Credit Records and Laws MYPF 3/12/2018 8 Credit Records and Laws 8.1 Establishing Credit 8.2 Evaluating Credit and Credit Laws © 2016 South-Western, Cengage Learning   Chapter 1

Lesson 8.1 Establishing Good Credit Learning Objectives LO 1-1 Discuss the purpose of credit records and credit reports. LO 1-2 Describe the concept of creditworthiness. LO 1-3 Explain how to get started using credit. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Records Before granting credit, a creditor will check into your past credit performance: Did you pay your bills on time? How much total credit did you receive? How much do you owe now and how large are your payments? Chapter 8 © 2016 South-Western, Cengage Learning  

Credit History Your credit history is the complete record of your borrowing and repayment performance. This record will provide answers to the creditor’s questions and thus help the creditor determine your ability to pay new debts. Chapter 8 © 2016 South-Western, Cengage Learning  

Your Credit File Every person who uses credit has a credit history on file at a credit bureau. A credit bureau is a business that gathers, stores, and sells credit information to other businesses. Chapter 8 © 2016 South-Western, Cengage Learning  

National Credit Bureaus Equifax (www.equifax.com) Experian (www.experian.com) TransUnion (www.transunion.com) Chapter 8 © 2016 South-Western, Cengage Learning  

How Information Is Gathered Credit bureaus gather information from businesses, called subscribers, that pay a monthly fee to the credit bureau for access to this information. Each subscriber supplies information about its accounts with customers, including the following: Names Addresses Credit balances On-time payment record Credit bureaus also gather information from many other sources. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Report A credit report is a written statement of a consumer’s credit history, issued by a credit bureau to businesses. Since credit reports may contain errors, you should order a copy of your credit report and review it at least once a year. You are entitled to one free credit report every 12 months from each of the three major credit bureaus. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Reports (continued) Credit reports are requested for credit applications, employment applications, and insurance reasons. Negative information stays on your report for seven years (excluding bankruptcy information, which stays on for ten years). Credit report formats vary, but contain sections similar to these: Summary of information Public record information Credit information Account detail Requests for credit history Personal information Chapter 8 © 2016 South-Western, Cengage Learning  

How Information Is Used When someone applies to a business for credit, the business (subscriber) asks the credit bureau for the applicant’s credit report. Information in the credit report is then used as the basis for granting or denying credit. Usually credit grantors (banks and retail businesses), employers, landlords, and insurance companies have an interest in credit reports. Before entering into a financial agreement, they want evidence that the person is financially responsible. Chapter 8 © 2016 South-Western, Cengage Learning  

Types of Information Stored Public information becomes part of your credit record. Examples of activities that result in public information: Failing to pay your property taxes Filing for bankruptcy Filing for divorce Applying for a marriage license Announcing the birth of a child Announcing a job promotion Being involved in a lawsuit Information you provide on a credit application becomes part of your credit record. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Protection Services Credit guard services You are notified whenever anyone accesses your credit file for any reason. Credit freezing services A credit freeze is a consumer request that requires the credit bureaus to deny all access to a consumer’s credit information or files. Chapter 8 © 2016 South-Western, Cengage Learning  

Creditworthiness Before potential creditors will grant credit to you, they must determine whether you are creditworthy. A person who is considered creditworthy usually meets five basic qualifications, called the five Cs of credit: Character Capacity Capital Conditions Collateral Chapter 8 © 2016 South-Western, Cengage Learning  

Character Will you repay the debt? Character is a responsible attitude toward honoring obligations, often judged on evidence in the person’s credit history. Creditors often use stability as a measure of character as well. Chapter 8 © 2016 South-Western, Cengage Learning  

Capacity Can you repay the debt? The financial ability to repay a loan with present income is known as capacity. Before lending you money, creditors want to know that your current income is sufficient to cover your current expenses each month plus the payments on the new loan–generally measured as a percentage of take-home pay. Chapter 8 © 2016 South-Western, Cengage Learning  

Capital Do you have sufficient assets to ensure payment of the debt? Capital refers to financial assets (bank accounts, investments, and property) you possess after deducting your debts. When you add up all that you own (assets) and subtract all that you owe (liabilities), the difference (net worth or capital) should be sufficient to ensure payment of your debt. Chapter 8 © 2016 South-Western, Cengage Learning  

Conditions What are the “external” conditions that affect your ability to repay the debt? Conditions refer to the overall economic climate and external environment. Therefore, creditors want to know the following: How secure is your job? How secure is the firm for which you work? How is the employment situation in your geographic location and in your occupation? Chapter 8 © 2016 South-Western, Cengage Learning  

Collateral What assets are pledged to secure the debt? Collateral is property pledged to assure repayment of a loan, such as the house, car, or furniture being purchased. Collateral protects creditors and lowers their risk, making them more willing to lend to you. If you do not repay your debt as agreed, the creditor can sell the pledged property or collateral to collect on or repay the debt. Chapter 8 © 2016 South-Western, Cengage Learning  

Getting Started with Credit Begin with opening a savings account. Once you have a cushion in savings, open a checking account. Open a store credit account. Many retail stores will allow you to open a small account with a responsible adult as a cosigner. A cosigner is someone who promises to pay if the borrower fails to pay. Get a small loan. Apply for a credit card. Chapter 8 © 2016 South-Western, Cengage Learning  

Lesson 8.2 Evaluating Credit and Credit Laws Learning Objectives LO 2-1 Discuss how credit scores and credit ratings are used to evaluate credit. LO 2-2 Discuss major credit laws and their impact on consumers. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Scores and Credit Ratings Credit bureaus evaluate consumers based on information contained in their credit files and credit reports. Credit scores and credit ratings make it easier to interpret a consumer’s credit report. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Score Credit bureaus use point systems to compute credit scores for consumers. In a point system, the credit bureau assigns points based on factors such as amount of current debt, number of late payments, number and types of open accounts, current employment, and amount of income. When your points are added up, they result in a credit score that tells potential creditors the likelihood that you will repay debt as agreed. The higher your score, the greater the chance you will be a good credit risk. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Score Your FICO score Credit inquiries (continued) Your FICO score Credit inquiries Improving your FICO score Chapter 8 © 2016 South-Western, Cengage Learning  

Calculating your FICO Score To calculate a FICO score, you must have at least one account open for six months or more. The highest FICO is 850; the lowest is 300. FICO scores are calculated from: Payment history Amounts owed Length of credit history Types of credit used New credit Chapter 17

Credit Inquiries A credit inquiry is a request by a business with a “permissible purpose” to check your credit. Businesses can make an inquiry without your permission or knowledge, but usually these requests don’t count toward your credit score. Personal credit inquiries made by you to obtain your credit report also do not affect your score. Authorizing a lender to check your credit for a loan will affect your FICO score, unless you are rate shopping for the best interest rate. Too many inquiries mean that too much debt is being taken on. Chapter 8 © 2016 South-Western, Cengage Learning  

Improving Your FICO Score Here are a few tips to use when trying to fix a credit score: Pay your bills on time. Improve your payment history. Keep balances low on credit cards and revolving credit. Pay off your debt rather than move it around. Open accounts slowly—not several at a time. Chapter 17

Credit Rating Your credit rating is a measure of creditworthiness based on an analysis of your credit and financial history. This process rates consumers according to how reliably they pay back money borrowed or charged. Excellent or “A” credit rating – does not miss payments; pays off debt early. Good or “B” credit rating – pays bills on time and often pays more than the minimum due. Fair or “C” credit rating – usually pays all bills within the grace period, but occasionally takes longer. Poor or “D” credit rating – usually denied credit because they miss some monthly payments or have other credit risk events, like bankruptcy. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Laws Consumer Credit Protection Act Fair Credit Reporting Act Also known as the Truth-in-Lending Act Requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed Fair Credit Reporting Act Regulates the collection, dissemination, and use of consumer credit information Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Laws Fair Credit Billing Act Equal Credit Opportunity Act (continued) Fair Credit Billing Act Requires creditors to resolve billing errors within a specified period of time. A billing statement is an itemized list showing changes posted to your account during the period. Equal Credit Opportunity Act Designed to prevent discrimination in the evaluation of creditworthiness. Discrimination is the act of treating people differently based on prejudice rather than individual merit. Chapter 8 © 2016 South-Western, Cengage Learning  

Credit Laws Fair Debt Collection Practices Act (continued) Fair Debt Collection Practices Act Designed to eliminate abusive collection practices by debt collectors. A debt collector is a person or company hired by a creditor to collect the overdue balance on an account. Chapter 8 © 2016 South-Western, Cengage Learning