2. Workshop Goal Learning Objectives
Provide usable information to help you manage and protect your credit worthiness.
Learning Objectives
Understand the Principles of Credit
Learn How Credit Affects Financing

3. Credit Concepts Quiz
What do lenders such as mortgage brokers and other creditors use your credit report and score for?
What are the three “C s” that a creditor considers when determining your approval for a loan?
Who has created the credit scoring formulas that lenders use for determining credit scores?
You are entitled to a free copy of your credit report every ?
How long will most items remain on your credit report?
Your credit affects your life in which of the following areas?

4. The 3 C’s of Financing After 1980: Before 1980: Collateral Capacity
Assets Securing a Loan
Income and Years of Employment
Relationship With Banker
After 1980:
Assets Securing a Loan
Debt to Income Ratio
Credit Score
Collateral
Capacity
Character

5. The 3 C’s – What Changed? What Changed after 1980?
Mortgage loans were grouped together into investment portfolios and sold on Wall Street.
Investors then required that the loans in the portfolio met STANDARDIZED parameters.
Credit scores became the method of standardizing a borrower’s Character.
Today, most financing has become credit-score driven, making “managing our credit worthiness” a necessity.

6. These figures are based on a mortgage loan of $100,000 for 30 years
The Cost of Bad Credit
These figures are based on a mortgage loan of $100,000 for 30 years

7. The Role of the Credit Bureaus
TransUnion, Equifax, & Experian
Profit-making companies
Gather data about consumers from creditors and public records depts.
Sell consumer data to the financial industry in the form of credit reports.
Their Affiliation with the Financial Industry
The credit bureaus’ customers are financial institutions (banks, creditors).
Financial Institutions want to avoid lending to bad credit risks.
Credit bureaus protect financial institutions by reporting ANY “potentially” negative credit data about consumers – often resulting in credit reporting errors.
What Does This Mean?
Credit bureaus have no incentive to correct errors (which hurt scores). Creditors prefer more errors than less to assure they are lending to good credit risks.

8. Errors In Your Credit Report
30% of all credit reports contain “serious” errors that result in the denial of credit, such as:
Paid items still showing an unpaid balance
Medical items sent to collection prior to insurance payment
Someone else’s items reporting; people with similar names or family members
Items reported in bankruptcy still showing balances owed

9. What’s In Your Credit Report?
Personal Information
SSN, Driver’s License, Birth Date, Employment
Information, Previous Addresses, and Name Aliases
Trade Lines
Open and Closed accounts
Collections, Bankruptcies, Judgments, & Late Payments
Inquiries
All positive and negative accounts report for 7 years from the date of last activity, excluding bankruptcies (10 yrs) and unpaid tax liens (15 yrs)

10. Score distribution among U.S. population
Credit Scores
Scores range between
Excellent Credit: 700 and above, excellent interest rates
Mediocre Credit: ~600 to ~700, loan qualify cutoff
Bad Credit: ~600 and below, need restoration
Score distribution among U.S. population

11. Who Is FICO? Fair Isaac Corporation (FICO) Established in 1956
Creates risk models (formulas) used by the financial industry to generate credit scores
Risk model formulas are trade secrets of FICO and are not shared with financial institutions or credit bureaus
Different risk models (formulas) are used for different types of financing, generating different scores

12. Key #1 - Payment History Payment History
How well we make payments on time in the past 24 months
35% of score
Considers positive accounts
Such as: auto loans, credit cards, mortgage loans, etc.
Considers negative accounts
Such as: collections, judgments, bankruptcies, late pays, etc.

13. Key #2 - Utilization Ratio
Ratio of total credit card debt to credit limit should be no more than 30%.
Closing accounts with high credit limits will increase your utilization ratio and decrease your credit score
Example: $3,000 of debt with a $10,000 credit limit = 30% utilization ratio

14. Key #3 - Credit Inquiries
Inquiries that DO affect credit score: HARD inquiries”
Reported when applying for credit
Auto and mortgage inquiries in any 14 day period count as one inquiry
Recent inquiries (prior 1-2 months) have the most impact on scores
Impact score less than 5%. (Rarely more than points)
Inquiries that DON’T affect credit score: SOFT inquiries
Your own requests for your credit report
Promotional offers
Your current lenders and collection agencies
Prospective employers and insurance companies

15. Credit Counseling Ruins Scores
Credit Counseling Companies:
Negotiate with creditors to make partial payments and lower interest rates
Stop credit harassment through the limited power of attorney
The Problem:
Part of each payment pays counseling fees, so less money is used to pay down the balance
Payments REPORT AS LATE on credit reports
Viewed as a chapter 13 bankruptcy by many lenders
IT IS NOT DEBT CONSOLIDATION

16. Thank You For Your Time! Opt-In Form QUIZ ANSWERS
Fill out top half of form to receive our newsletter
Fill out bottom half if you’d like to meet about any of the related topics.
QUIZ ANSWERS
(B) & (C) Credit scores affect interest rates and down payments. Income is not reported.
(C) Character, Capacity, Collateral
(D) Fair Isaac Corporation
(C) 1 free credit report every 12 months
(C) Most items remain for seven years.
(A), (B), (D) Investing does not require credit.
Next Workshop:
How to Improve Your Credit Score
How to Protect Your Credit and Identity