Understanding Credit Reports

1. Understanding Credit Reports Family Economics & Financial Education Take Charge of Your Finances

2. 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.

3. The Credit Process Credit – when goods, services, and/or money are received in exchange for a promise to pay back a definite sum of money at a future date.

4. Isabella’s Story • What is your analysis of her situation? • Does she need your help? • Why? In small groups: Read Isabella’s Scenario

5. Credit History Reporting What they do Additional Information

6. Credit Reporting Agencies • Acquire information from:

7. Information in a Credit Report Lenders may or may notreport information to all three credit reporting agencies. An individual’s information may be different in each report. Information can be divided into 4 categories: • Personal Information • Accounts Summary • Public record items related to credit • Credit Inquiries

8. 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

9. 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?

10. 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 ?

11. 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

12. 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.

13. Credit Inquiries Individuals should avoid too many hard credit checks at one time!

14. Isabella’s Report

15. Medical Information

16. 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

17. 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

18. Credit Scores • Most common scoring system is FICO • Credit scores range from 300-850, with 850 being the best score What is Isabella’s Score?

19. Credit Score Impact $256,680 saved over the lifetime of this loan because of a good credit score!

20. How Credit Scores are Determined

21. 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

22. 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?

23. 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

24. 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?

25. 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

26. 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?

27. 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

28. 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?

29. 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

30. 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?

31. 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) These variables may still be considered when a lender reviews a loan application.

32. Positive vs. Negative Credit Impact Positive 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 • Informs the lender a consumer is: • Financially responsible • Less risk • Benefits to the consumer • Lower interest rates • Access to additional credit Is Isabella a positive Or a Negative risk? Why?

33. Activity - What You Do Makes a Difference • Instructor will read a scenario • Determine if the scenario will have a positive or negative impact on an individual’s credit report • Move to the side of the room representing your selected answer • Be prepared to explain “why”

34. 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

35. Activity Positive An excellent habit for building a positive report

36. Activity Negative Fernando is responsible for the movie replacement Could be reported to collections

37. Activity Negative Cassie has probably already been referred to collections Will owe for the parking tickets and additional fees

38. Activity Positive Demonstrated the ability to responsibly use credit

39. Activity Negative Although Corey is paying his bill, he is doing so late!

40. Activity Positive All payments were made in time Having automatic withdrawals with the money in the account is a good practice

41. Activity Negative This is too many inquiries for new credit at one time from a variety of types of stores

42. Activity Negative A variety of types of credit may be good, however, Jessica’s balances are at the maximum level

43. Activity Negative Jon is delinquent on the account. If he contacts the loan company, they may be able to work with him

44. Positive Credit Practices

45. Negative Credit Practices

46. 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

47. 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

48. 2009 CARD Act • To receive a credit card: • Generally must be 21 years of age or older • UNLESS • Show documentation of sufficient income • Have a co-signer Changed how young adults receive certain types of credit

49. Establishing Credit If someone is a co-signer on a an account, they are equally as responsible and their credit report is impacted. Does Isabella have Any co-signers? What impact does Her actions have on them? • 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

50. Requesting A Credit Report Access the website: annualcreditreport.com Calling toll free: 1-877-322-8228 Send a written request: Annual Credit Report Request Service PO box 105281 Atlanta, GA 30348-5281 One free credit report annually from each of the three credit reporting agencies Credit scores are available for a small fee