CREDIT _FICO Scores_ from “Understanding Your FICO Score” by Fair

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CREDIT _FICO Scores_ from “Understanding Your FICO Score” by Fair Powered By Docstoc
					1)   FICO Score is a credit score
     •   Credit Score - a number that summarizes your
         credit risk, based on a snapshot of your credit
         report at a particular time

2)   FICO Score is a lending tool invented by
     Fair Isaac Corporation in 1956
   Lenders buy FICO scores from 3 major credit
    reporting agencies:
        * Equifax
        * Experion
        * TransUnion
   These companies maintain records about you
    and your credit.
   These companies produce “credit reports” on
   Lenders buy these “credit reports” and use the
    scores to help decide whether to give you a
    loan, and at what rate.
            In other words…..
FICO scores give lenders a fast, objective
       estimate of your credit risk
Personal Information
Name                 John Smith
Date of Birth        May 1, 1970
Social Security No   123-45-6789
Current Address      6100 Fifth Avenue
                     Dayton, OH 45439

Accounts Summary
Acct. Type Company      Account No.      Balance Neg. Items
Installment Ford Mot.   BFM915X           $23,000    No
Revolving   Citicorp    427188888         $325       No

Negative Items
Acct. Type Company      Status    Delinquency     Neg. Descrip.
Installment  Ford       Pays as     30 days            No
                         agreed     past due

Date      Company requesting your credit record
1/4/2005 Main Street Bank
9/21/2004 XKK Cellular Phone Service
1) Your FICO score is a mathematical
   calculation, using several pieces of
   information from your credit report

2)   You must have one account that’s been
     open for at least 6 months, and has been
     reported to the credit agency
   FICO Scores range from 300 to 850.
   The higher the score the lower the risk.
                                    National Distribution of FICO Scores



% Population




                     300-499   500-549   550-599   600-649   650-699   700-749   750-799   800+
                                                      FICO Score
1) Payment History - 35%
    * Late Payments are a “score-killer”
    * Takes into account:
         All types of accounts
         Bankruptcy, liens, attachments
         How many accounts show no late payments
2)   Amounts Owed - 30%
     * The amount owed on all accounts, and
     different types of accounts
     * How many accounts have balances
     * How much of total credit line is being
     * How much is still owed.
3) Length of Credit History
     * How long you have used credit
     * How long specific accounts have been
     * How long it has been since you’ve used
   certain accounts
4)   New Credit - 10%
      * How many new accounts you have
     * How many recent requests for credit you
     have made
     * Length of time since credit report
     request was made by lender
     * Whether you have good credit history
     following past problems
5)   Types of credit in use
     •   Is it a “healthy mix”?
     •   What kinds of credit you have, and how many of
1)   Pay bills on time
2)   Keep balances low on credit cards
3)   Pay off debt rather than moving it between
     credit cards
4)   Apply for and open credit cards only when
     you need them
5)   Check your credit report
6)   If you’ve missed payments, get current
     and stay current.
Credit Laws
Consumer Credit Protection Act

 Federal garnishment law that protects employees with
   wage garnishments

   1) employee cannot be discharged/fired for having a
   wage garnishment
   2) Amount of garnishment is limited to 25% of net pay
Consumer Credit Protection Act


 Ex #1 - John Doe did not pay his 2006 Federal Income Taxes. As a
    result, he has $40 deducted from his paycheck every week to pay
    back the taxes. John is fired from his employment as a result of
    this deduction.

 Ex #2 - John Doe is in debt to his bank for an outstanding loan. He
    has not made any payments on the loan for one year. The court
    orders that money be deducted from John’s paycheck in order to
    pay back the loan. John’s employer deducts 90% of his net pay for
    repayment of the loan.
Fair Credit Reporting Act
•   Regulates collection and distribution of
    consumer credit information
•   CRA = Consumer Reporting Agency
        ie. Experion, TransUnion, Equifax
•   CRA must provide accurate credit reports
    to those who request the report
Fair Credit Reporting Act
   Examples:
      • Jane Smith requests a copy of her credit report from the
        credit agency. The credit agency informs Jane that she
        is not allowed to receive a copy of her report.

      • Jane Smith goes to the bank for a car loan. She is
        rejected for the loan because her credit report reflects
        several missed payments on her home mortgage.
        However, Jane has in fact made all her mortgage
        payments on time, and for the full amount due.
Fair Credit Billing Act
 Protects consumer from unfair billing
 Consumer can write letter to credit card
  company regarding unfair billing, and it
  should be resolved within 60 days.
 For over-billing, damaged goods, wrong
  charges to account, etc.
Fair Credit Billing Act
   Examples:
      • John Doe purchases ski equipment from an
        internet sporting goods site. Upon receipt of
        the merchandise, John discovers that the ski
        poles are broken. However, the seller will not
        refund John for the purchase of the ski poles.

      • Jane Smith receives her monthly billing from
        her credit card. On her statement, she finds
        that she has been charged $1,200 for car repairs
        on a car she does not own.
Equal Credit Opportunity Act
 Credit company cannot discriminate
  against race, sex, religion, marital status,
  age, etc.
 Income, expenses, credit history can be
  considered when determining credit
 Everyone has a chance to obtain credit.
Equal Credit Opportunity Act
•   Jane Smith applies for a credit card from Lowes. Upon
    review of her application, Lowes informs Jane Smith that she
    is ineligible for a credit card because she is female.

•   Jane Smith applies for a credit card at Macy’s. On the credit
    card application, two separate questions state “Please list your
    national origin” and “Please list your religion”.
Fair Debt Collection Practices
 Intended to eliminate abusive practices in
  the collection of debt
 Debt Collector - tries to collect debt from
  consumer who has not paid
 Debt Collector is not allowed to use false
  statements, accuse consumer of a crime,
  contact you at any hour, etc.
Fair Debt Collection Practices

•   John Doe does not pay his bills, and is consequently
    contacted by a debt collector. The debt collector over-states
    the amount of debt owed by John Doe.

•   John Doe receives a phone call from a debt collector at 10
Solving Credit Problems

    The 20/10 rule - Your total borrowing
     should not exceed 20% of your
     yearly take-home pay
    You should not take on monthly
     payments that total more than 10%
     of your monthly take-home pay
Solving Credit Problems

    Credit Counseling
     – Gives good advice, help setting up
       budget, voluntary
     – Consumer Credit Counseling Service
Solving Credit Problems

    Debt Adjustment
      * Debt Adjustment companies charge a
     fee & require you to sign a contract.
      * A credit advisor will contact your
     creditors to work out a payment plan.
      * A credit advisor will supervise your
     budget, sometimes take away your credit
     cards, etc.
Types of Bankruptcy

    Involuntary bankruptcy
     – Creditors file a petition with the court, asking that you be
       declared bankrupt. Court takes over your property and
       pays debt off as possible
    Voluntary bankruptcy
     – Most common kind of bankruptcy
     – You ask to be declared bankrupt.
     – Court notifies creditors of your potential bankruptcy, and
       they file claims against you.
     – Court sells your assets and gives creditors a
       proportional share.
     – Balance of debt is discharged
Types of Bankruptcy (cont.)

    Chapter 11 bankruptcy
     – A form of voluntary bankruptcy where assets are “re-
       organized”. That is, debtor can keep his property, but
       must submit a plan to the court for repaying most of the
       debt, under court supervision. A type of business

    Chapter 7 bankruptcy
     – Called “straight bankruptcy”
     – A form of voluntary bankruptcy where assets are
       “liquidated”. Wipes out most of the debt in exchange for
       giving up most of debtors assets.
Types of Bankruptcy (cont.)

    Chapter 13 bankruptcy
     – Called “Wage-Earners Plan”
     – Reorganization form of bankruptcy that allows
       debtors to keep their property and use their
       income to pay a portion of their debts over 3 to
       5 years
     – Debtors work out a court-enforced repayment
Major Causes of Bankruptcy

    Business failure
    Emotional spending
    Failure to budget and plan
    Catastrophic injury or illness
Advantages and Disadvantages of

 Advantages             Disadvantages
  Debts are erased.    •Credit is damaged.
  Exempted assets
                        •Property is lost.
   are retained.
                        •Some obligations
  Certain incomes
   are unaffected.      remain.
  The cost is small.   •Some debts can
                        be reaffirmed.
                        •Co-signers must

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