MoneyCounts: A Financial Literacy Series FICO Score – Credit Risk 11-A Grange Building University Park, PA 16802 financialliteracy.psu.edu finlit@psu.edu 814-863-0214

Description FICO credit score is used as the standard measurement for extending other credits, so it affects you as a consumer. To apply for and get approved for a new line of credit, a credit card, or any loan, the lender uses your FICO credit score to (a) make sure you qualify, (b) calculate your interest rate and annual fees, and (c) calculate down payments. FICO credit score ranges 300-850: The higher the grade, the better off the terms of loans!

Learning Outcome Understand the impact of FICO credit score on consumer credit risk measurement Understand Credit Reporting Agencies function Understand how FICO credit score is calculated Explore ways to protect, improve, or repair FICO credit score

What is FICO The Fair Isaac Corporation (FICO) Consumer credit risk measurement tool Three digit score (300-850) A consumer financial grade The base for all lending credit decisions

Why bother? FICO Ability to secure new loans (mortgage, car loan) Ability to get additional credit (credit cards) Affects ability to secure new loans Mortgage, car loan Affects ability to get additional credit Credit card Affects the interest rate received on major purchases on credit Impacts long term financial decisions FICO The interest rate received on major purchases on credit Long-term financial decisions

When does it matter most? Before you embark on a major purchase Before you apply for additional credits At least one year prior to making significant long-term financial purchases You should keep a good credit report and a high FICO credit score all the time, but you will need it most: Before you embark on a major purchase Before you apply for additional credits At least one year prior to making significant long-term financial purchases

What makes the score? FICO Payment History Credit Account Utilization Mix FICO Credit Inquiries Credit Age

Key terminology Credit reporting agencies (CRA) Equifax, Experian, TransUnion Credit report Entitled by law to a free copy from each CRA once each calendar year Credit history The need to establish credit Credit score Financial grade (300-850)

Function of CRAs Follow, record, analyze, and report every credit- based financial transaction by consumers Credit Reporting Agencies Provide credit information

Who sends CRAs the information? Credit Reporting Agencies Credit cards companies Who sends them the information? Credit cards companies Lending institutions Collection agencies Consumer goods providers, etc., Lending institutions Collection agencies Consumer goods providers

Types of credits Revolving credit Charge card Credits Service credit Installment credit

How is FICO calculated? Credit Inquiries (10 %) Credit Age (15 %) Payment History (35 %) Credit Utilization (30 %) Credit Age (15 %) Credit Inquiries (10 %) Credit Mix

What hurts FICO? Missing payments Late payments More revolving credit Maxing out credit cards Opening many credit cards Getting loans Defaulting on loans Defaulted accounts Bankruptcy

What does NOT affect FICO? Length of residence Income, cash saving, investments, assets Length of employment Occupation

Changes to calculating FICO Cash balance in saving and checking accounts will be included in calculating FICO credit score starting 2019 FICO will start caring how much money you have in addition to how you manage your money! Keep enough in your saving and checking accounts as minimum balance Pad your emergency fund and use that as minimum balance in your checking account

How do I protect FICO score? Adhere to respecting the factors used to calculate the score! 1 Establish credit mix 2 Choose a few credit cards and keep them overtime 3 Pay bills on time and in full 4 Never max any credit limit (use only 30% of the capacity credit utilization) 5 Refrain from filing many credit applications

How do I improve or repair FICO Until satisfied Indefinitely FICO Positive information Child support/ loan defaults 7 yrs 10 yrs Bankruptcy (Chapter 7) Negative information

How do I protect credit information From 3 free reports each year (total) you can get all at the same time or one every 4 months from each CRA You do NOT get FICO score, you only get the report - Free FICO score *Click the icons for the hyperlinks

Accuracy of information What to check for? Accuracy of information Timely of information Protecting your identity Correcting reporting errors Validating positive information Evaluating credit mix Negative should drop off in 7 years Child support and student loan until satisfied Bankruptcy 10 years

Tips to protect yourself!

MoneyCounts: A Financial Literacy Series Comments and questions 11A Grange Building University Park, PA 16802 financialliteracy.psu.edu finlit@psu.edu 814-863-0214