Understanding Credit Reports

1. Understanding Credit Reports Family Economics & Financial Education

2. Credit Reports • Credit report - a record of a consumer’s transactions involving credit • No credit report if you have never used credit • Affects your ability to acquire credit • Bad credit history stays with your for 7-10 years

3. Why is it important to Building a Credit History • To be able to • purchase items on credit • house, vehicles, appliances • Renting an apartment • Emergencies

4. General Rule • 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

5. Debit/Credit cards over the limit Routinely paying bills late Having a criminal record Holding a large amount of debt Holding an unreasonable amount of unused credit Defaulting on a loan Obtaining a high number of credit inquiries Carrying many credit/store cards Having a public record of bankruptcy How can you harm your credit?

6. Bankruptcy • When a person or company does not have the financial means to pay their debts as they come due • Secured debt- creditor has the legal right to something of yours if you fail to make proper payments • Example: mortgage- bank can reposes your home • Unsecured debt- loans made without the security of assets • Example: credit cards- not always possessions to take back • Secured debt gets paid first in bankruptcy cases

7. Types of Personal Bankruptcy • Chapter 7- Liquidation Bankruptcy • Sell all assets to repay creditors • May reaffirm some debt- house, car • Some debt discharged- no repayment • Must have an average monthly income less than medium income of family of the same size • Example: family of 4 median income $64,427 or $5,368.92 per month • If salary is higher, must file Chapter 13 • Must get budget management and debt counseling before debt discharged

8. Types of Personal Bankruptcy • Chapter 13 • Restructuring of debt • Debtor retains assets • Plan of repayment created with a trustee of the court • 3-5 years • Pays only $.30 to $.50 on the dollar of debt value • Chapter 12 • Same as 13 but for farmers

10. Credit Reporting Agencies • Keep a record of a consumer’s credit transactions and compiles credit reports 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

11. 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

12. This may include: 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 Who can Request your report? • Credit inquiry- and entry on a credit report that shows a business has requested a copy of your report

13. Mistakes in Credit Reports • More than 50% of the credit reports checked in a study contained errors • Source: Consumer Reports (July 2000) • The two main errors 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

14. Fair Credit Reporting Act 1971 Consumers have the right: • To know the information in their credit report • To have errors corrected in their credit report

15. Correcting Errors on Credit Reports Steps include: • Contact the credit bureau that has the error • CRA must report to the consumer within 30 days • If the CRA can’t verify the information, • must be removed from the file • Corrected in file • If a consumer disagrees with result • right to submit a 100 word explanation • stays in the consumer’s file • Negative information is usually removed from credit file after seven years, • except bankruptcy- removed after 10 years

16. Credit Scores • A mathematical tool created to help lender evaluate the risk associated with lending a customer money • Not listed on a credit report • It takes 6 months of using credit to get a credit score • If you pay on time for 1st 6 months, score should me 650-700 range

17. FICO Score • 700 and above – Very good to excellent • 680 to 699 – This credit score puts you in the "Good" category. • 620 to 679 – If your credit score falls into this range, you fall into the "Okay" category. • 580 to 619 – plan on paying a higher interest rate • 500 to 580 – can still get credit, but expect to pay a very high interest rate • 499 and below – you can still be extended credit, but with very high interest rates

18. Five Standard Categories of Scores • 35%-Payment history - Timely manner in which a consumer pays debt • 30%-Outstanding debt -Amount of debt currently held • 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 is acquired over the length of the consumer’s credit history • 10%-Types of credit in use -May include credit cards, gas cards, store cards or accounts, loans, etc.

19. Effect of Credit Scores on Consumers • 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

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