Wells Fargo Financial EducationUnderstanding your Personal CreditRachel Goolsby

Wells Fargo At Work Program Manager

All credit products subject to qualification.© 2015 Wells Fargo Bank, N.A. All rights reserved. Member FDIC.

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What is credit?

Refers to a bank or business allowing its customers to purchase goods or services on the promise of future payment

Refers to the amount of money you borrow

Refers to the additional amount you will need to pay back to the lender

Depending on the type of credit you have, additional fees may be incurred in addition to the interest.

Credit Principal Interest

The Get Smart About Credit October initiative hosted annually by the American Bankers Association promotes financial education and helps bring credit awareness to your community. This presentation today is provided by Wells Fargo as part of its participation in the Get Smart About Credit initiative.

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The option of buying something today and paying back over time

The opportunity to act on major purchases, emergencies and life opportunities that may require more money than you have on-hand right now, like buying a computer or borrowing for college

Easier to rent an apartment, get a cell phone, get services from local utility companies if you have good credit

Opportunity to build a solid credit history

Mismanagement of credit can lead to: Overdoing it; borrowing more

than you can comfortably afford to repay

Impulsive spending

Potential damage to your credit history

Losing money on late fees

Having to pay additional interest

Difficulty getting loans or credit in the future, if you fail to make your payment on time.

Benefits Risks

Benefits and risks of credit

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Four C’s of credit

Lenders want to see a history of stability—how long have you lived at your current address, how long have you been at your current job, do you have a good history of paying your debts on time.

Assets of a borrower (for example, a home) that the lender has the right to take ownership of and use to pay the debt if the borrower is not able to make the loan payments as agreed.

Your other debts and expenses could impact your ability to repay the loan.

Creditors evaluate your debt-to-income ratio, that is, how much you owe compared to how much you earn.

Credit history Collateral Capacity

Lenders might consider outside circumstances that may affect the borrower’s financial situation and ability to repay (for example, what’s happening in the local economy).

Conditions

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Debt-to-income ratio

What is the percentage of your monthly gross income that you spend on paying debts and monthly obligations?

To find out, divide your total monthly debts/payments (e.g. rent, car loan, mortgage) by your monthly gross income.

Housing costs < 28% of monthly gross income

All recurring debt < 36% of monthly gross income

Example: Monthly debts/obligations ÷ Monthly gross

income = Debt-to-income ratio

$1,100 ÷ $2,600 = 42%

Expertsrecommend:

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Where can I get credit?

• Banks and credit unions• Department stores• Gasoline companies• Automobile dealerships• Student loans—government, banks• Furniture stores/electronics stores

Tip: If you’re just starting out, consider opening a secured credit card or loan, gas card, or retail store charge card to begin establishing your credit history.

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Types of credit

Lines of credit(secured and unsecured; including home equity and personal lines)

Loans(secured and unsecured; including student, mortgage, home equity, personal loans, auto loans, etc.)

Credit cards(secured and unsecured)

Sales contracts “90 days same as cash”

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Borrower receives the entire loan amountat one time.

Borrower must pay interest on the full loan amount.

Once the principal is paid back, it is not available to borrow again as part of the same loan (not “revolving”).

Interest rates can be fixed or adjustable

The term of the loan (amount of time the borrower has to pay it off) is fixed at that time the loan is issued.

Lender agrees to lend up to a certain credit amount, but the borrower does not have to take all of it at once.

Borrower makes payments only on the amount borrowed, rather than the entire line amount.*

Once the principal is paid back, it is available to borrow again in the future (revolving credit).

Interest rates are usually adjustable, and tied to an index plus/minus a margin.

The time allowed to pay back the principal is more flexible than with a loan, but the interest on any outstanding balance must still be paid monthly.

Loans Lines of credit

Loans versus line of credit

* With an interest-only plan, your principal balance is reduced only when you make voluntary principal payments during the interest-only period.

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You need to finance a large purchase or major expense.

You know the total cost up front.

Examples of loans:Mortgage, car loan, home equity loan, personal loan, student loan

You will be incurring portions of the total expense over time.

You do not know the total cost up front. You want more flexibility.

Examples of lines of credit:Personal line of credit or home equity line of credit

Consider a loan when: Consider a line of credit when:

Loans versus line of credit

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Using collateral to secure credit

• Large loan amounts are often secured by collateral. (called a “secured loan/line.”)

• Types of collateral typically include: house/property, equity in a home, savings, CDs, autos, investments.

• The potential value of the collateral will help influencethe lending decision.

• If the borrower defaults on the loan, the lender maytake ownership of the collateral property.

• Because there is collateral to back up the credit,secured credit typically has a lower interest rate than unsecured credit, and it is typically easier to qualify for secured credit.

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Who has at least one credit card?

When did you first get a credit card and why?

Think about how many credit cards you have now. Is that just the right number, too many, or would you like to have more? Why?

Credit card survey

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Selecting a credit card

All credit cards are not the same! When selecting a card, it pays to shop around.

Compare:• Annual percentage rate (APR)

• Annual fees, other fees and penalties

• Credit limit

• Card features (e.g. rewards)

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Card balance

Interest rate (APR)

Minimum payment Interest Expense

$1,000 14% $25 $563.01

92 months of minimum payments, total paid: $1,563.01

$1,000 8% $25 $245.67

74 months of minimum payments, total paid: $1,245.67

The cost of credit: An illustration

You’ve just charged $1,000…

Examples are for illustrative purposes only.

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Think about it….

• Do you pay your creditcard in full each month?

• If not, do you pay theminimum amount or moretoward the balance?

• What is the long-termconsequence of payingonly the minimum?

Planning your credit card payments

Scenario One Scenario Two

If you make no additional charges using this card and each month you pay…

Only the minimum payment ($25) $160

You will pay off the balance shown on this statement in about… 11 Years 4 Years

And you will end up paying an estimated total of… $3,270* $2,402*

(difference of $867)

Purchase information:200 lattes @ $3 $ 60050 pizzas @ $15 $ 75020 movies & treats @ $20 $ 400100 smoothies @ $3.50 $ 350Total credit card balance = $ 2,100

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Minimum monthly payment = $25

* Calculated based on an Annual Percentage Rate (APR) of 12.00%Example is for illustrative purposes only.

When was the last time you examined your credit card statement?

Why should you review it carefully each month?

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How to keep your credit cards safe

• Deal with loss or theft of a card immediately.• Treat your cards like cash.• Whenever possible, keep your card in sight when using it.• Keep accurate records and monitor your accounts

regularly.• Save your bills and receipts.• Don’t lend your credit card to anyone.

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Paying the outstanding balance in full or at least the minimum amount required every month

Keeping credit card balances below 70% of the total credit limit

Paying on time Never missing a payment Staying within your credit limit

Easier to borrow money No penalty fees More money to keep in your pocket Potentially lower interest rates Low ratio of revolving debt vs. income Increased approval rates for home

rentals and leases Ability to shop around to have lenders

compete for your business

Signs of responsible credit management

Results of responsible credit management

Responsible credit management

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Why credit history is important

• Lenders always want to know the credit history of people who ask them for credit cards and loans. To find out, they turn to Credit Reporting Agencies such as:

• Equifax

• Experian

• TransUnion

• Credit Reporting Agencies keep track of everybody’s credit history.

• The different types and number of credit accounts you have

• How much you owe

• Whether you pay your bills on time

• Where you live/work and how long you’ve lived/worked there

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What goes into your credit score

Payment track record

Length of credit history

New credit

Types of credit

What you owe

Credit scores are the most commonly used by credit reporting agencies.

Other scores besides credit reporting agency scores may be used when making lending decisions.

Your credit score may vary between credit reporting agencies based on the information on file at each one.

Over time, your credit score changes.

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Do you know what your credit score is?

Do you know how high a score needsto be in order to be considered a good credit risk?

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Why is your credit score important?

• In addition to your credit history, almost all lenders look at your credit score, which is a number that indicates how reliable you are at paying your debts.

• A computer program analyzes your entire credit history and generates a single number score, usually ranging from 300 to 850.

• This score helps lenders decide if you are a good credit risk or not.

• The higher the credit score, the better.

• Lenders may charge lower interest rates to borrowers with higher credit scores.

• That means you may keep more money in your pocket when you have ahigh credit score!

Credit Score300 850

Low High

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High credit score = more $ for you!

Buyer 1 Buyer 2

Credit score 590 740

Annual Percentage Rate (APR) 12.49% 4.74%

Monthly loan payment $427 $356

Interest paid $6,642 $2,816

Total cost $25,642 $21,378

Cost of Car: $20,000

Down Payment: $1,000

Loan Amount: $19,000

Months Financed: 60 months

Example contains sample figures only.

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Your credit report

You can get a free copy of your credit report* each year at annualcreditreport.com

Errors can and do occur.

Take action to get errors corrected as soon as possible.

Request it. Read it. Fix it.

* Your credit score may not be available on the credit report. It may be available for an additional fee.

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Wrap-upBe smart about managing your credit

• Shop for credit.• Keep track of charges.• Plan your shopping.• Pay on time.• Set limits…and stick to them!• Get help early if you are unable to meet your credit

obligations.

Wrap-upBe aware of credit trouble signs

• Paying late• Ignoring savings• Bouncing checks• Maxing out credit• Experiencing personal

stress over finances• Feeling like you’re

paying forever• Ignoring the phone to

avoid creditors

What do I do if I get introuble with debt?

Don’t ignore it! The problem won’t go away on its own.

Talk to your lender right away.

Get help—Your lender may be able to recommend a reputable credit counselor.

Know that credit management is a process—there is noquick fix.

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Thank you!