Building and Maintaining Good Credit PDF

Building and Maintaining Good Credit Credit is created when one party (a creditor) provides resources to another party (a debtor) where no immediate payment is made; rather, the resources are provided with a promise of future payment. The resources provided by the creditor may be financial resource...

Building and Maintaining Good Credit Credit is created when one party (a creditor) provides resources to another party (a debtor) where no immediate payment is made; rather, the resources are provided with a promise of future payment. The resources provided by the creditor may be financial resources, like actual cash, a credit card limit, or a mortgage for a property purchase. This is typically called a loan and is often extended by a bank or another financial institution. A credit score is a three-digit number that rates your creditworthiness. Fair Isaac Corporation (FICO) scores range from 300 to 850. The higher the score, the more likely you will get approved for loans and better rates. What is the importance of building and maintaining good credit? A credit score is more than just a number; it plays a crucial role in our financial lives. It can significantly impact our ability to secure loans, interest rates, and even find housing or employment. By understanding the benefits of good credit, we can take proactive steps to enhance our financial health and open doors to future opportunities. Key factors impact your credit score: 1. Payment History - This is the most significant factor, making up about 35% of your score. Lenders look for consistent on-time payments—just one missed payment can hurt your score. 2. Credit Utilization - This refers to how much of your available credit you’re using. Aim to keep this ratio below 30%, as high utilization can signal financial strain to lenders. 3. Length of Credit History - This accounts for about 15% of your score. Longer credit histories show stability, so it’s beneficial to keep older accounts open. 4. Types of Credit - Finally, the mix of credit—like credit cards, mortgages, and installment loans—affects around 10% of your score. A diverse mix shows your ability to manage different types of credit. A. Consumer Credit What are Consumer Credits? − Personal debt incurred to pay for goods and services is referred to as consumer credit or consumer debt. Consumer credit could refer to any kind of personal loan, but it's more commonly linked to lesser amounts of unsecured debt. INSTALLMENTS CREDITS Installment credit is a type of loan where a certain amount is lent out all at once and then paid back over a predetermined length of time. Usually, payments are made in equal amounts each month. REVOLVING CREDITS Credit cards and other forms of revolving credit are accepted for any kind of transaction. The credit is "revolving" in the sense that the line of credit remains open and can be utilized up to the maximum limit repeatedly, as long as the borrower keeps paying a minimum monthly payment on time. ADVANTAGES OF CONSUMER CREDITS Creditworthy customers can get a cash advance to pay for products and services. In an emergency, like a car breakdown, credit repair can help you get the money you need. DISADVANTAGES OF CONSUMER CREDITS Revolving consumer credit's primary drawback is the expense incurred by customers who don't pay off their entire obligations each month, which results in monthly interest costs. B. Good Uses of Credit 1. Lower Interest Rates - A good credit score allows you to qualify for lower interest rates on loans and credit cards, resulting in significant savings over time. 2. Better Credit Cards - Access to premium credit cards with rewards, cash back, and other perks is more likely. 3. Housing Opportunities - Landlords often prefer tenants with good credit, increasing your chances of securing a rental property. 4. Utility Usage-based credits - Determined by your service usage or spending patterns. 5. Insurance Savings - Good credit can lead to lower premiums on car and home insurance. 6. Employment Prospects - Some employers check credit scores as part of the hiring process, making good credit beneficial for job seekers. C. Obtaining Credit and Building a Good Credit Reputation 5 Steps in Obtaining Credit 1. Check Your Credit Score and Report. Before applying for credit, it's important to understand your current credit standing. In many countries, you can get a free credit report annually from major credit bureaus (like Equifax, TransUnion, and Experian in the U.S.). Reviewing this will give you a sense of how lenders view your financial behavior.  2. Determine the Type of Credit. Decide what kind of credit you need: a credit card, a personal loan, or other types of credit. Each type has different requirements and uses. Credit cards are typically easier to obtain for first-time borrowers, while loans might require a more substantial credit history. 3. Build a Relationship with a Bank or Credit Union. If you have a banking relationship, you may have an easier time obtaining credit. You can also ask about "credit builder" loans or secured credit cards. A secured credit card requires a cash deposit, which acts as collateral in case you default. 4. Apply for Credit. Once you have researched and selected the type of credit that suits your needs, you can apply through banks, credit unions, or online financial institutions. Credit card companies may have offers for first-time users or students, which might be more accessible. 5. Use Your Credit Responsibly. After obtaining credit, make sure you use it wisely. Pay off your balance in full each month if possible or at least make the minimum payment on time. This will help you build a positive credit history and increase your credit score. According to the Economic Justice Fund there are 6 Steps to Build and Maintain Good Personal Credit 1. Pay Bills on Time Consistently. 2. Keep Credit Card Balances Low Relative to Your Credit Limit. 3. Avoid Excessive Credit Applications. 4. Monitor Your Credit Reports for ko Inaccuracies and Address Them Promptly. 5. Diversify Your Credit Mix by Having Different Types of Credit Accounts. 6. Use Credit Responsibly and Avoid Excessive Debt. D. Sources of Consumer Loans 1. Banks. Provides several loan products catering to different types of needs. Interests will be charged on outstanding balances, and you need to make repayments according to a fixed schedule to avoid negative impact on your credit score. 2. Credit Cards. Also called bank cards, are issued by financial institutions. Credit cards provide prompt and convenient access to short-term loans. You borrow up to a set amount (your credit limit) and pay back the loan at your own pace—provided you pay the minimum due. You will also pay interest on what you owe, and may incur other charges, such as late payment charges. Whatever amount you repay becomes immediately available to reuse. 3. Lending companies. A financial institution or private entity that provides loans to individuals or businesses. They engaged in granting loans from its own capital funds or from funds sourced. They serve as an accessible alternative for borrowers who may need fast access to funds or have limited credit history.  4. Insurance companies. Allows you to borrow money from your insurance company by using the cash value of your life insurance policy as collateral, providing you with access to funds without surrendering your policy or affecting your life insurance coverage. 5. Credit unions. A credit union is a non profit financial institution that’s owned by the people who use its financial products. Credit union members can access the same kinds of products and services as offered by a traditional bank, such as credit cards, checking and savings accounts and loans. 6. Student loans. a type of financial aid that helps students cover the cost of their education. They are designed to assist students and their families in financing higher education expenses, such as tuition, other fees, books, gadgets, and living expenses. 7. Personal loans. Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs. For ex., Home Credit Philippines. 8. Government programs. Refers to financial assistance initiatives established by a government to provide funding for individuals, businesses, or specific sectors within the country. For ex., SSS. E. Dealing with Over Indebtedness Over indebtedness is the state of owing more money than one can repay. It is a present issue affecting individuals and households worldwide. As the cost of living rises and access to credit becomes more prevalent, the number of people struggling with debt is increasing. Causes of Over indebtedness 1. Excessive spending. By spending more than one earns, this can lead to a buildup of debt. 2. Unplanned expenses. The turn of unexpected events such as medical emergencies or job loss can strain your finances. 3. High-interest debt. Credit cards and loans often have high interest rates, this will make it difficult to pay off the balance. 4. Lack of financial knowledge. A lack of understanding about personal finance and budgeting can contribute to over indebtedness. Effects of Over indebtedness Over indebtedness can have severe effects on an individual, both financially and emotionally: 1. Stress and anxiety 2. Damaged credit score 3. Difficulty obtaining loans or credit 4. Bankruptcy Approach for overcoming Over indebtedness 1. Creating a Budget. Develop a detailed budget to track income and expenses, identifying areas where spending can be reduced. Categorize expenses to pinpoint unnecessary expenditures and set financial goals. 2. Debt Consolidation. Combine multiple debts into a single loan with a lower interest rate. Consolidating debts might reduce your credit score, but will improve as you pay on time. 3. Debt Management Plans. Work with a credit counselor to create a personalized budget and repayment plan. Credit counselors can provide guidance on negotiating with creditors. 4. Seeking Professional Help. Consider consulting with a financial advisor for support and advice. Financial advisors can offer tailored guidance based on your circumstances and help you develop a personalized plan to overcome debt. 5. Increasing Income. Explore opportunities to increase your income, such as finding a part-time job, or starting a side hustle. 6. Avoiding Further Debt. Develop a habit of mindful spending and avoid impulse purchases. Building an emergency fund can help you cover unexpected expenses without resorting to debt. Limit your use of credit cards and pay off balances in full each month to avoid accumulating more debt. Group 4 Aduracho, Crisia May Maguid, Nico Moral, Althea Lorraine Nacu, Sophia Erin Reyes, Jeselyn