Chapter 7 Assessing and Securing Your Credit. Copyright ©2014 Pearson Education, Inc. All rights reserved.7-2 Chapter Objectives Provide a background.

Chapter 7

Assessing and Securing

Your Credit

Copyright ©2014 Pearson Education, Inc. All rights reserved. 7-2

Chapter Objectives

• Provide a background on credit

• Describe the role of credit bureaus

• Provide a background on identity theft

• Describe identity theft tactics

• Explain how to avoid identity theft

• Discuss how to respond to identity theft


Background on Credit

• Credit: funds provided by a creditor to a borrower that will be repaid by the borrower in the future with interest

• Types of credit– Non-installment credit: credit provided for a short

period, such as department store credit

– Installment credit: credit provided for specific purchases, with interest charged on the amount borrowed


Background on Credit (cont’d)

– Revolving open-end credit: credit provided up to a specified maximum amount based on income and credit history; interest is charged each month on the remaining balance

• Advantages of using credit– Helps build a good credit score

– Eliminates the need for carrying cash or writing checks



• Disadvantages of using credit– Excessive spending

• Easier to avoid considering costs when using credit

– A large accumulation of debt• Especially when making only the minimum

payment



• Credit rights– Equal Credit Opportunity Act helps protect

debtors from unethical creditors– Financial Reform Act of 2010 established the

Consumer Financial Protection Bureau• Regulates online checking accounts, credit cards, and

student loan• To ensure accurate consumer information and prevent

deceptive practices• May also regulate credit rating bureaus





• Credit history– Often begins with timely payment of utility bills– Built by paying bills in a timely manner

• Credit insurance– Can cover payments under adverse conditions


Financial Planning Online

• Go to www.philadelphiafed.org/consumer-resources/publications/establish-use-and-protect-credit.cfm

• This site provides information on how to establish, use, and protect credit.


Credit Bureaus

• Credit bureaus provide credit reports documenting your credit payment history

• Credit reports: reports provided by credit bureaus to document a person’s credit payment history

• Primary credit bureaus are Equifax, Experian and TransUnion

• Free credit reports available annually


Credit Bureaus (cont’d)

• Credit Reports Provided by Credit Bureaus

1. Report number, date, and name to distinguish this report from others

2. Identifying information such as name, spouse’s name, birthdate, Social Security number, addresses, occupation, etc.

3. Potentially negative information from public records such as bankruptcy and tax liens



4. Accounts turned over to collection agencies, as well as resolution of these accounts

5. All account information, both open and closed accounts are included

6. List of companies that have requested your credit report




• Credit score

– Rating indicating creditworthiness

– Creditors rely on this score to help determine whether or not to extend a loan

– Can affect the interest rate received on loans



– Score affected by many factors• Credit payment history

– 35% of score• Credit utilization

– 30% of score• Credit history

– 15% of score• New credit

– 10% of score• Different types of credit

– 10% of score



• Different scores among bureaus– Bureaus don’t always have access to the

same information

• Interpreting credit scores– Range from 350–850, with 600 being considered

a good score– Correcting credit score mistakes

• Contact credit bureau that issued the inaccurate report• Credit bureau required to investigate within 30 days



• Improving your credit score

– Catch up on late payments and reduce debt– Review household budget and cut back on

unnecessary expenses– Destroy credit cards, but keep accounts open– Call creditors if unable to make payments on

time



• Reviewing your credit report– At least twice a year for accuracy, to correct

errors, to identify deficiencies• Make sure report is accurate

• Review the types of information used by lenders

• See what kind of information lowers credit rating and try to eliminate deficiencies




• Go to www.ftc.gov/freereports

• This Web site provides information on obtaining a free credit report.


Identity Theft: A Threat to Your Credit

• Identity theft: theft that occurs when an individual, without permission, uses your identifying information for his or her personal gain

• Goal may be to acquire money or goods or to establish a new identity for criminal purposes

• Impacts about 15 million people each year, costing about $50 billion


Identity Theft: A Threat to Your Credit

• The cost of identity theft– Personal costs

• Feeling of violation and insecurity• Problems getting a job• Being hounded for debt that isn’t yours• Turned down for credit

– Financial costs• Average individual loss is $3,500• Time and money to repair the damage


Identity Theft: A Threat to Your Credit (cont’d)

• Identity theft tactics

– Shoulder surfing: Tactic used when an identity thief stands close to you in a public place and reads the number of your credit card as you conduct business

– Dumpster diving: Tactic used when an identity thief goes through your trash for discarded items that reveal personal information that can be used for fraudulent purposes



– Skimming: Tactic used when a store employee steals your credit card number by copying the information contained in the magnetic strip on the card

– Pretexting: Tactic used when an identity thief poses as an employee of a company with which you conduct business, to solicit your personal information



– Phishing: Tactic used when pretexting happens online

– Pharming: Similar to phishing, but targeted to larger audiences; tactic that directs users to bogus Web sites to collect their personal information

– Abusing legitimate access to records– Crime rings


Identity Theft Tactics (cont’d)

– Violating your mailbox• Both incoming and outgoing mail can provide personal

information



• Protecting against identity theft

– Shielding personal information at home• Remove items containing SSN from purse/wallet

• Document your accounts

• Buy a shredder and use it

• Do not have SSN printed on your checks

• Remove your name and address from phone directories

• Install a locked mailbox or rent a P.O. box


Identity Theft: A Threat to Your Credit (cont’d)• Shop online only on secured sites

• Be suspicious of phone callers seeking personal information

• Mail all bills with account information in a U.S. Postal Service depository box

• Scrutinize bank and credit card statements

• Be careful using hand-held or cell phones when ordering merchandise

• Be aware of delivery schedules

• Never have personal checks delivered to your home


Identity Theft: A Threat to Your Credit (cont’d)• Protect home computer from hackers• Have mail held at the post office when on vacation

– Protecting your personal information at work

• Be sure photo IDs do not display SSN• Examine paycheck and stub for SSN• Examine health insurance card for SSN• Have a discussion with your human resource

department



– Identity-theft insurance• Available as part of homeowner or renter policies or as

a stand-alone policy



• Response to identity theft

– Take immediate action

– Maintain a record of all phone calls and correspondence

– Contact the police

– Contact Federal Trade Commission

– Contact credit reporting companies

– Contact creditors and others who may be impacted



• Go to www.ftc.gov/bcp/edu/microsites/idtheft

• This Web site provides information on identity theft and the tools to report identity theft.



How Credit Assessment and Security Fits Within Your Financial Plan

• The following are the key credit assessment and security decisions that should be included within your financial plan:

– Is your credit standing adequate so that you can use credit?

– Is your credit and personal identity information secure?


Chapter 7 Assessing and Securing Your Credit. Copyright ©2014 Pearson Education, Inc. All rights reserved.7-2 Chapter Objectives Provide a background.

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