Samantha Davis State Farm Financial Literacy Lab Credit Basics April 21, 2011

1. Samantha Davis • State Farm Financial Literacy Lab • Credit Basics • April 21, 2011 FIU Employee Financial Literacy Program

2. The financial downturn of the United States is linked to the • careless lending practices of the financial institutions.

3. Credit 750 300 679 433 822 569 502 650 720 850 487 369

4. What is a credit report and what does it include? A credit report contains detailed information on a person’s credit, including identifying information, credit and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her credit worthiness. http://money.howstuffworks.com/personal-finance/debt-management/credit-report1.htm

5. Contents of A Credit Report http://money.howstuffworks.com/personal-finance/debt-management/credit-report1.htm

6. What a credit report does not include A credit report does not include: • information about your income • checking or savings accounts • bankruptcies that are more than 10 years old • charged-off or debts placed for collection that are more than seven years old, • gender • ethnicity • religion • political affiliation • medical history • driving record • criminal records Your credit score is generated by information on your credit report, but is not part of the report itself. http://www.equifax.com/credit-information/credit-report

7. Who calculates credit score? • Fair Isaac Corp. developed the first credit score as well as the Classic FICO score. • There are currently three major credit bureaus in the United Sates. They provide different credit scores as the data they collect are different and their method of FICO scoring is also different. http://www.scoretruth.com/basics/range.php

8. Classic FICO Score Allocation http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

9. General Credit Scores Statistics http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

10. Fico Score and Loan Rates http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

11. Credit Rating Alternative!!!!!!!! The three major credit reporting bureaus are currently involved developing and allowing for restricted use of an alternative credit rating system called Vantage score. It ranges from 501 to 900. Your personal score is transformed into a letter grade. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

12. Auto Industry Option Score About 90% of auto lenders do not actually use classic FICO credit scores. Instead they use auto credit score. Due to this, there are individuals with car loans that are not necessarily eligible for credit cards. The theory behind this is that, people are more inclined to maintain good payment history in regards to auto loans. Studies have shown that individuals with low credit scores will continue payments while deteriorating their classic FICO score by defaulting on other payments. http://www.smartcredit.com/blog/2010/05/01/what-is-an-auto-credit-score/

13. Auto credit score Calculation and Scoring. http://www.smartcredit.com/blog/2010/05/01/what-is-an-auto-credit-score/

14. Insurance credit score • An insurance credit score is not a measure of credit worthiness but instead a assessment of risk. Some information from your credit report such as (age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) are included in the calculation of the insurance credit score. The remainder of insurance score is calculated by insurance claims and profitability data. • Insurance credit scores are unique to the insurance company and each line of business (example auto or home). • It is very possible for someone with a high classic FICO score to have a low insurance credit score. http://en.wikipedia.org/wiki/Insurance_score

15. Helpful information……….. • Everyone is entitled to a free annual credit report or a free credit report after being denied credit. • You can retrieve your credit report and credit score at Myficoscore.com or at the major credit bureaus • Before shopping for credit, pull your own free credit report (it does not affect your score negatively) and show lenders to see if you are credit worthy according to their lending standards. • If your shopping around for lenders through different companies in the same industry over a span of 14 days then the inquiries will only affect your credit score as if it was only one inquiry. • Closing unused accounts lowers your credit score so its best just to leave it open. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

16. More helpful information ……. • Diversifying your types of credit will improve your score. • The fastest way to increase your credit score is by staying within the 10% margin of utilization. Balance (divided) by Credit Limit = percentage. • To establish credit it is a good idea to become an authorized user on a responsible person’s account. The authorized user has no legal responsibility for the debt as oppose to a Joint or Co-Signer accounts. If this account starts to report negatively it is also easier to remove these types of credit from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs. Be certain that the lender reports this information to the credit bureaus. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

17. More Helpful Information……. • Do not apply for credit you do not need or apply for credit if you know you will be denied. • If your credit life is relatively new do not open numerous accounts in order to build credit. This looks risky to lenders. It will also lower your average account age which has an effect on your total credit score. • If you find yourself unable to pay back your debt be careful of debt consolidation or debt settlement companies. If you decide to settle your debt the negative report will take seven years to be removed from your credit report and your credit score will be substantially lowered. You may also have to pay income taxes at the end of the year for the discounted portion (balance – settlement = discounted portion) if the amount is $600 or greater. If you decide to declare bankruptcy it will take 10 years for the negative information to be removed from your credit. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

18. Helpful Websites For your free credit report go to: • https://www.annualcreditreport.com/cra/index.jsp For more information on credit go to: • http://www.myfico.com/Default.aspx • You can access your credit score at either website with the conditions of a 7 day free trial of credit monitoring. They will ask for your credit card information in the event you do not call to cancel during the free trial period. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

19. Savings & Banking

20. Different Types Bank Accounts • Checking Accounts • Savings Account • Money Market Accounts • CD’s, Certificate Deposit, Time Deposits • Basic or no frill accounts - Many institutions offer a type of bank account that provides you with a limited set of services for a low price • Totally Free Accounts • Interest Bearing Accounts

21. Be Aware of………………… • Availability of funds disclosures. • Extended Hold • Cut over time/ Turnover • Posted Balance and Available Balance • Maintenance Fees • Minimum balance accounts • Interest Bearing accounts • NSF, O/D, and Unavailable Overdraft fees. • Return item fees • Debit and Credit charges posted to debit cards. • ATM charges • International charges. • Fraud or Identity theft.