CREDIT – WHAT IS IT, & WHY IS IT IMPORTANT?

CREDIT ? WHAT IS IT, & WHY IS IT IMPORTANT?

The purpose of this handout is to familiarize you with credit and how you can develop and maintain a good credit history. Topics that will be discussed include:

how good credit fits in with your greater financial health, avoiding common credit-related mistakes, developing and maintaining a good credit history in order to improve your borrowing power.

A basic understanding of credit, credit products, and wise borrowing strategies is an essential component of financial literacy. Credit can be a powerful tool in achieving important financial goals. It allows you to make large purchases (such as a home or a dental practice) that you otherwise would not be able to afford if you were paying in cash. However, it is very important to understand wise borrowing strategies and money management when utilizing credit. Irresponsible use of credit products can have a negative impact on your financial wellbeing.

WHAT IS CREDIT?

Credit refers to a promise to pay back borrowed funds at a later date in order to make a purchase now. Unless you plan to make all future purchases in cash, it is likely that you will access multiple forms of credit in your lifetime. Student loans, credit cards, practice loans, mortgages, car loans, and even utilities such as electricity and cable are all examples of common credit products. Many lenders charge interest or fees on the amount that is borrowed.

There are four basic types of consumer credit:

Revolving

- Charges may be made up to a maximum credit limit. - May carry a balance and make minimum payments only. - Examples include credit cards and lines of credit.

Installment

- Loaned a specific, set amount of funds. - Agree to pay back in regular installments. - Examples include student loans and mortgages.

Service

- Contract with a service provider. - Not always included on a credit report. - Examples include apartment leases, gym memberships, and utilities.

Charge Cards

- Similar to revolving credit cards. - Balance must be paid in full every month.

Most people will utilize more than one type of consumer credit in their lifetimes. For example, if you currently have student loans and a credit card, you have both revolving and installment credit. Having more than one type of account is called your credit mix. Lenders look more favorably on customers who have borrowed a diverse array of credit types. Relying solely on one type of credit can negatively influence your ability to open new credit accounts.

While it is important to have a varied credit mix, be careful not to open accounts that you do not need or intend to use!

CREDIT SCORES & WHAT THEY MEAN

Many people associate their creditworthiness with what is known as a credit score. This is a numerical representation of your trustworthiness as a borrower. Lenders use your credit score to determine whether they are willing to loan you money and, in many cases, what interest rate you will be charged. The higher your score, the less risky you appear as a borrower and the more likely you are to receive approval for new accounts and to receive a favorable interest rate. In order to have a credit score, you must have at least one credit account that is at least six months old.

There are several different "models" that are used to determine an individual's credit score, with the FICO scoring model being the most popular. However, the following general ranges in scores are used:

LEAST TRUSTWORTHY BORROWERS

CLASSIFICATION Excellent Good Fair Poor Bad

MOST TRUSTWORTHY BORROWERS

RANGE 750 & above

700 ? 749 650 ? 699 550 - 649 550 & below

*Source:

Five factors (not just the timeliness of your payments!) about your credit history are used to determine your credit score.

Payment history: How often you make (or miss) your monthly payments.

Amount owed vs. credit limit: How much you owe each month and the percentage of your available credit that you have used up.

Length of history: Average age of your open accounts.

Credit mix: The different types of open credit.

New credit: How many accounts have you recently opened (or attempted to open).

*Source:

Your credit score is not a static number: It can (and will) change from month-to-month based on your recent activity. So, if you decide to pay down a bunch of credit card debt, your score will likely go up the next time it is calculated. However, if you then open one or more new accounts, your score will dip as the average age of your accounts decreases.

Most people do not need to know their credit score, especially since it changes so often. Exceptions may include if you are making a large purchase, such as buying a home or a dental practice. If you truly want to know your current credit score, you can purchase it from one (or each) of the three credit reporting bureaus. However, there are a few "free" products out there that can help you monitor and estimate your credit score. Examples include (listed in alpha order), , Credit Karma, Credit Sesame, Quizzle, and WalletHub. Keep in mind that sites such as these rely on ad revenue, so be wary of advertisements encouraging you to apply for new credit cards or loans.

TRACKING YOUR CREDIT

Your credit history is compiled into what is known as a credit report. This is a comprehensive record of your borrowing history for the past seven years. Your credit report is used to generate your credit score. Lenders will usually review your credit report in addition to your credit score in order to get more information about your borrowing patterns and behavior.

Although there is only one of you, it is possible (and likely) to have three different credit reports. That is because there are three credit reporting agencies in the United States that generate and track consumer credit reports: Equifax, Experian, and TransUnion. Not every lender reports to all three agencies. For example, you may find that your credit card is listed on your Equifax report, but your mortgage is listed on your TransUnion report. Similarly, when you are applying for a new credit product, it is likely that your lender will review only one of your three available credit reports.

As a consumer, you are entitled to receive one free copy of your credit report from each of the three credit bureaus every 12 months via (not to be confused with a similar website that advertises free reports). This means that every year, you can receive one copy each of your Equifax, Experian, and TransUnion credit reports. We recommend pulling one report every fourth months so that you are reviewing your credit report/history at regular intervals. Remember, is the only truly free method of pulling your report.

This is the only truly free & secure way to review your accurate credit report. Other services will either charge a fee or "suggest" credit cards to you for ad revenue!

While you should be reviewing your credit report periodically in order to assess your strength as a borrower, you should also be checking for mistakes, errors, and information that is not yours. Other things to check for each time you review your credit report:

Make sure that your name and date-of-birth are correct.

Verify that all accounts listed are actually your accounts.

Check that any negative comments that are seven years old or older are no longer listed.

Verify that accounts you have closed are listed as

such.

Make sure that you recognize all negative

remarks, i.e. that you actually made those late payments.

You have the right to dispute errors on your credit report. Contact the credit bureau that issued the report to dispute any incorrect information:

Equifax

(866) 349-5191

Experian

(800) 831-5614

TransUnion

(877) 322-8228

If you see accounts on your credit report that you do not remember opening yourself, you may have been the victim of identity theft. Click here to learn more about what to do if you have been victimized and how to protect yourself from identity theft.

HOW TO MANAGE CREDIT RESPONSIBLY

The number one rule of responsible credit use is to always pay your bills on time! Late or missed payments have a big impact on your ability to secure new credit. But, there is more to being a better borrower than making timely monthly payments. Lenders consider the full financial health of an individual who is applying for a credit product, so you will want to make sure that your credit portfolio isn't lacking in any key areas.

Here are some positive habits that you should focus on developing when managing credit:

? Borrow only what you need! With all types of credit, including your student loans, make sure that you aren't borrowing any more than what you truly need. Always consider the impact that swiping your plastic can have on your future finances.

? Pay your credit card bills in full every month. Carrying a balance on credit cards can be tempting, especially since minimum payments are usually around 1-3% of your total balance.

? Don't ignore your service agreements. While your utility company, doctor, or landlord probably isn't charging you interest, late or missed payments can be reflected on your credit report. You can even be sent to a collection agency (which is very, very bad for your credit) if you fail to pay for long enough. Always pay your bills on-time.

? Build a budget. Developing and sticking to a realistic personal budget will help you to better understand what you can and cannot afford, and can even help you to plan and save for large future purchases, like a house.

? Use no more than 30% of your available credit limit. This is really important for credit cards and personal loans. You should aim to use no more than 30% (but try for less) of your available limit each month. Even if you pay your bill in full every single month, if a lender sees that you are using most or all of your available credit, they will assume that you need all of that credit.

? Focus less on your credit score, and more on developing positive, lifelong habits. You are more than a number, and it is more important to be in good financial health than it is to have a perfect credit score. Work on reducing your spending and eliminating your debt.

? Use the free resources that are available to you!

Salt is a free, comprehensive financial literacy program created by the non-profit American Student Assistance (ASA) that can help you learn how to better manage your budget, borrowing, and overall financial health. With Salt, you can:

Track your student loans Get advice from expert, neutral counselors via

email or phone Learn about money management in school and

beyond

Read articles on tips & tricks for better credit

management Look for an internship or job Search for scholarships Learn how to save money Develop positive financial habits

This program is free-of-charge (!!) for all Tufts students and has been custom-tailored to meet your needs. Current students can activate their account at any time using their Tufts.edu email account. New students will receive an activation email during their first semester of school.

STILL HAVE QUESTIONS?

Contact your Financial Aid Coordinator if you would like to set-up an appointment to discuss your student loans:

D17s, D19s, and DPG: Nikki Lowe Lane, Associate Director Nikki.Lowe@tufts.edu 617-636-6640

D18s, D20s, and DIS: Rosemary Hilliard, Assistant Director Rosemary.Hilliard@tufts.edu 617-636-3850

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