Transcript Slide 1
Samantha
Davis
State Farm Financial Literacy Lab
Credit Basics
April 21, 2011
The financial downturn of the United States is linked to the
careless lending practices of the financial institutions.
A credit report contains detailed information on a person’s credit,
including identifying information, credit and loans, bankruptcies and
late payments, and recent inquiries. It can be obtained by prospective
lenders with the borrower’s permission, to determine his or her
credit worthiness.
http://money.howstuffworks.com/personal-finance/debt-management/credit-report1.htm
Personal
Identifying
Information
name, current and previous address, social security
number, telephone number, birth date, your current and
previous employers, and your spouse's name may be
included as well
Credit
History
Bill-paying history with companies that have granted you
credit. Account information such as: date opened, type
of account, credit amount extended, monthly payment
amount, etc. Information about late payments, closed,
charged off, or paid off account.
Public
Records
Information that might indicate your credit worthiness,
such as tax liens, court judgments and bankruptcies.
Report
Inquiries
All credit granters who have received a copy of your
credit report and others who were authorized to view it.
Lists of companies that have received your name and
address in order to offer you credit.
Dispute
Statements
The report may also include any statements you've made
disputing information on the report. Most credit bureaus
allow both the consumer and the creditor to make
statements to report what happened if there is a dispute
about something on the report.
http://money.howstuffworks.com/personal-finance/debt-management/credit-report1.htm
A credit report does not include:
information about your income
checking or savings accounts
bankruptcies that are more than 10 years old
charged-off or debts placed for collection that are more than
seven years old,
gender
ethnicity
religion
political affiliation
medical history
driving record
criminal records
Your credit score is generated by information on your credit report, but is
not part of the report itself.
http://www.equifax.com/credit-information/credit-report
Fair Isaac Corp. developed the first credit score as well as the
Classic FICO score.
There are currently three major credit bureaus in the United
Sates. They provide different credit scores as the data they
collect are different and their method of FICO scoring is also
different.
Equifax
Experian
Transunion
Beacon Score/
Pinnacle Score
Experian/Fair
Isaac Risk Model
Empirica Score
Classic FICO
Score
Plus Score
Transunion score
300 to 850
330 to 830
150 to 934
http://www.scoretruth.com/basics/range.php
35%
How you pay your bills.
30%
Amount of money you owe and the amount of
available credit.
15%
Length of credit history
10%
Mix of credit
10%
New credit applications or inquires.
100%
TOTAL
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
Score
Delinquency Rate
300-499
Percentage of
Population
1
500-549
5
71%
550-599
7
51%
600-649
11
31%
650-699
16
15%
700-749
20
5%
749-799
29
2%
800 and higher
11
1%
87%
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
FICO Score
Grade
Typical Mortgage Rates
*
720-850
Excellent
A (e.g., 6.2%)
700-719
Very Good
A + 0.13%
675-699
Good
A + 0.65%
620-674
Fair
A + 1.80%
560-619
Bad
A + 4.30%
500-619
Very Bad
A + 5.00%
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
The three major credit reporting bureaus are currently involved developing
and allowing for restricted use of an alternative credit rating system called
Vantage score. It ranges from 501 to 900. Your personal score is transformed
into a letter grade.
Score
Grade
901 – 990
A
801 – 900
B
701 – 800
C
601 – 700
D
501 – 600
F
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
About 90% of auto lenders do not actually use classic FICO credit scores.
Instead they use auto credit score. Due to this, there are individuals with
car loans that are not necessarily eligible for credit cards. The theory behind
this is that, people are more inclined to maintain good payment history in
regards to auto loans. Studies have shown that individuals with low credit
scores will continue payments while deteriorating their classic FICO score by
defaulting on other payments.
http://www.smartcredit.com/blog/2010/05/01/what-is-an-auto-credit-score/
Factors affecting auto score
An auto loan or lease sent to collections
Any late payments on an auto loan or lease
An auto loan or lease settled for less than owed
A repossession by the lender
Previous two year overall credit
Great or Excellent
775-850
Good or Very Good
685-774
Normal or Average
615-684
Below Normal or Poor
515-614
Bad or Very Bad
350-514
http://www.smartcredit.com/blog/2010/05/01/what-is-an-auto-credit-score/
An insurance credit score is not a measure of credit worthiness
but instead a assessment of risk. Some information from your
credit report such as (age of oldest account, number of inquiries
in 24 months, ratio of total balance to total limits, number of
open retail credit cards, number of revolving accounts with
balances greater than 75% of limits, etc.) are included in the
calculation of the insurance credit score. The remainder of
insurance score is calculated by insurance claims and
profitability data.
Insurance credit scores are unique to the insurance company and
each line of business (example auto or home).
It is very possible for someone with a high classic FICO score to
have a low insurance credit score.
http://en.wikipedia.org/wiki/Insurance_score
Everyone is entitled to a free annual credit report or a free credit report
after being denied credit.
You can retrieve your credit report and credit score at Myficoscore.com or
at the major credit bureaus
Before shopping for credit, pull your own free credit report (it does not
affect your score negatively) and show lenders to see if you are credit
worthy according to their lending standards.
If your shopping around for lenders through different companies in the
same industry over a span of 14 days then the inquiries will only affect
your credit score as if it was only one inquiry.
Closing unused accounts lowers your credit score so its best just to leave
it open.
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
Diversifying your types of credit will improve your score.
The fastest way to increase your credit score is by staying within
the 10% margin of utilization. Balance (divided) by Credit Limit =
percentage.
To establish credit it is a good idea to become an authorized
user on a responsible person’s account. The authorized user has
no legal responsibility for the debt as oppose to a Joint or CoSigner accounts. If this account starts to report negatively it is
also easier to remove these types of credit from the credit
reports by either contacting the creditor and requesting
termination of the relationship; or disputing through the CRAs.
Be certain that the lender reports this information to the credit
bureaus.
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
Do not apply for credit you do not need or apply for credit if you know you
will be denied.
If your credit life is relatively new do not open numerous accounts in order
to build credit. This looks risky to lenders. It will also lower your average
account age which has an effect on your total credit score.
If you find yourself unable to pay back your debt be careful of debt
consolidation or debt settlement companies. If you decide to settle your
debt the negative report will take seven years to be removed from your
credit report and your credit score will be substantially lowered. You may
also have to pay income taxes at the end of the year for the discounted
portion (balance – settlement = discounted portion) if the amount is $600
or greater. If you decide to declare bankruptcy it will take 10 years for the
negative information to be removed from your credit.
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
For your free credit report go to:
https://www.annualcreditreport.com/cra/index.jsp
For more information on credit go to:
http://www.myfico.com/Default.aspx
You can access your credit score at either website with the conditions of a
7 day free trial of credit monitoring. They will ask for your credit card
information in the event you do not call to cancel during the free trial
period.
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169
Checking Accounts
Savings Account
Money Market Accounts
CD’s, Certificate Deposit, Time Deposits
Basic or no frill accounts - Many institutions offer a type of bank
account that provides you with a limited set of services for a low
price
Totally Free Accounts
Interest Bearing Accounts
Availability of funds disclosures.
Extended Hold
Cut over time/ Turnover
Posted Balance and Available Balance
Maintenance Fees
Minimum balance accounts
Interest Bearing accounts
NSF, O/D, and Unavailable Overdraft fees.
Return item fees
Debit and Credit charges posted to debit cards.
ATM charges
International charges.
Fraud or Identity theft.