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 you. 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 Inquiries 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 30% 25% 20% % Population 15% 10% 5% 0% 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 used. * How much is still owed. 3) Length of Credit History * How long you have used credit * How long specific accounts have been established * 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 each 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 Examples: 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 Examples: • 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 Act 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 Act Examples: • 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 p.m. 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 (CCCS) 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 bankruptcy. 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 plan Major Causes of Bankruptcy Business failure Emotional spending Failure to budget and plan Catastrophic injury or illness Advantages and Disadvantages of Bankruptcy 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 pay.