Understanding Credit Reports Advanced

1. Understanding Credit Reports Advanced The University of Arizona Take Charge America Institute www.tcainstitute.org

2. Credit Reports • Credit report - a record of a consumer’s credit history • Credit history - a record of transactions involving credit use • Individuals do not have a credit report if they have not previously used credit • They affect one’s ability to acquire credit

3. Name and aliases Current and past addresses Marital status Date of birth Employment history Public records Judgments, criminal, and bankruptcy Credit card, store card, book clubs, music clubs, etc. Payment history Credit card, store card, book clubs, music clubs, etc. Information on a Credit Report

4. Financial records Loans, bounced checks, closed accounts, etc. Loans/leases Rent-to-own contracts, payday loans, lease agreements, etc. Credit inquiry- Number of credit inquiries Credit inquiry - a request for your credit. Can be done by businesses you apply to for credit or whom pre-approve you for credit Information continued *Medical information is not on a consumer’s credit report, but late medical payments are.

5. Building Credit History • Important for consumers to build a credit history to be able to purchase items using credit • For example – house, vehicle • Credit reports can influence more than just purchases made using credit. • Renting an apartment • Insurance rates • Employment opportunities

6. Building Credit History continued • Store accounts (JcPenny or Sears charge accounts) • Credit card accounts • Loan from financial institution • Acquire a small loan from a financial institution and pay the loan off in timely payments to develop a positive credit history

7. While the following are all positive financial practices, a credit history is not built if a consumer performs the following actions: Having no history of credit use Not having any credit accounts in own name Paying cash for all major purchases Paying phone and utility bills on time No Credit History

8. Practicing good banking techniques Keeping checkbook balanced, not bouncing checks Paying bills consistently and on time Keeping public records free of bankruptcy Keeping a reasonable or small amount of debt (less than 20% of net income) Not having a criminal record Applying for credit sparingly, keeping credit inquiries low Holding a low number of credit/store cards Checking credit report annually to remove errors Maintaining reasonable amount of unused credit Positive Credit A consumer may develop and keep good credit by:

9. General Rule • Percentage of current debt compared to the total credit available is reviewed by potential lenders • Keep the amount of debt currently held at 25% of the total amount of available credit • For example - if Sue’s total amount of credit available is $1,000, her current amount of debt should not exceed $250

10. Bouncing checks Routinely paying bills late Having a criminal record Holding a large amount of debt Holding an unreasonable amount of unused credit Not paying utility or cell phone accounts consistently and on time Obtaining a high number of credit inquiries Carrying many credit/store cards Having a public record of bankruptcy Defaulting on a loan Having cards over the limit Negative Credit A consumer may develop or keep poor credit by:

11. Example of How Much a Low Score Can Cost You Product: 30-year, fixed rate mortgage, $300,000 loan Source: Fair Isaac Co: www.myfico.com

12. Credit Reporting Agency (CRA) • Keeps a record of a consumer’s credit transactions and compiles credit reports • Acquires information from several different types of lending companies • Information on credit reports can differ between each individual agency • Lenders may only report to one credit agency • Consumers should contact all agencies when checking their credit report

13. CRA’s continued • The three main credit reporting agencies are: • Equifax • www.equifax.com • (800) 685-1111 • Trans Union • www.transunion.com • (800) 888-4213 • Experian • www.experian.com • (800) 397-3742

14. Free Credit Reports • www.annualcreditreport.com is the only government sponsored agency which gives free credit reports • Other agencies do charge, even if they advertise free • Be sure to enter your state and click here. If you select the credit report agencies logos you will be sent to their site which is not free • You will have to enter personal information including your social security number

15. Who Reports to CRA’s? • Store accounts • Credit card companies • Mortgage and other loan lenders • Financial institutions • Landlords • Courts • Utility accounts • Cellular phone companies • Delinquent accounts

16. Mistakes in Credit Reports • More than 50% of the credit reports checked in a study contained errors • Consumer Reports (July 2000) • The two main errors commonly appearing in a consumer’s credit report are: • Mistaken identity – occurs when a lender reports a credit transaction and information is recorded on the wrong person’s credit report, usually of a similar name • Fraud

17. Correcting Errors on Credit Reports • Steps include: • Contact the particular credit bureau that has the error • CRA must report to the consumer within 30 days • If the CRA can’t verify the information, then it must be removed from the file or if in error it must be corrected • If a consumer disagrees with result of CRA investigation, they have the right to submit a 100 word explanation which stays in the consumer’s file • Negative information is usually removed from credit file after seven years, except bankruptcy which is removed after 10 years

18. Fair Credit Reporting Act • Enacted to protect the consumer in 1971 • Designed to promote accuracy and ensure privacy of information in credit reports • Consumers have the right: • To know the information in their credit report • To have errors corrected in their credit report

19. Credit Scores • A mathematical tool created to help lenders evaluate the risk associated with lending a customer money • Scores range from 150-850, with 850 being the best score • Not listed on a credit report but can be purchased separately for about $8.50 • Each CRA has an independent scoring system based upon a standard percentage of five different categories • Consumer’s scores can differ between each CRA

20. Categories of predictive characteristics, Classic FICO Score

21. Credit Scores continued • Other factors calculated into a credit score may include: • Length of time at current address • Current income • Financial information • Late payments • Amount of outstanding credit • Amount of credit in use • Length of time credit has been established

22. Conclusion Build and maintain positive credit! Check credit reports annually for errors! Act financially responsible!

23. Materials were provided by: The Family Economics and Financial Education Project www.fefe.arizona.edu