1. Understanding Credit Reports
Family Economics & Financial Education

2. 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

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

4. 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

5. 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

6. 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

7. 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, per month
If salary is higher, must file Chapter 13
Must get budget management and debt counseling before debt discharged

8. 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

9. Credit Reporting Agencies
Keep a record of a consumer’s credit transactions and compiles credit reports
The three main credit reporting agencies are:
Equifax
(800)
Trans Union
(800)
Experian

10. Requesting Credit Reports
Consumers can request his/her credit report any time
Can obtain one free credit report annually from all three credit agencies
Additional copies can be purchased for no more than $9.50
Consumers should check credit report once a year for accuracy
Mistakes are common

11. 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

12. 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

13. 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

14. 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

15. 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 range

16. 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

17. 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.

18. 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

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