What Is Your History? Credit Reports

Introduction Video

How is Credit Information Used FICO or credit score: Credit Card Issuers & Lenders Determine APR Auto Insurers Determine Premium Employers Are you a worthy hire? Landlords Are you a reliable tenant? But these days auto insurers are using credit-based scores to calculate premiums. Employers are using credit checks to determine whether you’re a worthy hire. And landlords are using them to figure out whether you’ll be a reliable tenant. Some utility companies are linking credit scores to the size of the deposit you must pay to have your power turned on. Source: Consumer Reports, “Credit scores: What you don’t know can be held against you ,” August 2005. _________________________________________________________________________________________________________________________ Insurers to set rates. Auto and home insurers often use credit-scoring formulas to help determine premiums. Insurers and independent researchers have found a strong, although still unexplained, correlation between how well people handle their credit and how likely they are to cost the insurer money. Folks with the highest credit scores tend to file the fewest claims; as credit scores deteriorate, the propensity to file claims rises. The practice is controversial (for details, read "Is your insurer discriminating against you?") but widespread; only a few states, including California and Massachusetts, prohibit insurers from using credit information. Source: Pulliam-Weston, Liz, “Demand Your FICO Score Now!,” MSN Money, October 9, 2006.

Credit / FICO Score Fair Isaac Company Range between 300 & 850 A number lenders use to help them decide whether to make a loan to an individual Range between 300 & 850 U.S. Median: 723 < 620 = sub prime > 760 = best rates Higher the score, cheaper the financing Credit Score: A number, roughly between 300 and 850, that reflects the credit history detailed by a person's credit report. The Fair Isaac Company is the organization that computes credit scores for the three credit bureaus: TransUnion, Experian, and Equifax. _____________________________________________________________________________________________________________________ Credit scores change constantly, so one peek won't do much good. Scores are built on the information in your credit reports, which does indeed change all the time. Pay down a credit card balance and your score goes up; apply for a new account and your score goes down. But most peoples' FICO scores are relatively stable, changing less than 20 points in any three-month period, so an annual look would at least help people understand their credit ballpark. Source: Pulliam-Weston, Liz, “Demand Your FICO Score Now!,” MSN Money, October 9, 2006.

The Cost of Borrowing Your Credit score: Your interest rate: Your monthly payment: 760 - 850 6.13% $1,313 700 - 759 6.35% $1,344 680 - 699 6.53% $1,369 660 - 679 6.74% $1,400 640 - 659 7.17% $1,462 620 - 639 7.72% $1,543 The example is for a $216,000 30-year, fixed rate mortgage. These ranges show how the interest rate and monthly payment increases as your credit score decreases

35% Payment History Late payments have the greatest negative impact. Recency & frequency are important too. Payment history (35%) -Aside from extreme events, like bankruptcy or tax liens, late payments have the greatest negative impact on your score. Recency and frequency of late payments count too. In other words, even though a 60-day late payment is not as risky as a 90-day late payment in and of itself, a 60-day late payment made just a month ago will count more than a 90-day late payment from five years ago.

30% Outstanding Balances Total balance vs. total available credit. Are you overextended? Outstanding balances (30%) - Evaluation of your total balances in relation to your total available credit on revolving accounts is one of the most important factors in the FICO score. Owing a great deal of money on many accounts or "maxing out" on various credit cards can indicate that a person is overextended, and is more likely to make some payments late or not at all.

15% Length of Credit History Number of years you’ve used credit. How long since you’ve used certain accounts. Length of credit history (15%) -Your score takes into account how long your credit accounts have been established in general, how long specific credit accounts have been established, and how long it has been since you used certain accounts.

10% New Credit Number of new accounts. Multiple requests reduce your score. New Credit (10%) -Research shows that opening several credit accounts in a short period of time does represent greater risk-especially for people who do not have a long-established credit history. Multiple requests will reduce your score because it looks like you are either trying to get a high amount of credit (possibly because of a cash flow problem) or that you are being rejected by lenders and having to apply elsewhere.

Credit Inquiries

10% Types of Credit Mix of: Revolving Credit Installment Credit Credit cards Installment Credit Car loan Home loan Types of credit (10%)-The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your score takes into account what kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have. Revolving Credit: Creditor places a credit limit for a given period, and the consumer can add charges as long as the credit limit is not exceeded and the account remains in good standing. Another name for open credit. Installment Credit: A loan that is paid in equal monthly installments with a fixed interest rate. Loan payments include principal and finance charges and are a form of closed credit.

How to Improve Your Score Pay all bills on time. Pay any delinquent bills. Lower your total credit card debt. Apply for new accounts only when necessary Check your credit reports for accuracy

Duration of Info on Report Trade: Sears, Macy’s 7 years from last activity Judgments or liens 7 years from filing. Chapter 7 Bankruptcy 10 years Medical: case by case The following shows how long information stays on your credit report: Trade (Sears, Nordstrom’s, Macy's, etc.) credit card companies or collections agencies stay on credit report for 7 years from date of last activity. Judgments or liens stay on credit report for 7 years from date it is filed. Chapter 7 bankruptcy stays on for 10 years. Medical is difficult and has to be handled case by case.

Changed how young adults receive certain types of credit 2009 CARD Act Changed how young adults receive certain types of credit To receive a credit card: Generally must be 21 years of age or older UNLESS Show documentation of sufficient income Have a co-signer

how much can you afford? (the 20-10 rule) Never borrow more than 20% of your yearly net income If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards. Monthly payments shouldn’t exceed 10% of your monthly net income If your take-home pay is $400 a month: $400 x 10% = $40 Your total monthly debt payments shouldn’t total more than $40 per month. Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.

Review Why is credit important? How do lenders find the credit history of individuals? What makes up credit history? What is FICO? What is a credit report What is the 20-10 Rule?

Assignment “How Much Credit Can They Have” worksheet ( www.practicalmoneyskills.com ) Reading a Credit Report “Caroline Blue” fefe