Understanding Credit Reports Advanced

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Understanding Credit Reports Advanced

The University of ArizonaTake Charge America Institute

www.tcainstitute.org

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

7.4.4.G1

Credit Reports Credit report - a record of a

consumer’s credit history Credit history - a record of transactions

involving credit use Individuals do not have a credit report

if they have not previously used credit They affect one’s ability to acquire

credit

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Information on a Credit Report Name and aliases Current and past

addresses Marital status Date of birth Employment history Public records

Judgments, criminal, and bankruptcy

Credit card, store card, book clubs, music clubs, etc.

Payment history Credit card, store

card, book clubs, music clubs, etc.

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Information continued Financial records

Loans, bounced checks, closed accounts, etc.

Loans/leases Rent-to-own

contracts, payday loans, lease agreements, etc.

Credit inquiry-

Number of credit inquiries Credit inquiry - a

request for your credit. Can be done by businesses you apply to for credit or whom pre-approve you for credit*Medical information is not on a consumer’s

credit report, but late medical payments are.

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Building Credit History Important for consumers to build a

credit history to be able to purchase items using credit For example – house, vehicle

Credit reports can influence more than just purchases made using credit. Renting an apartment Insurance rates Employment opportunities

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Building Credit History continued Store accounts (JcPenny or Sears

charge accounts) Credit card accounts Loan from financial institution

Acquire a small loan from a financial institution and pay the loan off in timely payments to develop a positive credit history

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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No Credit History While the following

are all positive financial practices, a credit history is not built if a consumer performs the following actions:

Having no history of credit use

Not having any credit accounts in own name

Paying cash for all major purchases

Paying phone and utility bills on time

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

7.4.4.G1

Positive Credit

Practicing good banking techniques

Keeping checkbook balanced, not bouncing checks

Paying bills consistently and on time

Keeping public records free of bankruptcy

Keeping a reasonable or small amount of debt (less than 20% of net income)

Not having a criminal record

Applying for credit sparingly, keeping credit inquiries low

Holding a low number of credit/store cards

Checking credit report annually to remove errors

Maintaining reasonable amount of unused credit

A consumer may develop and keep good credit by:

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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General Rule Percentage of current debt

compared to the total credit available is reviewed by potential lenders

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

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Negative Credit

Bouncing checks Routinely paying bills

late Having a criminal record Holding a large amount

of debt Holding an

unreasonable amount of unused credit

Not paying utility or cell phone accounts consistently and on time

A consumer may develop or keep poor credit by:

Obtaining a high number of credit inquiries

Carrying many credit/store cards

Having a public record of bankruptcy

Defaulting on a loan Having cards over the limit

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Example of How Much a Low Score Can Cost You

Product: 30-year, fixed rate mortgage, $300,000 loan

Source: Fair Isaac Co: www.myfico.com

FICO Score Interest Rate

Monthly Payment

760 5.9% $1,787

650 7.2% $2,047

590 9.3% $2,500

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Credit Reporting Agency (CRA) Keeps a record of a consumer’s credit

transactions and compiles credit reports Acquires information from several

different types of lending companies Information on credit reports can differ

between each individual agency Lenders may only report to one credit agency Consumers should contact all agencies when

checking their credit report

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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CRA’s continued 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 (800) 397-3742

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Free Credit Reports www.annualcreditreport.com

is the only government sponsored agency which gives free credit reports

Other agencies do charge, even if they advertise free

Be sure to enter your state and click here. If you select the credit report agencies logos you will be sent to their site which is not free

You will have to enter personal information including your social security number

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Who Reports to CRA’s? Store accounts Credit card companies Mortgage and other loan

lenders Financial institutions Landlords Courts Utility accounts Cellular phone companies Delinquent accounts

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Mistakes in Credit Reports More than 50% of the credit reports checked

in a study contained errors Consumer Reports (July 2000)

The two main errors commonly appearing in a consumer’s credit report 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

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Correcting Errors on Credit Reports

Steps include: Contact the particular credit bureau that has the error CRA must report to the consumer within 30 days If the CRA can’t verify the information, then it must be

removed from the file or if in error it must be corrected If a consumer disagrees with result of CRA

investigation, they have the right to submit a 100 word explanation which stays in the consumer’s file

Negative information is usually removed from credit file after seven years, except bankruptcy which is removed after 10 years

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Fair Credit Reporting Act Enacted to protect the consumer in 1971 Designed to promote accuracy and

ensure privacy of information in credit reports

Consumers have the right: To know the information in their credit report To have errors corrected in their credit

report

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Credit Scores A mathematical tool created to help lenders

evaluate the risk associated with lending a customer money

Scores range from 150-850, with 850 being the best score

Not listed on a credit report but can be purchased separately for about $8.50

Each CRA has an independent scoring system based upon a standard percentage of five different categories

Consumer’s scores can differ between each CRA

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Categories of predictive characteristics, Classic FICO Score

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Credit Scores continued Other factors calculated into a credit score

may include: Length of time at current address Current income Financial information Late payments Amount of outstanding credit Amount of credit in use Length of time credit has been established

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Conclusion

Build and maintain positive credit!

Check credit reports annually for errors!

Act financially responsible!

© Take Charge America Institute – September 2008 – Workshop Guide – Understanding Credit Reports AdvancedFunded 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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Materials were provided by: The Family Economics and Financial

Education Project www.fefe.arizona.edu