Transcript Credit for You and Your Project

Credit for You and Your Project
© 2001, Dr. B. C. Paul
Your Personal Credit
• Each person (or couple) is tracked by 3
credit reporting agencies (CRAs)
– Most businesses or organizations extending
credit are members of one or more
– These businesses send in information about
your account or payment history
• The information on your report is
mathematically rated by Fairchild and
Issacs Company (FICO)
– Your credit rating or score
Personal Credit
• Many Lenders also have you fill out
applications with information not on your
credit report
– Your current income
– Your savings and other assets
• Information is used to determine credit
worthiness
– Can determine if you will get credit
– Is used to fix your interest rate/ security deposit
Use of Credit Ratings
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Mortgage Lenders (buying a home)
Auto Lenders (buying a car)
Credit Cards (used to set limits and interest rates)
Some Rental Organizations
Some Utility and Service Providers
Potential Employers
Insurance Companies
Failure to maintain a good credit rating can not
only raise your interest or force you to make big
security deposits but may determine your ability to
obtain even critical services
What's in a Credit Report
• Your Name, Address, Age, Social Security
Number, former addresses, your employer
• Every Credit Card you have ever had, Every
installment loan you have had, Every mortgage
you have ever had
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Your credit limits
Your initial loan or credit amounts
Your current account balances and payments
The number of times you have been late on a payment and how
much for the last 7 years
– A month by month status statement on each account for the last 2
years
They Know That About Me?
• Any account that is delinquent, or has been
delinquent and when it was delinquent (up to 7
years) and how much you owed.
• Any account that has been turned over to
collection or written off - when and how much (up
to 7 years)
• Any public record items such as liens filed against
you, court judgments ordering you to pay (how
much and when), any bankruptcies for up to 10
years
The Fair Credit Reporting Act
• You have the right to a free copy of your
credit report when you are preparing to seek
a job or when your report is inaccurate due
to fraud
• You may obtain a copy at any time for a fee
of $8/CRA or less
• Anyone who uses information from your
report to deny you credit must indicate the
name and address and phone number that
was a source for the information.
FCRA
• You have the right to challenge any
inaccurate or incomplete information and
the CRA has 30 days to investigate
– The CRA must remove or correct any inaccurate information
– The CRA must remove any information that cannot be verified
– The CRA must provide you with a report of findings and a free
copy of your report if there is a change
– You may rechallenge with additional information
– You may add a statement of your dispute to information not
changed
FCRA
• Access to your file is limited
• Many report accesses require your written
consent
• Some access to summary information is
provided to insurers and credit card
companies
– Used for the unsolicited offers you get in the
mail
– You can ask your name be taken off these lists
(CRA must comply for 2 years)
The CRAs
• Equifax - 1-888-202-4025
• Experian - 1-800-831-5614
• Trans Union - 1-800-899-7132
Your FICO Credit Rating
• Fairchild and Issacs has developed a system
of 10 score cards for each credit bureau
– These score cards are compared against a data base
– The score cards are used as a basis for assigning you a
risk score
• Current Area of Consumer Group Challenge
– You have no right to know your score
• consumer group challenge - how can you negotiate on equal
ground with others if they have critical information that you
don’t have?
– The algorithms and procedures are a secret
FICO Credit Ratings
• Not all organizations use FICO
– local banks may still look at the CRA reports
and determine for themselves
– Use of FICO scores in national banks and
organizations is becoming almost universal
• FICO Credit Ratings do not provide all the
information that mortgage or other lenders
commonly use in credit decisions
What Is Known about FICO
• Each individual has a score between 350
and 900
– Big numbers are good - low numbers are bad
• Numbers above 650 or 680 (some 730) will
usually put you in A+ rating range
– You will be able to get faster hassle free
closings
– You will be able to get the best interest rates
– (This is the issue with witholding info - how can you know when to
negotiate hard or shop around)
FICO Scores
• If above 620, but below A+ line
– You may be cut out of some of more cautious
lenders
– Others will probably take a hard look - ask a lot
of questions - require explanation letters
• It could at least slow you up with the hassle factor
– You may still be able to get good the best
interest rates (but the pool will be more limited
and harder to fish)
Sub-Prime
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If less than 620 your sub-prime
Your interest rate will be higher
Your choices more limited
Sub-Prime lenders are more likely to play
tricks and games
Statistical Reasons for Caution
Disruption Risk by Credit Score
120%
100% 87%
80%
60%
40%
20%
71%
Population
51%
Default Risk
31%
Can see why
many break at
around 650 to
680. Get 70% pop.
With < 5% risk
of disruption.
% above
15%
5% 2% 1%
<4
50 99
05
55 4 9
05
60 9 9
06
65 4 9
06
70 9 9
07
75 4 9
07
80 9 9
090
0
0%
Credit Score
Disruption means
account falling 90
days behind in a
2 year period
Guessing Your FICO Score
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Five Basic Areas are used in your rating
Previous Credit History - 35%
Your Debt Level - 30%
Your Time in Use - 15%
Your Types of Credit - 15%
Your Pursuit of Credit - 5%
Previous Payment History (35%)
• CRA’s don’t consider payments late till the
bill is 30 days past due
– Don’t use that as an invitation to push the limit
(checks really do get lost in the mail)
– Any past due payment will be on your record
for 7 years
• CRA’s will track
– 30 days past due, 60 days, 90 days, to collection
or bad debt
Payment History Manipulation
• Your best choice is pay all bills on time
(don’t have any dings)
• Avoid being real late
– a couple 30 days late probably won’t kill you
– more than two will start hurting (especially in
the last 2 years)
– 60 days late is much worse than 30
– 90 days - many lenders will question whether it
will be repaid at all
– Don’t default / that’s real bad
Late Payments
• Timing of late payments
– Current status is important - if you have accounts 90 days overdue
now you'll be clubbed
– Last 6 months is very bad
– Last 12 months is bad
– Last 24 months is not good
– The will know for next 7 years
– Screw-Ups will haunt you a long time / if you have to rebuild
you’ll be suffering for at least a year or two
• Picking Late Payments
– late on large transactions is worse than late on small transactions
– All your accounts going to heck at the same time is worse than
scattered incidents
• If you get in trouble keep bailing what you can
Kisses of Death
• Bankruptcies - the CRA’s will toast you for
10 years (and so will everyone else)
– There are a lot of credit services and even
lenders that will try to help you rather than let it
go here
• Take them up on it
• Mortgage Foreclosures
• Vehicle Repossessions / other Repos
Debt Level (30%)
• What FICO Looks at
– Report shows credit limit on Revolving
Accounts (Credit Cards - Department Store
Cards) - also shows balance and payments
– FICO looks at the ratio of current debt to the
limit
• on a collective basis what % of your credit line is
tapped
– over 50% tapped is bad
– for highest ratings even over 20% will impact
• looks for number of cards that are maxed out or
nearly so - the more the worse
Debt Level
• Other FICO factors
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Number of credit lines
Age of credit lines
To many credit lines reduces rating
Large numbers of recently opened credit lines
raises questions about your intentions
• your CRA report tells when every account was
opened
Debt Level - The Other Shoe
• FICO doesn’t know your income - your
credit application will
– Your credit report will tell all your monthly payments
(and your credit application is likely to ask as well)
– Most home loans want your monthly payment to be less
than 27-33% of your gross income
– Most want less than 38% of your income going to fixed
obligations
• Major purchases Cars/Furniture just prior to going for a home
loan will likely reduce your buying power
• High installment and credit card debt will limit your mortgage
options.
Too Many Accounts
• FICO will cut you some
• Lenders may check your credit limits on
unsecured lines and calculate how much
potential debt you have
– especially a problem with a lot of recently opened
accounts
– They may ratio your potential debt level against your
income - even if the credit cards have no balances
• Warning - make sure credit cards are officially canceled or they
may stay on your credit report even though you don’t have the
card any more
Time in Use (15%)
• Length of Credit History is important
– To even be rated two basic conditions to meet
• Your file must not indicate that you are dead
• You must have at least one account with undisputed
reported activity in last 6 months
– More extensive loans probably want at least 3
years of credit history
– Seven years is short
– 30 year is optimal
Need to Build Credit
• While handling credit badly will sink you,
refusing to play with them will too.
• Need to begin to build early with a plan
– Credit cards often target College students
• They want to trap you in the debt wagon
• Can make to your advantage by building a good
credit history along with a good college transcript
• Remember - your credit report lists opening
date for every account
History Beyond FICO
• Banks usually inquire about former addresses
– Some of this info can be checked on your credit report
– Moving around too much could indicate you are unstable or could
get hard to find if your debt started going bad
• Also inquire about employment history
– Too many job changes hurt
• you may be unstable or have low enough standing in your
company to be first to go in a slowdown
– Changes from one line of work to another hurt more
than changes within a line of work
Types of Credit (15%)
• Lenders like to see good performance with
more than one type of credit
– Just getting bunch of credit cards is not
complete
• These are termed revolving credit
• Also want to see performance on
installment loans
– These are regular payment loans
• car and furniture loans
Mortgage
• Herby and Hanna Housing may have been
building more than equity by buying a
house
– There are some first time home buyer
advantages - one risk of buying a house for
temporary use is it may use your first time
buyers position.
Bad Credit Types
• Taking sub-prime loans tends to lower your
score
– Puts you in the statistical category with people
in some degree of distress
• Classic example is the debt consolidation
loan
– Occurrence of debt consolidation loans is
usually interpreted as you got yourself strungout.
Pursuit of Credit (5%)
• Every time you pursue credit it goes on
your record
– Lenders get nervous if they see too many inquires (could mean
your in trouble)
– Often ask if you have ever been turned down
• Trick for lenders is to tell the difference
between a conscientious shopper in search
of best deal and the distressed desporado
– First 30 day inquires are ignored (you can go out and shop without
sinking yourself)
– Next 14 days multiple inquires are counted as 1
Figuring Your Score
• Information tells you what to avoid and
some of the touch stones that earn you
Brownie Points
• Obvious way to handle is do no bad and do
all the good and you’ll have a good score
• By with-holding algorithms it becomes
impossible to know quantitatively how bad
the “little?” blemishes may be
FICO did Disclose Part of
Algorithm
• Where do you live
– Own your own home - give yourself 25
– Rent - give yourself 15
– Other arrangement - give yourself 10
• How many years have you been at your current
address
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Less than 1/2 year - give yourself 12 points
.5 to 2.49 years – give yourself 10 points
2.5 to 6.49 years – give yourself 15 points
6.5 to 10.49 years – give yourself 19 points
10.5 or more – give yourself 23 points
Partial FICO Score
• What is Your Occupation
– If you’re a Doctor, Lawyer etc. (Professional) then 50
points
– Semi-Professional – 44 points
– Manager – 31 points
– Office Worker – 28 points
– Blue Collar – 25 points
– Retired – 31 points
– Other – 22 points
FICO Continued
• Years on your present job
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< 6 months - 2 points
6 months to 1.49 years – 8 points
1.5 to 2.49 years – 19 points
2.5 to 5.49 years – 25 points
5.5 to 12.49 years – 30 points
12.5 and greater – 39 points
Retired – 43 points
FICO Cont.
• Do you have reports on active credit cards
(do you have a credit card – not debit card)
– No - Give yourself 0 (you refused to play with
us)
– Department Store Card – 11 points
– A Visa MC or American Express – 16 points
– Both – 27 points
What Bank Records Show
• Do you have a checking account – 5 points
• Do you have a savings account – 10 points
• Do you have both a checking and savings
account – 20 points
• No checking or savings- but other bank
types of accounts (CD etc) – 11 points
Debt to Income Considerations
• How much of your monthly gross income is
tied up in credit card, mortgage, or
installment debt obligations
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< 15% - 22 points
15 to 25% - 15 points
26 to 35% - 12 points
36 to 49% - 5 points
50% + - no points for you you notty boy
Number of Inquires into your
Credit last 12 months
• Number inquires from banks, department stores
(lenders)
• Special rules – last 30 days don’t count
– Any number of inquires inside 14 days is 1
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No inquires – 3 points
1 inquire – 11 points (it pays to play)
2 inquire – 3 points
3 or 4 - subtract 7 points
5 to 9 - subtract 20 points
How Long Have You Been on
File?
• < 6 months 0 points (in fact they prob won’t
rate you period)
• 1 to 2 years – 5 points
• 3 to 4 years – 15 points
• 5 to 7 years – 30 points
• 8 plus years – 40 points
How Many Revolving Accounts
do you have open?
• These are credit cards or revolving lines of
credit at stores
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0 open - 5 points
1 to 2 - 12 points (it pays to play)
3 to 5 - 8 points
6 + minus 4 (what you planning to do with all
those cards?)
% of Credit Lines Used
• Take take the total of the credit limits on your
cards
• Add up all your outstanding balances
• Divide your outstanding balances by your credit
limits to find out % your using
• <15% - 15 points
• 15-30% - 5 points
• 31-40% minus 3 points
• 41-50% minus 10 points
• >50% minus 18 points
Worst Negative Remark
• No record – 0 in fact they probably won’t rate you
because you didn’t play on their tread mill.
• Any default or collection turn over minus 29 (if
its bankrupcy they’ll get you elsewhere)
• Any late payments minus 14
• 1 satisfactory line – a creditor with all good
history – 17 points
• 2 satisfactory lines – 24 points
• 3 satisfactory lines – 29 points
Dirty Credit Rating Est.
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Weighting is wrong
Add up your number multiply by 2.8
900 would be perfect
700 would be average
650 or 680 is a cut-off on sub-prime lending
On-Line Service Options
• Some banks offer web site features where you
input information and they will use their own
“quick and dirty” algorithms to rate you
– Often just get A rating or sub-prime etc.
• programs may make suggestions on things that could hurt you
• There are fee services that will get you a copy of
your report and will then review the report and
rate you
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Won’t give you FICO and often rate on a 100 scale
May include rating your relative ranking
Will include much more detailed specific suggestions
Services can be almost instant and on-line