Credit Records and Laws Chapter 17

Credit Records Credit History is the complete record of your borrowing and repayment performance. A credit bureau is a company that gathers, stores, and sells credit information to business subscribers.

When you open a new account with a business, they record your information and every time you use credit to make a payment, the business records the transaction. Once a month, the business electronically submits the accumulated data about your borrowing and repayments to the credit bureaus.

The credit bureau enters the information into your file and stores it under your social security number for ID. Local and regional credit bureaus can access those bureau networks to access files.

Credit Bureaus www.experian.com www.transunion.com www.equifax.com

Credit Report A written statement of a consumer’s credit history, issued by a credit bureau to its business subscribers. You can order a copy of your credit report for a small fee. If you are denied credit, you can get a free credit report if you ask within 30 days of being denied.

Types of Information Stored Any public information Failure to pay taxes, marriage, bankruptcy, divorce

The 5 C’s of Credit Character- Will you repay the debt? Character is a responsible attitude toward living up to agreements, often judged on evidence in the person’s credit history. If you have character, you pay your bills on time, and your credit history will show it. Creditors also use stability as a measure of character as well- if you have moved six times during the past year, they may see you as a credit risk.

The 5 C’s of Credit Capacity- Can you repay the debt? Capacity is the financial ability to repay a loan with present income. Before lending you money, creditors want to make sure that your income is sufficient to cover your current expenses each month plus the payment of the new loan.

The 5 C’s of Credit Capital- Is the creditor fully protected if you fail to repay? Capital is the property you possess that is worth more than 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 repayment of the loan.

The 5 C’s of Credit Conditions- What general economic conditions can affect your repayment of debt? The state of the economy can affect your ability to repay. If economy is slow and there is a chance you can lose your job, they may not want to loan money to you. They ask: How secure is your job? How secure is the company you work for?

The 5 C’s of Credit Collateral- What assets back up you promise to pay? Collateral is property pledged to assure repayment of a loan. Collateral protects creditors, making them more willing to lend to you.

Getting Started With Credit Begin With a Savings Account Open a savings account where they do not charge you a monthly fee or require a minimum balance. Open a Checking Account When you have enough money in your savings account to allow you a little “cushion” you can open a checking account. This will give you a convenient way to pay your bills when you have credit accounts and will serve as a record-keeping system for your budget.

Open a Store Credit Account Your parent or guardian may need to serve as a co-signer to help you open your first credit account- they are promising to pay if you fail to do so. When you make purchases, you can pay your bill using your checking account. Make small payments that you can afford to pay, and pay on time!

Get a Small Loan Take out a small loan from the bank that you use and use the money to buy something you really need. Pay back the loan as agreed. Make early payments if possible. Apply for a Credit Card With credit established for a few years, a part-time job, and a few credit references, you may now be eligible for a credit card.

Credit Ratings Credit bureaus give each consumer a credit rating- a measure of creditworthiness based on an analysis of the consumer’s financial history. A point system is common. The bureau assigns points based on factors such as amount of current debt, number of late payments, number and types of open accounts, current employment, amount of income, and so on. Business subscribers use these scores as part of their decision to grant or not grant credit.

Credit Ratings Another rating system rates consumers according to how reliably they pay back money borrowed or charged. Credit bureaus supply credit files (account balances, payment records) to their subscribers, and they make their own rating decisions.

Credit Ratings To earn an excellent credit rating, or A-rating, the customer pays bills before the due date, and is well established (has successfully used credit for several years), has not missed any payments, and has made larger payments than the minimum amount required. To earn a good credit rating, or B-rating, the customer must pay bills on the due date or within the grace period, and does not miss any payments.

Credit Ratings A fair credit rating is earned by a customer who usually pays all bills within the grace period, but occasionally takes longer. Late charges are sometimes applied. They are described as slow in paying but fairly dependable. People with a poor credit rating are usually denied credit because their payments are not regular. They miss some monthly payments, and have failed to entirely pay back a debt.

Credit Score 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, amount of income.  Credit score—your points added up, which tells potential creditors the likelihood that you will repay debt as agreed.

FICO Score FICO stands for Fair Isaac and Company. Their scores are the credit scores most lenders use to determine credit risk.  Each person has three FICO score, one for each of the three credit bureaus. As information changes, so does your score.  FICO scores affect the loan terms, such as interest rate, that you will be offered.  To calculate a FICO score, you must have at least one account open for at least six months.  Your scores may be different at each of the credit bureaus because of varying information collected and slight differences in the way the rating system is applied.

FICO Score Breakdown Payment History (35%) is rated based on how you pay your debts; the presence of bankruptcy, liens, or collections, and whether accounts are past due or paid as agreed. Amounts Owed (30%) is rated based on the amounts owed on accounts, amounts on specific types of accounts, lack of balances, and proportion of credit line used. Length of Credit History (15%) is rated based on the oldest account opened and the average age of all accounts. New Credit (10%) is rated based on the number of recently opened accounts and the number of recent credit inquiries. Types of Credit Used (10%) is rated based on the mix of credit accounts, such as credit cards, retail accounts, installment loans, mortgages, etc.

How Errors Are Made When a credit report contains errors, it is often because it is incomplete or contains information about someone else.

Credit Inquiries An item that indicates a business with a “permissible purpose” has requested a credit check.  Business can make an inquiry without your permission or knowledge, but usually these don’t count toward your score.  When you apply for a loan, mortgage, or other credit, you authorize the lender to check your credit. These inquiries, which are prompted by your own actions, will affect your FICO score.

Improving Your FICO Score To raise your FICO score takes time and patience. Pay your bills on time. If you have missed payments, get and stay current. Keep balances low on credit cards and revolving credit. Open accounts slowly.

Credit Reports Credit reports will contain these sections: Summary of Information- A summary of the negative and positive items. It tells the subscriber what to look for as they go through the information that follows. Negative items are those that could harm your ability to get credit. Accounts in good standing are those that are favorable to your credit. Public Record Information- this section lists information found in public records.

Credit Reports Credit Information- lists the credit accounts, including department stores, credit cards, and other loans, that have been reported to credit bureaus. It reports details such as each account’s high and payment status. Account Detail- shows the monthly balances of accounts and lists the credit limits.

Credit Reports Requests for Credit History- lists every business that has sought information from your credit file- requests from potential employers, creditors, insurance companies, and others, along with requests that you have made. Personal Information- lists the personal information you have given when applying for credit or that is available through public records.

Credit Laws The government has passed laws to protect consumers from unfair credit practices.

Consumer Credit Protection Act (1968) Known as the Truth-in-Lending Law, requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed. Lenders must disclose the finance charge and the annual percentage rate (APR). The law also requires a grace period of three business days in which purchasers can change their mind about a credit agreement, and limits the consumer’s liability to $50 after the consumer reports a credit card lost or stolen and it has been used.

Fair Credit Reporting Act If you are denied credit based on a credit report, inaccurate information in your file may be the cause. You have a right to know what is in your file and who has seen your file. A listing of requests made for your file for credit purposes in the last six months, and for employment purposes in the last two years, must be available to you. You may see your credit report for free within 30 days of credit denial.

Fair Credit Billing Act Creditors must resolve billing errors within a specified period of time. A statement is an itemized bill showing charges, credits and payments posted to your account during the billing period. Creditors need to have a written policy that would outline what would happen if there were charges on your statement that you did not make. If you believe there is an error, you should write to the creditor and include the account number and detailed information. They must acknowledge your complaint within 30 days and correct it or show why it is correct within 90 days.

Equal Credit Opportunity Act (1975) Prevents discrimination in the judgment of creditworthiness. Discrimination is treating people differently based on prejudice rather than individual merit. Credit cannot be denied solely because you are a woman, single, married, divorced, etc. Credit cannot be denied specifically because of religion, national origin, race, color, or age Credit cannot be denied because you receive public assistance, unemployment, social security, or retirement benefits.

Credit applications can be oral or written Credit applications can be oral or written. Creditors are prohibited from asking you certain questions, like Do you plan on having children? What is your ethnic origin? A creditor may not discourage you from applying for credit for any reason prohibited by the act. The act also states that creditors must notify you of any action taken on your credit application within 30 days of submission. If you are denied, it must be in writing and you have the right to appeal.

Fair Debt Collection Practice Act Eliminates abusive collection practices by debt collectors- people or company hired by a creditor to collect the overdue balance on an account. The law prohibits the use of threats, obscenities, and false and misleading statements to intimidate the consumer into paying. It also restricts the time and frequency of collection practices, like telephone calls.