understanding_credit
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1.4.2.G1
Understanding
Credit
1.4.2.G1
The Credit Process
Credit – when goods, services, and/or money are received in exchange
for a promise to pay back a definite sum of money at a future date.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 2
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Advantages
• Able to buy needed items now
• Don’t have to carry cash
• Creates a record of purchases
• More convenient than writing checks
• Consolidates bills into one payment
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 3
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Disadvantages
• Interest (higher cost of items)
• May require additional fees
• Financial difficulties may arise if one loses track
of how much has been spent
each month
• Increased impulse buying may occur
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 4
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
What Lenders Look For—
The 3 C’s
Character—will you repay the debt?
From your credit history, does it look like you possess the
honesty and reliability to pay credit debts?
• Have you used credit before?
• Do you pay your bills on time?
• Do you have a good credit report?
• Can you provide character references?
• How long have you lived at your present address?
• How long have you been at your present job?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 5
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
What Lenders Look For—
The 3 C’s
Capital/Collateral—what if you don’t repay the debt?
Do you have any valuable assets such as real estate, savings,
or investments that could be used to repay credit debts
if income is unavailable?
• What property do you own that can secure the loan?
• Do you have a savings account?
• Do you have investments to use as collateral?
• Do you own your own home?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 6
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
What Lenders Look For—
The 3 C’s
Capacity—can you repay the debt?
Have you been working regularly in an occupation that is
likely to provide enough income to support your credit
use?
• Do you have a steady job? What is your salary?
• How many other loan payments do you have?
• What are your current living expenses? What are your
current debts?
• How many dependents do you have?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 7
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Borrower Responsibilities
• Borrow only what you can repay.
• Read and understand the credit contract.
• Pay debts promptly.
• Notify creditor if you cannot meet payments.
• Report lost or stolen credit cards promptly.
• Never give your card number over the phone
unless you initiated the call or are certain of the
caller’s identity.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 8
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Types/Sources of Credit
Single-Payment
Items and services are paid for in a single payment,
within a given time period, after the purchase.
Interest is usually not charged.
• Utility companies, medical services
• Retail businesses when buying on account or
running a tab
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 9
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Types/Sources of Credit
Installment Credit
Merchandise and services are paid for in two or more regularly
scheduled payments of a set amount. Interest is charged.
• Auto dealers
• Appliance companies
Money may also be loaned for a special purpose from depository
institutions such as:
• Commercial banks
• Consumer finance companies
• Savings and loans
• Credit unions
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 10
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Types/Sources of Credit
Revolving Credit
Many items can be bought using this plan as long as the
total amount does not go over the credit user’s assigned
dollar limit.
Repayment is made at regular time intervals for any
amount at or above the minimum required amount.
Interest is charged on the remaining balance.
• Retail store credit cards—JC Penney, Carson’s
• Credit cards from credit card companies—Visa,
Discover
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 11
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Report Detectives
Meet Isabella, your new client:
• About to graduate from college
• In extreme debt
• Concerned about finding a job
• Doesn’t understand her credit report
YOUR MISSION:
Help Isabella understand her credit report, identify
what she did to get into this situation, and decide
what she can do to improve her credit report.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 12
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Isabella’s Story
IN SMALL GROUPS:
READ ISABELLA’S SCENARIO
• What is your analysis of her situation?
• Does she need your help?
• Why?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 13
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit History
Reporting
What they do
Additional
Information
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 14
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Reporting
Agencies
• Acquire information from:
Retail stores that
Credit card Mortgage and
offer credit
companies finance companies
accounts
Depository
Utility accounts Landlords
Institutions
Cell phone Collection
companies agencies
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 15
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Information in a
Credit Report
Information can be divided into 4 categories:
• Personal Information
• Accounts Summary
• Public record items related to credit
• Credit Inquiries
Lenders may or may not report information to
all three credit reporting agencies.
An individual’s information may be different in each report.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 16
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Personal Information
Personal Information Isabella’s Personal Information:
• Name and aliases • Name – Isabella G. Langley
• Current and past addresses • Addresses – 101 Hopeful Ave. &
• Social security number 695 Parent Street
• Date of birth • Date of birth – 05/04/86
• Telephone numbers –
• Employment history
555-354-2368 & 555-198-2358
• Employers – Lucky’s Restaurant
FIND ISABELLA’S & Jane’s Daycare
PERSONAL
INFORMATION
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 17
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Accounts Summary
Accounts Summary
• Types of accounts Isabella’s Accounts
• Date the account was • Sam’s Electronic World
opened • City of Anywhere
• Credit limit or loan • U.S. Department of Education
amount • Financial Institution School
• Account balance Loan
• Payment history, including • Shop ‘Til You Drop Store
missed or late payments Credit Card
WHAT LENDERS • Love to Read Store Credit
DOES ISABELLA Card
HAVE ACCOUNTS • The Free Money Credit Card
WITH?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 18
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Accounts Summary
DOES ISABELLA
HAVE ANY LATE OR
MISSED PAYMENTS
ON ACCOUNTS ?
Isabella’s Late or Missed Payments
• Sam’s Electronic World
• Past due
• Store Credit Card
• Occasional late payments
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 19
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Public record items
related to credit
Public Record Items
• Accounts turned over to Isabella’s Public Record Items
collection agencies • City of Anywhere
• In Collection
• Public records
• Bankruptcy
• Tax liens
• Legal suits
• Foreclosures
IDENTIFY
PUBLIC RECORD ITEMS
IN ISABELLA’S
REPORT
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 20
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Inquiries
• Requests for an individual’s credit report
• Completed by:
• Insurance agencies
• Potential credit companies
• Financial institutions
• Landlords WHAT INQUIRIES
• Potential employers, etc. DOES ISABELLA
HAVE ON
HER REPORT?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 21
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Inquiries
Not all credit inquiries are the same!
Type of inquiry Soft check Hard check
Do they impact Not usually Yes
your credit
score?
Examples •Individuals checking Permission given by
their credit reports the individual when
•Credit card companies seeking credit
pre-approving •Credit card
individuals •Automobile loan
•Pre-employment checks •Insurance
Individuals should avoid too many hard credit checks at one time!
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 22
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Isabella’s Report
Inquiries
Type of inquiry Soft checks Hard checks
Examples •A Very Big Bank •Shop ‘Til You Drop
•Need More Credit
•Keeping You Insured
•The Dream Sales Job
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 23
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Medical Information
Information • Where an individual was
NOT allowed treated
on a credit
report: • What they were treated for
Information
• Information regarding late
allowed on a medical payments
credit report
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 24
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Equal Credit
Opportunity Act
• Prohibits credit discrimination on the basis of:
• Race
• Religion Creditors may ask for this
information (except
• Marital status religion) in certain
• Nationality situations, but may not use
it to discriminate when
• Gender deciding whether to grant
• Age you credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 25
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Scores
Mathematical tool created to help a lender evaluate the
risk associated with lending a consumer money
•Based upon information in the credit report
•At a particular point in time
•Numeric “grade” of a consumer’s financial reliability
•Used by lenders to determine a consumer’s risk of
defaulting on a loan
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 26
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Scores
• Most common scoring
system is FICO WHAT IS
ISABELLA’S
• Credit scores range from SCORE?
300-850, with 850 being the
best score
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 27
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Score Impact
$256,680 saved over the lifetime of this loan
because of a good credit score!
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 28
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
How Credit Scores are
Determined
Five categories of information from a credit
report are used:
• Payment history
• Outstanding debt
• Length of credit history
• Pursuit of new credit
• Types of credit in use
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 29
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Payment History
• The timely manner in
which a consumer did or
did not repay debt
• Includes:
• Several types of credit
accounts
• Late or missed payments
• Public records and
collection items
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 30
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Payment History
WHAT IS ISABELLA’S • Found in status column
PAYMENT HISTORY?
• Payment history
• Sam’s Electronic World is past due
WHAT IMPACT • City of Anywhere is in collection
DOES THIS HAVE ON • Shop ‘Til You Drop has occasional
HER CREDIT SCORE? late payments
• Love to Read was closed and never
late
• The Free Money Credit Card is paid
on time
• Credit score impact
• Negative
• Too many late accounts
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 31
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Outstanding Debt
• The total dollar amount
of debt currently held
• Includes balances on all
reported accounts
• When a high percentage
of debt is used, then it
negatively impacts a
score
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 32
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Outstanding Debt
HOW MUCH TOTAL • Total debt
DEBT DOES ISABELLA • Found in recent balance
HAVE? column
• $37,325
HOW MUCH • Available credit
AVAILABLE CREDIT IS • Found in credit limit column
ISABELLA USING? • $37,546
• Impact
WHAT IMPACT DOES • Negative
THIS HAVE ON HER • $37,546-$37,325 = $221
CREDIT SCORE? she is using almost all her
available credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 33
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Length of Credit
History
• Length of time a
consumer has held credit
accounts
• Includes how long ago
credit accounts were
established
• A longer credit history
will generally increase a
credit score
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 34
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Length of Credit
History
WHEN DID ISABELLA • Credit history
FIRST BEGIN HER • Found in date opened
CREDIT HISTORY? column
IF ISABELLA KEEPS HER • 08/05 U.S. Dept. of
FREE MONEY CREDIT Education
CARD OPEN FOR • Free Money Credit Card
ANOTHER 10 YEARS AND PAYS • Score will improve
OFF THE BALANCE, WHAT
WILL HAPPEN?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 35
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Pursuit of New Credit
• Assesses how many accounts
have been opened recently
and the type of account
• Includes the number of
recently opened accounts as
well as requests for new
credit
• Opening too many types of
accounts in a short period of
time has a negative affect
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 36
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
New Credit
HAS ISABELLA • Additional credit
PURSUED ANY • Shop ‘Til You Drop in
ADDITIONAL CREDIT August 2008
SINCE JANUARY 2008?
• Impact of seeking
IF ISABELLA ACQUIRED additional credit
ANOTHER CREDIT • Credit score will go down
CARD AND SHOPPED FOR
AN AUTOMOBILE LOAN, WHAT
WOULD HAPPEN TO HER
SCORE?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 37
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Types of Credit in Use
• Analyzes the types of
credit in use
• Credit cards, retail cards,
mortgages, automobile
loans, etc.
• Variety is generally good
to have
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 38
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit in Use
WHAT TYPES OF • Types
CREDIT DOES • Credit card (revolving)
ISABELLA HAVE?
• School loan (installment)
WHAT ARE • Private school loan
ADDITIONAL FORMS (installment)
OF CREDIT SHE MAY SEEK? • Store cards (revolving)
• Additional forms
• Mortgage
• Automobile loan
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 39
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Information not
included in a FICO score
• FICO score is only based upon credit use
• Information not included is:
• Personal information such as age, where you live, marital
status, race, color, religion, national origin, gender
• Employment information
• Interest rates charged on accounts
• Overall wealth (assets an individual may have)
These variables may still be considered when a lender
reviews a loan application.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 40
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Positive vs. Negative
Credit Impact
Positive Negative
• Informs the lender a • Informs the lender a
consumer is: consumer is:
• Financially responsible • Not financially responsible
• Less risk • May be a higher risk
• Benefits to the consumer • Impact on the consumer
• Lower interest rates • May pay higher interest
• Access to additional credit rates
• May not be able to qualify
IS ISABELLA A POSITIVE for credit
OR A NEGATIVE RISK? • May limit employment
WHY? opportunities
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 41
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity - What You Do
Makes a Difference
1. Read the scenario
2. Determine if the scenario will have a positive or
negative impact on an individual’s credit report
3. Move to the side of the room representing your
selected answer
4. Be prepared to explain “why”
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 42
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report impact:
• Joey rented a TV Negative
from “The Best Joey owes the store the
Deal” rent to own money which was
store during agreed upon in the
college
contract
• The TV was May be responsible for
neither returned
nor paid for as additional fees
stated in the He may be referred to
contract collections
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 43
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report
impact:
• Sally pays the Positive
total amount An excellent
due on her habit for
credit cards building a
each month positive report
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 44
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report
impact:
• Fernando Negative
rented a DVD Fernando is
from Busting responsible for the
Bronco Rental movie replacement
and never
returned the Could be reported
movie to collections
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 45
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report
impact:
• Cassie has Negative
received three Cassie has probably
parking tickets already been referred
throughout to collections
the past year Will owe for the
and has not parking tickets and
paid them additional fees
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 46
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report impact:
• Sam acquired a Positive
loan from Buy Demonstrated the
More Credit ability to
Union for
$1,000 to responsibly use
purchase a credit
motorcycle. He
paid the loan
back in full and
on-time
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 47
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report
impact:
• Corey’s credit
card bill is paid Negative
in monthly Although Corey is
installments. paying his bill, he
However, it is is doing so late!
due on the 15th
and usually paid
a few days late
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 48
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report impact:
• Kari bought a car Positive
and financed it
though the “Drive All payments were
Bigger and Better” made in time
promotion Having automatic
• Payments are withdrawals with the
automatically money in the account
removed from her
checking account is a good practice
• Money is always in
the account
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 49
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report
impact:
• In the past three Negative
months, Tammy This is too many
has applied for inquiries for new
credit cards at credit at one time
these
establishments: from a variety of
• Tarmore, Wally types of stores
World, JcMoney,
and Seemores
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 50
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report impact:
• Jessica has several Negative
types of credit
A variety of types of
cards
credit may be good,
• Each of her
credit card however, Jessica’s
balances are at the balances are at the
maximum level maximum level
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 51
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Activity
Action: Credit report impact:
• It is 12 months Negative
after graduation
and Jon has not Jon is delinquent
started paying his on the account.
student loan back If he contacts the
because he has
not found a job
loan company,
• He has not they may be able
contacted the to work with him
loan company
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 52
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Positive Credit
Practices
Positive
Practice good banking techniques, such as keeping a checkbook
balanced, managing accounts online, and not bouncing any
checks
Pay bills consistently and on time
Maintain reasonable amounts of unused credit
Apply for credit sparingly, thus keeping credit inquiries to a
minimum
Check credit reports annually and search for errors
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 53
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Negative Credit
Practices
Negative
Having non-sufficient funds (NSF) when writing checks, also
known as bouncing checks
Routinely paying late on credit cards, utility, and cell-phone bills
Maxing out limits on credit cards
Numerous credit applications in a short period of time
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 54
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
When Credit is not
established
• Although the following are all positive financial
habits, no credit is established when:
• Credit is never used
• Accounts are not in own name
• Cash is paid for all major purchases
• Phone and utility bills are paid on time
• It only negatively impacts a score if payments are late
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 55
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Building credit history
• Important for consumers to build a credit
history to be able to purchase items on credit
• For example – house, vehicle
• Having no credit history may be just as
challenging to a consumer as having a negative
history
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 56
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
Ways to Establish/Build
1.4.2.G1
Credit
• Pay all bills promptly.
• Apply for a local store credit card
and make regular monthly If someone is a
co-signer on a
payments.
an account, they
• Acquire a secured credit card are equally as
which requires a security deposit responsible and
to ensure payment. their credit
• Get a co-signer or use your savings report is
account for collateral to get a loan impacted.
and pay back the loan as agreed.
DOES ISABELLA HAVE ANY CO-SIGNERS?
WHAT IMPACT DOES HER ACTIONS HAVE ON THEM?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 57
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
What is a Co-Signor?
• Someone who has a good credit history
• They meet the 3 C’s requirement and qualifies for
the loan
• Someone who agrees to pay the debt if the
borrower does not
What is a Co-Signor’s
Responsibility?
• To pay the debt if the borrower does not
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 58
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
2009 CARD Act
Changed how young adults receive
certain types of credit
To receive a credit card:
• Generally must be 21 years of age or older
UNLESS
• Show documentation of sufficient income
• Have a co-signer
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 59
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Requesting A Credit Report
• One free credit report annually from each of the three
credit reporting agencies
• Equifax
• TransUnion
• Experian
• Credit scores are available for a small fee
Access the website: annualcreditreport.com
Calling toll free: 1-877-322-8228
Send a written request:
Annual Credit Report Request Service
PO box 105281
Atlanta, GA 30348-5281
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 60
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Annualcreditreport.com
annualcreditreport.com - Only government sponsored Web site
Other sites may be fraudulent or charge a fee
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 61
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Mistakes in Credit
Reports
• Two common errors
• Fraud (identity theft)
• Mistaken identity
• When a lender reports a transaction on the wrong
person’s credit report
• Important to check each credit report annually
to correct mistakes
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 62
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Fair Credit Reporting
Act
• Gives consumers the right to review and correct
their report
• If a person is denied credit, they have the right
to request their credit report from the credit
reporting agency
• If within 60 days it is free of charge
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 63
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Correcting Errors on
Credit Reports
Write a letter
• To the credit bureau that has the incorrect
information and/or the information provider
Bureau has 30 days to investigate
• If investigation is not completed within this time,
the information must be dropped from the credit
file
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 64
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Correcting Errors on
Credit Reports
Incorrect information must be corrected
• Consumer can request the corrected report be
sent to any creditors who viewed the incorrect
report
Negative information on a credit report
• Usually removed after seven years
• Bankruptcy is removed after ten years
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 65
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Credit Repair Agencies
• Offer to help a consumer “fix” his/her negative credit
report
• According to the Better Business Bureau (BBB) and the
Federal Trade Commission (FTC):
• Consumers can do just as good of a job repairing their credit
report errors as a fee based debt repair agency
• Be cautious of debt repair agencies promising instant help
because there is no immediate fix for negative credit
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 66
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
Advice Isabella
was given
From Angie From George
• Credit ratings improve as • Shopping around too much
people get older and income for credit is not good because
increases it increases inquiries
• Isabella’s credit score will • Opening new accounts, even
improve when she: if not used, provides evidence
• Moves to a better side of town of credit worthiness
• Gets a better interest rate on • Close old accounts, including
loans those with loans not paid on
• Is promoted time to wipe the slate clean
WAS THE ADVICE GOOD? WHY OR WHY NOT?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 67
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
CREDIT REPORT
DETECTIVES ADVICE
• Will Isabella receive her dream job?
• What advice would you give Isabella to improve
her credit report and score?
• What should she do immediately?
• What recommendations would you suggest she
employ in the near future?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 68
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
How Much Credit Can You
Afford? (20-10 Rule)
Never borrow more than 20% of your yearly net income
• If you earn $400 a month after taxes, then your net income in
one year is:
12 x $400 = $4,800
• Calculate 20% of your annual net income to find your safe debt
load.
$4,800 x 20% = $960
• So, you should never have more than $960 of debt outstanding.
• Note: Housing debt (mortgage payments/rent) should not be
counted as part of the 20%, but other debt should be included,
such as car loans, student loans and credit cards.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 69
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
How Much Credit Can You
Afford? (20-10 Rule)
Monthly payments shouldn’t exceed 10% of your monthly net
income
• If your take-home pay is $400 a month:
$400 x 10% = $40
• Your total monthly debt payments shouldn’t total more than
$40 per month.
• Note: Housing payments (mortgage payments/rent) should not
be counted as part of the 10%, but other debt should be
included, such as car loans, student loans and credit cards.
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 70
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
1.4.2.G1
QUESTIONS?
© Family Economics & Financial Education – Revised April 2010– Credit Unit – Understanding Credit Reports – Slide 71
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
