Understanding Credit Reports

1. Understanding Credit Reports Family Economics & Financial Education

2. Credit Report videos • Free Credit Report Commercials • http://www.youtube.com/watch?v=7dFbNw3bpKE • About Credit • http://videos.howstuffworks.com/business-and-money/credit-score-videos-playlist.htm#video-5225 • http://money.howstuffworks.com/personal-finance/debt-management/credit-report.htm

3. What is Credit? • derived from the Latin word “credo” meaning “I believe.” • Credit is when money is received in exchange for a promise to pay a definite sum of money at a future date.

4. Lender and borrowers • A lender is the person or organization who has the resources to provide the individual with a loan. • The lender “trusts” the borrower to repay the money. • banks, mortgage companies, car manufacturers, gov’t (student loans) • A borrower is the person or organization that is receiving the money from the lender • When the privilege of borrowing has been extended, the borrower is usually expected to pay interest or some fees, such as processing.

5. Credit Worthiness • When a lender is considering granting credit to the borrower, he/she needs to believe the prospective borrower has both the • willingness and ability to pay the money back.

6. CREDIT WORTHINESS IS DETERMINED BY ANALYZING YOUR 5 C’s to determine your Credit Score

7. ‘S The 5 • Character is a person’s honesty and reliability determined by their history of repaying bills on time and in-full. • Capital is an evaluation of a person’s net worth = Assets – Debts • Within Debts, they will look at Good Debt vs. Bad Debt • Capacity is the income a person has available to repay the loan determined by job longevity • Is it a JOB or a CAREER – careers have growth and the potential to make more $$$ • Collateral is property and assets which can be seized if a person does not repay the loan. • Conditions refer to the general state of the economy. • Unemployment rate is HIGH, lenders are much more Cautious If an individual has these qualities, he/she is more likely to be perceived as having the ability and willingness to pay back a loan and will be granted one by a lender.

8. 40 Million Mistakes: Is your credit report accurate? • Let’s Watch: • http://www.youtube.com/watch?v=HdMR2wYNmt4

9. Advantages of using credit include: • Convenience – A person does not have to carry large sums of cash or wait to buy things. In addition, a credit card provides a record of transactions in case there is ever a dispute. • For emergencies – Many individuals do not have 3-6 months of income accumulated. Therefore, if an emergency happens they may be able to use credit. • For identification – Credit cards may be used to cash a check, rent an apartment, or rent an automobile.

10. Consumers who cannot afford to purchase big ticket items with cash, a house or car • Make reservations – Most hotels, car rental agencies, and expensive restaurants require a credit card to hold a reservation. • Consolidate debts – An individual with numerous small loan amounts and interest rates would consolidate the loans into a single large loan with one interest rate.

11. The disadvantages of credit include: • High interest rates • Fees -late payment penalties if an individual misses a payment, annual fees to have the credit, and/or transaction fees each time the credit is used. • Overspending can lead to poor credit reputation, damage employment prospects, and could result in the loss of items purchased Some PEOPLE THINK CREDIT IS THE SAME AS CASH….but….. IT’S A LOAN…WITH HIGH INTERST IF NOT PAID BACK ON TIME

12. Credit Reports • Credit report - a record of a consumer’s credit use, financial, criminal, and personal history • Credit history - a record of transactions involving credit use • Individuals do not have a credit report if they have not previously used credit or under 18 • Affects one’s ability to acquire credit

13. SCORES • score is between 300 and 850 • median score is 723 • PA average - 696 • http://www.creditreport.com/info/credit-scores/average-credit-scores.asp

14. Name and aliases Current and past addresses Marital status Date of birth Employment history Educational Degrees earned Public records Judgments, criminal, and bankruptcy Information on a Credit Report • Payment history • Every bill you pd (IF on time, in-full) • Financial records • Loans, bounced checks • Loans/leases • Credit inquiry- allowed to request a FREE credit report 3 times a year • Any request more than 3, negatively affects your score

15. SCORES • score is between 300 and 850 • median score is 723 • PA average - 696 • http://www.creditreport.com/info/credit-scores/average-credit-scores.asp

16. 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.

17. Building Credit History • Important for consumers to build a credit history to be able to purchase items on credit • For example – house, vehicle • Affects a young adult’s ability to make a purchase on credit in the immediate future including: • Renting an apartment • Buying a car • Purchasing electronics or other merchandise

18. Building Credit History continued • Store accounts (Abercrombie or Home Depot charge accounts) • Credit card accounts • Even with a co-signer • 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

19. No Credit History 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

20. Practice good banking techniques Keep checkbook balanced, do not bounce checks Pay bills consistently and on time Keep public records free of bankruptcy Have no criminal record Keep small amount of GOOD debt Student loan, college, car Apply for credit sparingly, keeping credit inquiries low Hold a low number or credit/store cards Check credit report annually to remove errors Maintain reasonable amount of unused credit Positive Credit • Being responsible with credit and finances can lead to good credit • A consumer may develop and keep good credit by:

21. 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

22. 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 • Being irresponsible with credit and finances can lead to poor credit • A consumer may develop or keep poor credit by:

23. Credit Reporting Agencies (CRA) – There are 3 • Keeps a record of a consumer’s credit transactions and compiles credit reports • Acquires information from lending companies • Information on credit reports differ between each individual agency • Lenders may only report to one credit agency • Consumers should contact all agencies when checking their credit report • Every 4 months contact a different CRA for your Credit Report • Each CRA, call once a Year

24. 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

25. 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

26. Requesting Credit Reports • Consumers can request his/her credit report any time • Can obtain one free credit report annually from all three credit agencies www.annualcreditreport.com • Additional copies can be purchased for no more than $9.50 • Consumers should check credit report once a year for accuracy • Mistakes are common

27. Insurance agencies Current and potential credit companies State/local child support agencies Government agencies Financial institutions inquiring for lines of credit Landlords Potential employers Only with applicant’s written request Requesting continued • Any time a consumer requests credit from a business, they are able to review his/her credit report. This may include:

28. 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

29. 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

30. 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

31. Correcting Errors on Credit Report Cont. • According to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC): • Consumers can do just as good of a job repairing their credit report errors as a fee based debt repair agency • Be cautious of debt repair agencies promising instant help because there is no immediate fix for poor credit • Be proactive

32. Credit Scores • A mathematical tool created to help lender evaluate the risk associated with lending a customer money • Also known as a FICO score • Watch: http://www.youtube.com/watch?v=ALafbrbbli8 • Scores range with 850 being the best score • Not listed on a credit report • Each CRA has an independent scoring system based upon a standard percentage of five different categories • Consumer’s scores can differ between each CRA

33. Five Standard Categories of Scores • 35%-Payment history – ABILITY TO LIVE WITHIN YOUR INCOME - Timely manner in which a consumer pays debt • 30%-Outstanding debt -Amount of debt currently held Bad Debt = credit cards going unpaid Good Debt = college loan, car loan, mortgage • 15%-Credit history -How long the consumer has held credit accounts and how often they are used • 10%-Pursuit of new credit -How much credit are you looking to borrow! • 10%-Types of credit in use -May include credit cards, gas cards, store cards or accounts, loans, etc. http://www.youtube.com/watch?v=lx4SXQeO6Iw

34. The score • If you NEVER had any credit lines before (car loans, credit cards, overdraft) you have what is called a "thin file". • This means you would not have any score. • You only get a score when you start managing your credit lines. • Not to worry! • Having no score is BETTER than having a bad (low) score.

35. 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

36. Financial Effect of Credit Scores • Interest rate of loans • High score – can insure a lower interest rate on credit • Low score– can cause a higher interest rate on credit • Ability to receive future loans/credit • Financial lending institutions have guidelines of what score will qualify for a loan • Reflection of risk of borrower to the lender • The lower the score, the higher the possibility the consumer pays bills late • Financial security for lifetime • Takes time to improve credit, which could take time from building financial security • Credit scores are often used in determining prices for auto and homeowner's insurance

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

38. ASSIGNMENT • Create a 3-panel Brochure in MS Publisher • Create from the perspective that you are a Financial Advisor educating New College Graduates on Credit, Credit Reports, How to Earn Good Credit and how to Keep Good Credit • Your Contact name/Info should be from an actual Pennsylvania Financial Advisory Firm • http://online.barrons.com/report/top-financial-advisers/pennsylvania • Formatting • Select a Theme • Relevant pics/clip art