Understanding Credit Reports Family Economics & Financial Education Take Charge of Your Finances
Credit Report Detectives Meet Isabella, your new client: • About to graduate from college • In extreme debt • Concerned about finding a job • Doesn’t understand her credit report Your Mission: Help Isabella understand her credit report, identify what she did to get into this situation, and decide what she can do to improve her credit report.
Credit History Reporting What they do Additional Information
Credit Reporting Agencies • Acquire information from:
Information in a Credit Report Lenders may or may not report information to all three credit reporting agencies. An individual’s information may be different in each report.
Personal Information Personal Information Isabella’s Personal Information: Name – Isabella G. Langley Addresses – 101 Hopeful Ave. & 695 Parent Street Date of birth – 05/04/86 Telephone numbers – 555-354-2368 & 555-198-2358 Employers – Lucky’s Restaurant & Jane’s Daycare • Name and aliases • Current and past addresses • Social security number • Date of birth • Employment history Find Isabella’s Personal Information
Accounts Summary Accounts Summary Isabella’s Accounts Sam’s Electronic World City of Anywhere U.S. Department of Education Financial Institution School Loan Shop ‘Til You Drop Store Credit Card Love to Read Store Credit Card The Free Money Credit Card • Types of accounts • Date the account was opened • Credit limit or loan amount • Account balance • Payment history, including missed or late payments What Lenders Does Isabella Have Accounts With?
Accounts Summary Isabella’s Late or Missed Payments Sam’s Electronic World Past due Store Credit Card Occasional late payments Does Isabella Have Any Late or Missed Payments on Accounts ?
Public record items related to credit Public Record Items Isabella’s Public Record Items City of Anywhere In Collection • Accounts turned over to collection agencies • Public records • Bankruptcy • Tax liens • Legal suits • Foreclosures Identify Public Record Items In Isabella’s Report
Credit Inquiries What Inquiries Does Isabella Have on Her Report? • Requests for an individual’s credit report • Completed by: • Insurance agencies • Potential credit companies • Financial institutions • Landlords • Potential employers, etc.
Credit Inquiries Not all credit inquiries are the same! Soft checks do not hurt your credit score Hard check do hurt your credit score
Credit Inquiries Individuals should avoid too many hard credit checks at one time!
Equal Credit Opportunity Act Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit • Prohibits credit discrimination on the basis of: • Race • Religion • Marital status • Nationality • Gender • Age
Credit Scores • Mathematical tool created to help a lender evaluate the risk associated with lending a consumer money • It is a number • It is based upon information in the credit report • It is shown at a particular point in time • It is a numeric “grade” of a consumer’s financial reliability • It is used by lenders to determine a consumer’s risk of defaulting on a loan
Credit Scores • Most common scoring system is FICO • Credit scores range from 300-850, with 850 being the best score
Credit Score Impact $256,680 saved over the lifetime of this loan because of a good credit score!
Payment History • The timely manner in which a consumer did or did not repay debt • Includes: • All types of credit accounts • Late or missed payments • Public records and collection items
Payment History What is Isabella’s Payment History? • Found in status column • Payment history • Sam’s Electronic World is past due • City of Anywhere is in collection • Shop ‘Til You Drop has occasional late payments • Love to Read was closed and never late • The Free Money Credit Card is paid on time • Credit score impact • Negative • Too many late accounts What Impact Does this have on Her Credit Score?
Outstanding Debt • The total dollar amount of debt currently held • Includes balances on all reported accounts • When a high percentage of debt is used, it negatively impacts a score • Try to keep debt at 25% of available credit or less
Outstanding Debt How much Total Debt does Isabella Have? • Total debt • Found in recent balance column • $37,325 • Available credit • Found in credit limit column • $37,546 • Impact • Negative • $37,546-$37,325 = $221 she is using almost all her available credit How much Available Credit is Isabella using? What Impact Does This have on her Credit score?
Length of Credit History • Length of time a consumer has held credit accounts • Includes how long ago credit accounts were established • A longer credit history will generally increase a credit score
Length of Credit History When did Isabella First begin her Credit history? • Credit history • Found in date opened column • 08/05 U.S. Dept. of Education • Free Money Credit Card • Score will improve If Isabella keeps her Free Money Credit Card Open for Another 10 years and pays Off the balance, what will happen?
Pursuit of New Credit • Assesses how many accounts have been opened recently and the type of account opened • It includes requests for new credit (hard credit checks) • Opening or requesting too many types of accounts in a short period of time has a negative affect on credit score
New Credit Has Isabella Pursued any Additional credit Since January 2008? • Additional credit • Shop ‘Til You Drop in August 2008 • Impact of seeking additional credit • Credit score will go down If Isabella acquired Another credit Card and shopped for An Automobile loan, what would happen to her score?
Types of Credit in Use • Analyzes the types of credit in use • Credit cards, retail cards, mortgages, automobile loans, etc. • Variety is generally good for the credit score
Credit in Use What types of Credit does Isabella have? • Types • Credit card (revolving) • School loan (installment) • Private school loan (installment) • Store cards (revolving) • Additional forms • Mortgage • Automobile loan What are Additional forms Of credit she may seek?
Information not included in a FICO score • FICO score is based onlyupon credit use • Some information included on a credit report (or other personal information) does NOT affect the credit score, such as: • Personal information such as age, where you live, marital status, race, color, religion, national origin, gender • Employment information • Interest rates charged on accounts • Overall wealth (assets an individual may have) These variables may still be considered when a lender reviews a loan application.
Interest Rates are Based on Credit Score (information from lendingclub. com)
Activity Negative Joey owes the store the money which was agreed upon in the contract May be responsible for additional fees He may be referred to collections
Activity Positive An excellent habit for building a positive report
Activity Negative Fernando is responsible for the movie replacement Could be reported to collections
Activity Negative Cassie has probably already been referred to collections Will owe for the parking tickets and additional fees
Activity Positive Demonstrated the ability to responsibly use credit
Activity Negative Although Corey is paying his bill, he is doing so late!
Activity Positive All payments were made in time Having automatic withdrawals with the money in the account is a good practice
Activity Negative This is too many inquiries for new credit at one time from a variety of types of stores
Activity Negative A variety of types of credit may be good, however, Jessica’s balances are at the maximum level
Activity Negative Jon is delinquent on the account. If he contacts the loan company, they may be able to work with him
When Credit is not established • Although the following are all positive financial habits, no credit is established when: • Credit is never used • Accounts are not in the person’s own name • Cash is paid for all major purchases • Phone and utility bills are paid on time • These only negatively impact a score if payments are late
Building credit history • Important for consumers to build a credit history to be able to purchase items on credit • For example – house, vehicle • Having no credit history may be just as challenging to a consumer as having a negative history!
Establishing Credit If someone is a co-signer on a an account, they are equally as responsible and their credit report is negatively impacted. • Strategies to build credit include acquiring and positively managing small lines of credit • Get a co-signer • Get a secured Credit card • Requires a cash security deposit to ensure payment of the card—basically paying for the charges in advance • Small loan from financial institution
Annualcreditreport.com annualcreditreport.com - Only government sponsored Web site Other sites may be fraudulent or charge a fee
Advice Isabella was given From Angie From George Shopping around too much for credit is not good because it increases inquiries Opening new accounts, even if not used, provides evidence of credit worthiness Close old accounts, including those with loans not paid on time, to wipe the slate clean • Credit ratings improve as people get older and income increases • Isabella’s credit score will improve when she: • Moves to a better side of town • Gets a better interest rate on loans • Is promoted