Understanding Credit Reports

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Understanding Credit Reports

Family Economics & Financial Education

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Why is it important to Building a Credit History◊ To be able to

◊ purchase items on credit◊ house, vehicles, appliances

◊ Renting an apartment◊ Emergencies

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

How can you harm your credit?Debit/Credit cards over

the limitRoutinely paying bills lateHaving a criminal recordHolding a large amount of

debtHolding an unreasonable

amount of unused credit

Defaulting on a loanObtaining a high number

of credit inquiriesCarrying many credit/store

cardsHaving a public record of

bankruptcy

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Credit Reporting Agencies◊ Keep a record of a consumer’s credit transactions

and compiles credit reportsThe 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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Who can Request your report?

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

◊Credit inquiry- and entry on a credit report that shows a business has requested a copy of your report

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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:1) 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

2) Fraud

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Fair Credit Reporting Act 1971Consumers have the right:

◊ To know the information in their credit report ◊ To have errors corrected in their credit report

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Correcting Errors on Credit ReportsSteps 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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Five Standard Categories of Scores1. 35%-Payment history

- Timely manner in which a consumer pays debt2. 30%-Outstanding debt

-Amount of debt currently held3. 15%-Credit history

-How long the consumer has held credit accounts and how often they are used

4. 10%-Pursuit of new credit-How much credit is acquired over the length of the

consumer’s credit history5. 10%-Types of credit in use

-May include credit cards, gas cards, store cards or accounts, loans, etc.

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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

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© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Conclusion

Build and maintain positive credit!

Check credit reports annually for errors!

Act financially responsible!