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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.