Lesson_9 - Credit Reports and Credit Scores FSoS 1301: Cash...

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Unformatted text preview: Credit Reports and Credit Scores FSoS 1301: Cash or Credit: You Need to Know Lesson 9 Required Readings and Viewing Materials for Lesson 9 Federal Trade Commission (2008, March). Your Access to Free Credit Reports. R etrieved from http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm. Read pages 1-3. Keown, A. (2010). Using credit cards: The role of open credit. In Olver, J.M., Lant, T.K., Plant, R., Higgins, C.A., Majeske, K.D., & Kursh, S.R. (Eds.), Personal Finance: Turning Money into Wealth (pp. 162-193). Upper Saddle River, NJ: Prentice Hall Business Publishing. Read pages 15-18. Office of the Minnesota Attorney General Lori Swanson (n.d.). C redit Scores. Retrieved March 14, 2011, from http://www.ag.state.mn.us/Consumer/Publications/CreditScores.asp. R ead pages 1-2. Springboard Nonprofit Consumer Credit Management (2008). The consumer guide to good credit. R etrieved May 1, 2010, from http://www.credit.org/resources/Materials. Read pages 19-21, 24-27. Federal Trade Commission (n.d.). Annual Credit Report Request Form. R etrieved March 14, 2011, from http://www.ftc.gov/. View Form Optional Readings and Viewing Materials for Lesson 9: Consumer Federation of America & VantageScore Solutions. (2011). The credit score quiz. Retrieved from http://www.creditscorequiz.org/ Take the quiz. McGuire, K. (2011, February 28). Credit score knowledge improves (weblog post). Star Tribune. Retrieved from http://www.startribune.com/lifestyle/blogs/117086513.html?source=error Read entire article. Office of the Minnesota Attorney General Lori Swanson (2007, March). The Credit Handbook. Retrieved March 14, 2011, from http://www.ag.state.mn.us/. Read pages 17-18. Savvy, N. (Host). (n.d.). Your credit report card: Credit score. FDIC Money Smart. Podcast r etrieved from h ttp://74.205.121.32/listen_credit.html# Listen to audio clip, or read transcript. Savvy, N. (Host). (n.d.). Your credit report card: How they work. FDIC Money Smart. Podcast r etrieved from h ttp://74.205.121.32/listen_credit.html# Listen to audio clip, or read transcript. Springboard Nonprofit Consumer Credit Management (2008). T he consumer guide to good credit. R etrieved May 1, 2010, from http://www.credit.org/resources/Materials. Read pages 22-23. 1 Learning Objectives • Comprehend the importance of a credit report. • List the information provided in a credit report. • Explain how a credit report is created. • Define the role of a credit bureau. • Identify how a credit report is utilized in the lending decision. • Know what a credit score is and how it is computed. Lesson 9 By the end of this lesson, you should be able to: • Comprehend the importance of a credit report. • List the information provided in a credit report. • Explain how a credit report is created. • Define the role of a credit bureau. • Identify how a credit report is utilized in the lending decision. • Understand what a credit score is and how it is computed. 2 What is a Credit Report? A credit report is a compilation of financial information provided by credit agencies and used by lenders to identify an individual’s credit worthiness. • Credit report creation • Lender use • Credit reporting agencies Lesson 9 The Credit Report: A credit report is a compilation of financial information showcasing how well you manage your credit. Therefore, the report is a reflection of how well you manage your money, credit, and debt. A credit report takes into account how many lines of credit you have, the available amount of credit on each account, how much credit is in use by carrying a balance, and how often payments are made by the due date. Credit Report Creation: When applying for a new line of credit, you are authorizing the lender to check your credit report at the credit bureau. In doing this, you are also allowing the lender to share their information on how well you manage your account with the credit bureau. When you initially apply for credit, a file is created, and information regarding your name, date of birth, social security number, and place of employment may be obtained. When applying for additional credit, lenders will access your credit report to see how you manage your accounts and to see what credit you have acquired. Your credit lenders will continually update your report in regard to how you manage your account. They will record information on whether you pay on time, whether you pay late, how much you have charged against your credit limit, and how much available credit you have left. Thus, each month you are creating your credit report as you use and pay your accounts. Lender Use: When lenders are deciding to extend a line of credit, they want to be reasonably sure the person they are lending to will pay back the money provided. Therefore, lenders use your credit report to see how well you have performed with credit in the past. They use this information to determine your credit worthiness and how likely you are to pay them back. Credit Reporting Agencies: Three major credit bureaus manage the collection and distribution of consumer information in regard to how an individual manages their accounts. These bureaus will be discussed further in the following slides. 3 What’s in a Credit Report? • Personal information • Trade lines – List of accounts • Inquiries – Requests for credit • Public records – Debt collection efforts • Summary – Abstract of credit usage • Length of reporting history Lesson 9 The information provided in a credit report is standard across all credit bureaus. Personal Information: The beginning of your credit report will include information such as your name, address, date of birth, and number of years of employment. The report does not contain information that is prohibited by law for use when extending credit. Information NOT provided includes: race, ethnicity, number of children, etc. I f the individual is married or has joint accounts, the spouse’s name will also be shown. The purpose of this section is to identify the individual. Trade Lines: This is a list of an individual’s credit accounts, the amount of credit that has been approved, the minimum monthly payment requirement, current account balance, and payment history. The payment history discloses whether the individual pays on time, 30 days late, 60 days late, or 90 days late. This information outlines how much credit one has available, how much is being used, and how well the credit is being managed. Inquiries: This section lists the creditors the individual has authorized to view their credit report when applying for credit. This information shows lenders how actively the individual is seeking and accumulating credit. If an individual opens many lines of credit in a short period of time, this may mean the individual w ill end up with more debt than they can afford or repay. Public Records: This section contains information on all debts that have not been paid voluntarily. The lender may be trying to recover the money owed. Public records may contain information on tax liens on property, unpaid charge accounts, unpaid medical bills, rents due to landlords, and other types of unpaid debt. Public records will also contain information on any bankruptcy filings the consumer has initiated. A bankruptcy filing will show on an individual’s credit report even if the individual changes his or her mind during the process. Summary: A summary line is included that provides a condensed version of an individual’s credit report. This section is a quick go-to guide for how many accounts an individual has, p ast payment history, the largest credit balance carried, and whether there are any public record items included. Reporting History: The three major sections of your credit report include: trade lines, inquiries, and public records. If negative information is provided in the trade lines section, such as late payments, involuntary account closings, or auto repossessions, this information will be reported for 7 years. Credit inquiries will be reported for two years from the date of inquiry. Bankruptcies are reported for 10 years. However, if an individual applies for a loan over the amount of $350,000.00 or a life insurance policy of $1,000,000.00 or more, the bankruptcy may be reported despite the 10 year time limit. 4 Credit Reporting Agencies The function of a credit reporting agency includes: • Collecting and distributing consumer credit use information. – May sell information to potential creditors, employers, landlords, or insurance companies. • Determining an individual’s credit rating and score. • Selling names of individuals who meet a potential lender’s list of criteria for marketing purposes. Lesson 9 To Collect and Distribute Information: A credit bureau’s role is to collect information, store the information, and maintain accurate records. The credit bureau may assign the consumer a credit score based on a number of factors. These factors will be discussed later in this lesson. Credit bureaus may also sell consumer credit i nformation to potential lenders, employers, landlords and insurance companies who perform authorized credit checks. It is important to note that a credit bureau does not make lending decisions. The financial institution that purchases the report makes the decision to extend credit based on their company’s standard practices and regulations. Determining a Consumer’s Credit Rating and Score: A credit bureau assigns a consumer a credit rating based on their past payment history. This rating is also somewhat determined by the individual’s forecasted payment performance. A FICO credit score is assigned to an individual to reflect the consumer’s level of creditworthiness. This score is a numerical number that takes into account many factors. These factors will be covered in the next few slides. Selling Consumer Information to Marketers: Ever wonder where all those pre-approved credit offers in your mailbox come from? Often lenders will contact credit bureaus to request a list of names and addresses of people who meet designated lending criteria. The credit bureau takes this criteria and generates a list of individuals who meet the lender’s request. The lender uses this list to mail pre-approved credit offers to potential customers. However, the offer is often subject to verification because the lender has not seen the individual’s credit report or employment status. These marketing inquiries are different from the inquiries that are generated when you authorize a “credit check.” Marketing inquiries are not shown on reports sent to potential lenders. However, when the consumer accesses their credit report, they will see the marketing inquiries made in a section separate from the authorized requests for credit. 5 Obtaining Your Credit Report Individuals may obtain a free copy of their credit report every 12 months from each of the three credit reporting agencies.Your free credit report can be obtained three different ways: 1. Visit https://www.annualcreditreport.com 2. Call by phone: 877-322-8228 3. Request by mail: a. Print off the form provided in this lesson b. Mail completed form to: Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281 Lesson 9 According to the FACT Act of 2003, every individual is eligible to obtain their credit report from each of the three national credit-reporting agencies. An individual’s credit report can be obtained using the means listed in the slide. We suggest ordering one of the three offered credit reports from Equifax, E xperian, and TransUnion every four months. In doing this, you are able to ensure all information is correct and that identity theft has not taken place. In order to obtain your credit report, you must provide identity verification through provision of your name, address, Social Security number, and date of birth. If your address has changed within the last two years, you will also have to provide your previous address. In addition, the credit reporting agency will request you answer some verification questions pertaining to your extended lines of credit. It is important to note that www.annualcreditreport.com is the only government authorized means of obtaining your free credit report. We strongly recommend that you do not use third parties to obtain your credit report (other than Equifax, Experian, and TransUnion). An individual may acquire an additional free copy of their credit report should: - They be denied credit, insurance, housing, or employment in the past 60 days. - They be the victim of identity theft and suspect information is incorrect on their credit report. - The unemployed individual plan to apply for employment within the next 60 days - They currently receive public assistance. - The information in their credit report be used to make an unfavorable decision against them. - Their request for a credit report investigation result in modifications. - They live in one of the following states: Colorado, Maine, Massachusetts, Maryland, New Jersey, Vermont, or Georgia. 6 The Major Credit Bureaus There are three major credit bureaus: • Equifax – www.equifax.com – To request report: 800-685-1111 – To report fraud: 800-685-6285 • Experian – www.experian.com – To request report: 800-397-3742 – To report fraud: 888-397-3742 • TransUnion – www.transunion.com – To request report: 800-888-4213 – To report fraud: 800-680-7289 Lesson 9 There are three major credit bureaus: Equifax, Experian, and TransUnion. Each of these companies is separate, and they do not disclose information to one another. However, in the instance of fraud or identity theft, information is shared amongst one another. Federal laws regulate this practice. This action is a safeguard to deter the thief from opening additional accounts in the victim’s name. Each bureau has developed relationships with different companies, banks, credit unions, and other businesses. These organizations and corporations pay the credit bureau an annual fee to access consumer credit report information. Three Different Credit Bureaus Means Three Different Credit Reports: Each credit bureau obtains different information. For instance, only one credit bureau may receive record of your credit transactions at a certain store. This is because the retailer only reports the consumer’s account activity to the credit bureau with which they have formed a relationship. Thus, it is not uncommon for the three bureaus to have credit reports showing different information. It is of great importance that an individual check all three credit reports before making major purchases, such as buying a home. Mortgage lenders know that credit reports differ and check reports from all three bureaus in the loan approval process. While credit bureaus provide a detailed summary of your past credit usage, it is best to obtain your credit score from FICO. There are other non-FICO scores available, such as VantageScores and Empirica. However, these indicators are not as widely used as the FICO Score. You can obtain your FICO score at m yFICO.com. 7 Your FICO Credit Score An individual’s credit score provides an overall rating of their credit risk. The score ranges from 300-850. It is generated using the following five factors: Pursuit of New Credit 10% Types of Credit 10% Length of Credit History 15% Payment History 35% Outstanding Debt 30% Lesson 9 The FICO score is widely used by lenders and creditors when determining whether to extend credit to an individual. The FICO score is generated using a complicated algorithm that takes the following factors into account: 1. Payment History (35%): This information includes p ayments made on time, late payments, debt that has gone into collection, and bankruptcies. 2. Outstanding Debt (30%): This includes any information on credit card balances, loans, and number of credit cards. 3. Length of Credit Card History (15%): Age of longest held credit account, average age of credit account, and time since accounts were last used are included. 4. Pursuit of New Credit (10%): Information on number of inquiries from potential lenders and number of newly opened accounts is included here. 5. Types of Credit Used (10%): The more balanced a report is, the higher an individual’s score will be. Creditors like to see both installment and revolving accounts. Information on bank cards, department store cards, finance companies, secured credit, and unsecured credit is provided here. An individual’s credit score ranges from 300-850. In order to obtain a credit score, you must have these three things on your file: 1. At least one credit account 6 months or older, 2. Reported credit activity within the last 6 months, and 3. Absence of message stating “Social Security number reported as deceased.” 8 What the FICO Score Doesn’t Consider • Consumer-generated inquiries. • An individual’s gender, race, religion, occupation, homeowner status, zip code, and income level. • Account review inquiries. • Accounts “under dispute.” • An individual’s participation in a debt management program. Lesson 9 Consumer-Generated Inquiries: When an individual requests and obtains their credit report, they do not impact their credit score. Individual’s Personal Information: An individual’s personal information in regard to their gender, race, religion, and occupation are not taken into account when determining the FICO score. In addition, the score does not consider whether or not the individual is a homeowner. It doesn’t even take into consideration what zip code the individual lives in. An individual’s income level is not a determining factor. Account Review Inquiries: Some creditors do “ account reviews” of their current card holders. This means they will periodically check their consumer’s credit report. These inquiries are not taken into consideration when generating a FICO score. Accounts Under Dispute: An individual’s credit score is not impacted when an account is labeled “ under dispute.” An account may be under dispute when an individual questions a charge made on their account. By law, the creditor must report to the credit bureaus that the a ccount is “under dispute.” Participation in Debt Management Programs: An individual’s participation in a debt management program does not impact their credit score. However, their enrollment in the program may be reported to the credit bureau. 9 Rate Shopping When shopping for a loan for a house or a car, you may have multiple inquiries made on your credit report while trying to find the best deal. However, all inquiries made within a 30-day period will count as one inquiry. Lesson 9 When shopping for a house or car, you may speak to multiple lenders in trying to acquire a loan at the best rate possible. Therefore, multiple lenders may request to access your credit report despite the fact you only need one loan. When computing your FICO credit score, mortgage and auto inquiries made within the past 30 days will not affect your rate. This is known as “rate shopping.” All inquiries made during the rate shopping period will count as one inquiry. 10 When to Check Your Credit Report It is best to check your credit report when: • • • You lose your wallet. Making a major purchase. Seeking employment with financially sensitive work. Lesson 9 When You Lose Your Wallet: When you lose your wallet or one of your credit cards, it is important to check your credit report right away. Someone could potentially use your personal information to open new lines of credit. Credit cards could also be used to rack up debt. Even if your credit card or wallet is returned to you, it is essential to still check your credit report. An individual could use your credit card number to purchase something online or through a television advertisement. Checking your credit report will help you to identify unknown accounts and suspicious activity. When M aking a Large Purchase: Before shopping for insurance or a major purchase you intend to finance through credit, check your credit report. For example, when shopping for an auto loan, look at your credit report first to ensure there are no errors. Resolve any mistakes before shopping for your major purchase. Having a strong credit report and score will help an individual acquire the best loan possible. When Seeking Employment that Deals with Financially Sensitive Information: If you have reason to believe your employer will want to check your credit report as part of the hiring process, it is important for you to check your credit report beforehand. This way, you will know what is on your credit report. For example, if the job entails handling money or expensive items, the employer may want to check your credit to be sure you don’t have too much debt and that you have been handling your accounts responsibly. This is a reasonable action since people who have debt problems are more likely to steal from their employer to help relieve their personal financial pressures. If there are any errors in your report, it is t ime to have them corrected. Be sure to check your report about 2 months in advance of any of these events. 11 Stopping the Credit Card Application Avalanche In order to stop pre-approved offers from being mailed to your house, opt-out by calling the following number: • 1-888-5-OPT- OUT Lesson 9 As discussed before, credit bureaus sell your name and general credit information to creditors who may want to offer you their credit card. In order to stop credit bureaus from mailing pre-approved offers to your house, contact the provided number to optout. Calling the number shown here will stop the pre-approved offers for a period of two years. After two years, you will have to renew your request. 12 ...
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