Understanding Credit Reports Family Economics & Financial Education

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

Why is it important to Building a Credit History To be able to purchase items on credit house, vehicles, appliances Renting an apartment Emergencies

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

How can you harm your credit? Debit/Credit cards over the limit Routinely paying bills late Having a criminal record Holding a large amount of debt Holding an unreasonable amount of unused credit Defaulting on a loan Obtaining a high number of credit inquiries Carrying many credit/store cards Having a public record of bankruptcy

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

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

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

Credit Reporting Agencies Keep a record of a consumer’s credit transactions and compiles credit reports 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

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

Who can Request your report? Credit inquiry- and entry on a credit report that shows a business has requested a copy of 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

Mistakes in Credit Reports More than 25% of the credit reports checked in a study contained errors Source: Federal Trade Commission The two main errors 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

Fair Credit Reporting Act 1971 Consumers have the right: To know the information in their credit report To have errors corrected in their credit report

Correcting Errors on Credit Reports Steps 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

Credit Scores A mathematical algorithm 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 be 650-700 range

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

Five Standard Categories of Scores 35%-Payment history - Timely manner in which a consumer pays debt 30%-Outstanding debt -Amount of debt currently held 15%-Credit history -How long the consumer has held credit accounts and how often they are used 10%-Pursuit of new credit -How much credit is acquired over the length of the consumer’s credit history 10%-Types of credit in use -May include credit cards, gas cards, store cards or accounts, loans, etc.

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

Conclusion Build and maintain positive credit! Check credit reports annually for errors! Act financially responsible! (Get assignments in, Sproul!!)