Understanding Сredit Reports Notes

Understanding Credit Reports Personal Information • • • • • Name and aliases Current and past addresses Social security number Date of birth Employment history 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 Accounts Summary • • • • • Types of accounts Date the account was opened Credit limit or loan amount Account balance Payment history, including missed or late payments 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 Isabella’s Late or Missed Payments • • - Sam’s Electronic World Past due Shop ‘Til you Drop Store Credit Card Occasional late payments Public record items related to credit • • - Accounts turned over to collection agencies Public records Bankruptcy Tax liens Legal suits - Foreclosures Isabella’s Public Record Items - City of Anywhere In Collection Credit Inquiries • • - Requests for an individual’s credit report Completed by: Insurance agencies Potential credit companies Financial institutions Landlords Potential employers, etc. Equal Credit Opportunity Act • - 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 • • • • • • Based upon information in the credit report At a particular point in time Numeric “grade” of a consumer’s financial reliability Used by lenders to determine a consumer’s risk of defaulting on a loan Most common scoring system is FICO Credit scores range from 300-850, with 850 being the best score THIS IS BASED UPON A 30 YEAR FIXED MORTGAGE RATE FOR A $300,000 LOAN FICO Interest Monthly 30 Year Score Rate Payment Amount 760 5.9% $1,787 $643,320 650 7.2% $2,047 $736,920 590 9.3% $2,500 $900,000 $256,680 saved over the lifetime of this loan because of a good credit score! How Credit Scores are Determined Five categories of information from a credit report are used: • • • • • Payment history Outstanding debt Length of credit history Pursuit of new credit Types of credit in use Outstanding Debt • • • The total dollar amount of debt currently held Includes balances on all reported accounts When a high percentage of debt is used, then it negatively impacts a score Payment History • • - The timely manner in which a consumer did or did not repay debt Includes: Several types of credit accounts Late or missed payments Public records and collection items 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 Pursuit of New Credit • • • Assesses how many accounts have been opened recently and the type of account Includes the number of recently opened accounts as well as requests for new credit Opening too many types of accounts in a short period of time has a negative affect Types of Credit in Use • • • Analyzes the types of credit in use Credit cards, retail cards, mortgages, automobile loans, etc. Variety is generally good to have Information not included in a FICO score • • - FICO score is only based upon credit use Information not included is: 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) Positive vs. Negative Credit Impact Positive: • • - Informs the lender a consumer is: Financially responsible Less risk Benefits to the consumer Lower interest rates Access to additional credit Negative: • • - Informs the lender a consumer is: Not financially responsible May be a higher risk Impact on the consumer May pay higher interest rates May not be able to qualify for credit May limit employment opportunities Positive Credit Practices Positive: Practice good banking techniques, such as keeping a checkbook balanced, managing accounts online, and not bouncing any checks Pay bills consistently and on time Maintain reasonable amounts of unused credit Apply for credit sparingly, thus keeping credit inquiries to a minimum Check credit reports annually and search for errors Negative Credit Practices Negative Having non-sufficient funds (NSF) when writing checks, also known as bouncing checks Routinely paying late on credit cards, utility, and cell-phone bills Maxing out limits on credit cards Numerous credit applications in a short period of time 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 own name Cash is paid for all major purchases Phone and utility bills are paid on time • It only negatively impacts 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 • - Strategies to build credit include acquiring and positively managing small lines of credit Co-signer Secured Credit card Require a cash security deposit to ensure payment of the card Small loan from financial institution Requesting A Credit Report • • One free credit report annually from each of the three credit reporting agencies Credit scores are available for a small fee Mistakes in Credit Reports • • • Important to check each credit report annually to correct mistakes Two common errors Fraud (identity theft) Mistaken identity When a lender reports a transaction on the wrong person’s credit report Fair Credit Reporting Act • • - Gives consumers the right to review and correct their report If a person is denied credit, they have the right to request their credit report from the credit reporting agency If within 60 days it is free of charge Correcting Errors on Credit Reports Write a letter • To the credit bureau that has the incorrect information and/or the information provider Bureau has 30 days to investigate • • - If investigation is not completed within this time, the information must be dropped from the credit file Incorrect information must be corrected Consumer can request the corrected report be sent to any creditors who viewed the incorrect report Credit Repair Agencies • • - Offer to help a consumer “fix” his/her negative credit report 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 negative credit