in full...or not - Each time you charge, you borrow money. However, because credit cards offer a revolving balance option, you aren’t required to pay the entire loan -- as long as you make at least the minimum requested payment, you can carry the remainder over to the next month. Interest will be added to the balance.

6. You have rights - As a cardholder, you have a legal right to fair treatment. The Truth in Lending Act requires issuers explain all the terms of the contract in detail, in language the average adult can understand. Problems with your bill? The Fair Credit Billing Act gives you the right to dispute and correct errors, and protects your credit rating during the process.

THINGS YOU NEED TO KNOW ABOUT CREDIT CARDS

KEY CREDIT TERMSINTEREST: A charge for borrowing money, most often based on a percentage of the amount owed and your credit score.

APR: This stands for annual percentage rate. With credit cards, APR is the amount of interest a cardholder pays in a year in additon to the regular balance. It is important to note that an APR can be fixed or variable.

FIXED INTEREST RATE: When the interest you are charged on borrowed money remains consistent. (Ex. For the entire time your credit card is open, your interest rate is 12.99%)

VARIABLE INTEREST RATE: When the interest you are charged on borrowed money changes based on outside influences. (Ex. Your initial interest rate is 12.99% but you miss a payment and the next month your interest rate increases to 21.99%)

CREDIT LIMIT: The maximum amount of money you are allowed to borrow from any one source. (Ex. Your Express credit card allows you to borrow up to $300, if you currently owe them $100, you will only be permitted to charge an addition $200)

GRACE PERIODS: The time between your purchase and the point when you start having to pay interest on the amount you borrowed.

MINIMUM PAYMENT: Credit cards typically demand you pay a minimum amount of money on what you owe each month. Remember though, you will be charged interest on the remaining balance you owe so making more than the minimum payment each month saves you money. (Ex. You owe $200 but your minimum payment due is $25. You may choose to pay the $25 with no negative consequences or you can payoff the entire balance or any amount in between the balance and the minimum payment)

ANNUAL FEE: Many credit cards, particularly those that offer rewards like airline miles, charge an annual fee to use the card. This is important to pay attention to as the fee can acutally be more than any rewards you might be able to use.

KEY CREDIT TERMSINTEREST: A charge for borrowing money, most often based on a percentage of the amount owed and your credit score.

APR: This stands for annual percentage rate. With credit cards, APR is the amount of interest a cardholder pays in a year in additon to the regular balance. It is important to note that an APR can be fixed or variable.

FIXED INTEREST RATE: When the interest you are charged on borrowed money remains consistent. (Ex. For the entire time your credit card is open, your interest rate is 12.99%)

VARIABLE INTEREST RATE: When the interest you are charged on borrowed money changes based on outside influences. (Ex. Your initial interest rate is 12.99% but you miss a payment and the next month your interest rate increases to 21.99%)

CREDIT LIMIT: The maximum amount of money you are allowed to borrow from any one source. (Ex. Your Express credit card allows you to borrow up to $300, if you currently owe them $100, you will only be permitted to charge an addition $200)

GRACE PERIODS: The time between your purchase and the point when you start having to pay interest on the amount you borrowed.

MINIMUM PAYMENT: Credit cards typically demand you pay a minimum amount of money on what you owe each month. Remember though, you will be charged interest on the remaining balance you owe so making more than the minimum payment each month saves you money. (Ex. You owe $200 but your minimum payment due is $25. You may choose to pay the $25 with no negative consequences or you can payoff the entire balance or any amount in between the balance and the minimum payment)

ANNUAL FEE: Many credit cards, particularly those that offer rewards like airline miles, charge an annual fee to use the card. This is important to pay attention to as the fee can acutally be more than any rewards you might be able to use.

LEARN THE INS AND OUTS OF CREDIT CARDSCredit cards are the most common way people borrow money. Credit cards are also a very helpful tool in life. Like any other tool, however, you need to know how to use one properly to get the most out of it. When paying with a credit card, you are essentially borrowing money from a credit card lender. You are then expected to pay back the credit card company in a set amount of time.

And, if you don’t pay the full amount you owe, you must pay interest (the cost of borrowing money) on the remaining balance. Fill in the credit card worksheet on the next page in order to compare credit card offers as you complete this step.

CREDIT CARD OFFER RANKING TABLE

Study the credit card offers in the table above. Then rank each credit card by what you determine is the best deal. Discuss your choices in your group.

N/A

0% FOR 15 MONTHS

0% FOR 21 MONTHS

0% FOR 12 MONTHS

N/A

0% FOR 21 MONTHS

N/A

0% FOR 15 MONTHS

0% FOR 15 MONTHS

N/A

29.99%, APR VARIABLE

10.99% - 22.99%, APR IS VARIABLE

11.99 - 21.99%, APR IS VARIABLE

10.99% - 22.99%, APR IS VARIABLE

29.99% VARIABLE

12.99% - 22.99%, APR IS VARIABLE

17.00% - 23.9%, APR IS VARIABLE

12.99% - 21.99%, APR IS VARIABLE

12.00% - 21.99%, APR IS VARIABLE

17.00% - 23.9%, APR IS VARIABLE

$75

0

0

$35

$125

0

$35

$75

$95

$99

RANK INTRO PURCHASE APR REGULAR PURCHASE APR ANNUAL FEE

LEARN THE INS AND OUTS OF CREDIT CARDS

TOTAL INTEREST PAID BASED ON RATE TABLE

CREDIT CARD BALANCE

$1,000

$1,000

$1,000

$1,000

$1,000

MONTHLY INTEREST RATE

29.99%

10.99%

12.99%

17.00%

23.9%

MONTHLY PAYMENT

$40

$40

$40

$40

$40

TOTAL INTEREST PAID

$1,261.21

$238.40

$296.53

$433.98

$768.86

CREDIT COMMITMENT FORM

Take everything you’ve learned so far and create your credit commitment. Make sure it includes at least three personal guidelines for how or when you will borrow money in the future. Whenever you think about borrowing money in years to come, you’ll be able to refer to your code for guidance.

CREDIT COMMITMENT FORM

CREDIT COMMITMENT FORM