© January 23, 2013 Cities for Financial Empowerment Fund All rights reserved.

Financial Empowerment Center Counselor Training Curriculum Topic 3: Understanding a Credit Report

I 3 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. What are the different types of credit and why is credit important? What is a credit report? How does credit impact future financial goals? Questions to Think About

I 4 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. What is Credit? Credit is a trust relationship. A party such as a lender, a bank, merchant or credit card company, known as a creditor, gives you, the debtor, funds or makes payment on your behalf so that you can make a purchase or payment, with expectation that you will pay the creditor back in accordance with your agreement.

I 5 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Why is Credit Important? Credit is used to judge character and level of risk Potential employers and mangers Housing and rental decisions Lenders (home, car or business) Lack of credit Inconvenience No emergency options Bad credit Everything costs you more Fewer loan options

I 6 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. What Does Credit Actually Cost You? Assume an 18% interest rate AMOUNT OF PURCHASE MINIMUM MONTHLY PAYMENT 4% INTEREST YOU WILL PAY FINAL COST OF PURCHASE TIME TO PAY OFF $500$20$131.36$ Mos. $2,000$80$525.24$2, Mos. Assume an 18% interest rate

I 7 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Real Cost of Credit Terminology Interest: The amount a borrower pays to use someone else’s money Annual Percentage Rate (APR): The annual cost of using the credit for the year; the figure includes interest, transaction fees and service charges if any. This is the charge when a borrower carries a balance Annual Fee: The cost of having the use of a credit card, or having access to the use of the credit per year

I 8 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Terminology Finance Charge: This is the actual amount the borrower pays for using the credit for the year Origination Fee: The cost of setting up a loan; this usually applies in the case of a mortgage or real estate loan Loan Term: The period of time over which the borrower has to repay the loan Late Fees: The penalty that a borrower must pay if a payment is made late. This is in addition to the interest that is calculated.

I 9 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Minimum Payment: Usually at least 2% of the outstanding balance. Most creditors will set a minimum of $15 or $20/ month. Minimum payments have been rising recently. Grace Period: The number of days that a borrower will not have to pay interest. A good strategy is to pay off the balance within the grace period whenever possible. Terminology

I 10 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Benefits of Credit Emergencies Safety and Convenience Extras – bonus points/miles Tool for Managing Your Money

I 11 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Types of Credit Credit Cards/Revolving Credit: Credit limit decreases as account is used, and increases as balance is repaid. Installment Loan: Usually for larger purchases such as car loan or appliances. Payments are set at a fixed amount payable monthly until the full amount and interest are paid in full. Mortgages: A loan made in which the borrower’s collateral securing the loan is real estate. Student Loans (covered in separate module)

I 12 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Establishing Credit How to Build Credit History Establish savings and checking accounts Obtain credit cards and installment loans Establish a Banking Relationship for the Long-Term Will products and services offered fit my future plans? Handle your accounts responsibly Get to know your branch manager

I 13 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Potential Lenders & Creditors Triple C’s Character Capacity Capital

I 14 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. CHARACTER – Does the Borrower Appear Fiscally Responsible? A good credit report and score A good past history of paying on time A set of good financial and personal references CAPACITY – Does the Borrower Have the Ability to Repay? Is the applicant employed? Are there other sources of income? What are the applicant’s expenses (is there net income after expenses – refer to budget form from Session I, i.e. cash flow)? CAPITAL – Does the Borrower Have Capital? Does the applicant have any savings, or investments? Does the applicant have any collateral such as real estate?

I 15 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Your Free Credit Report Mail Write letters to the three credit bureaus: Experian, Equifax, and TransUnion requesting a free copy of your credit report. Your letter should include your:  Full name including middle initial and suffix (Jr., Sr., II, etc.)  Date of birth  Social Security number  Current mailing address  A prior address if your current address is less than 2 years  If you are married, separate requests should be made for husband and wife.  Proof of mailing address by copy of 2 utility bills. Telephone Online:

I 16 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. To Obtain Free Credit Report CREDIT REPORTIN G AGENCY ADDRESSTELEPHONE NUMBER WEBSITE ADDRESS EXPERIAN P.O. Box 2104 Allen, TX To obtain a report EQUIFAXEQUIFAX INFORMATION SERVICES LLC P.O. Box Atlanta, GA To request a report Customer Service TRANSUNIONTRANSUNION CONSUMER SOLUTIONS P.O. Box 2000 Chester, PA To request a report Customer Service

I 17 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Credit Score Score is not free FICO Score – Fair Isaacs Company Score Three Credit Bureaus’ Scores

I 18 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Score Determines Interest Rates FICO scores range Each credit bureau uses slightly different system, but are generally based on FICO

I 19 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Calculating Your Score 35%: Punctuality of payment in the past (only includes payments later than 30 days past due) 30%:The amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits) 15%: Length of credit history 10%: Types of credit used (installment, revolving, real estate) 10%:Recent search for credit and/or amount of credit obtained recently

I 20 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Reviewing a Sample Credit Report Merged report – shows information from all 3 bureaus Summary page

I 21 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved.

I 22 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Check to make sure addresses are yours Check employer information Aliases – maiden name, nicknames, adopting name upon citizenship, name changes

I 23 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Sample Credit Report Scores given by each company may vary based on scale and information available to them

I 24 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Merged credit score was 615 when information from all 3 reports aggregated Sample Credit Report

I 25 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Factors impacting score Balance on revolving loans too high Short credit history Too many active accounts with balance Not enough Installment Debt Experience Sample Credit Report

I 26 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Strategies for Credit Repair Immediately report any errors Start paying on time Severely delinquent payments – talk to creditors Obtain secured credit card

I 27 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. Correcting Errors To dispute or correct credit reports, make sure you utilize your 100-word statement Write to the Credit Bureau that supplied the information In your letter be sure to include: Full name including middle initial and suffix (Jr., Sr., II, etc.) Date of birth Social Security number Current mailing address If applicable, the name and account number of the creditor and item in question The specific reason for your disagreement with the disputed item Your signature

I 28 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. How to Repair Credit Passage of Time: Negative information reported for 7 years Chapter 7 Bankruptcies reported for 10 years Chapter 13 Bankruptcies reported for 7 years Criminal records – no time limit

I 29 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. How Do Credit Decisions Affect Financial Goals? Credit cards / Revolving credit; Installment loans; Mortgages; Student loans Creditors look for triple C’s – Character, Capacity & Capital Lack of credit allow for fewer loan options and no emergency outlet Credit provides safety and convenience and tools for managing your money

I 30 © January 23, 2013 Cities for Financial Empowerment Fund All rights reserved. How Do Credit Decisions Affect Financial Goals? Case Study (handout) # 2 How would counsel Marta and Bobby about their rights as consumers, and advise them on how to handle their credit card debt and why, applying the principles presented in class and in your reading.