Your Name – Your Business Helping People Improve & Protect Their Credit Credit Concepts I.

Your Name – Your Your Name – Your BusinessBusiness

Helping People Improve & Protect Their Helping People Improve & Protect Their CreditCredit

Credit Credit ConceptsConceptsII

Helping people improve and protect their credit

Credit Concepts

Your Name – Credit ExpertYour Name – Credit Expert

Provide usable information to help Provide usable information to help you manage and protect your credit you manage and protect your credit

worthiness.worthiness.

Learning ObjectivesLearning ObjectivesUnderstand the Principles of CreditUnderstand the Principles of CreditLearn How Credit Affects FinancingLearn How Credit Affects Financing

Workshop GoalWorkshop Goal


Credit Concepts


Credit Concepts QuizCredit Concepts Quiz

1.1. What do lenders such as mortgage brokers and other What do lenders such as mortgage brokers and other creditors use your credit report and score for?creditors use your credit report and score for?

2.2. What are the three “C s” that a creditor considers What are the three “C s” that a creditor considers when determining your approval for a loan?when determining your approval for a loan?

3.3. Who has created the credit scoring formulas that Who has created the credit scoring formulas that lenders use for determining credit scores?lenders use for determining credit scores?

4.4. You are entitled to a free copy of your credit report You are entitled to a free copy of your credit report everyevery ??

5.5. How long will most items remain on your credit report?How long will most items remain on your credit report?

6.6. Your credit affects your life in which of the following Your credit affects your life in which of the following areas?areas?


Credit Concepts


The 3 C’s of FinancingThe 3 C’s of Financing

CollateralCollateral

CapacityCapacity

CharacterCharacter

Before 1980:Before 1980:

Assets Securing a Assets Securing a LoanLoan

Income and Years Income and Years of Employmentof Employment

Relationship With Relationship With BankerBanker

After 1980:After 1980:

Assets Securing a Assets Securing a LoanLoan

Debt to Income Debt to Income RatioRatio

Credit ScoreCredit Score


Credit Concepts


The 3 C’s – What Changed?The 3 C’s – What Changed?

What Changed after 1980?What Changed after 1980?– Mortgage loans were grouped together into Mortgage loans were grouped together into

investment portfolios and sold on Wall Street. investment portfolios and sold on Wall Street.

– Investors then required that the loans in the Investors then required that the loans in the portfolio met portfolio met STANDARDIZEDSTANDARDIZED parameters.parameters.

– Credit scores became the method of Credit scores became the method of standardizing a borrower’s Character.standardizing a borrower’s Character.

– Today, most financing has become credit-score Today, most financing has become credit-score driven, making “managing our credit driven, making “managing our credit worthiness” a necessity.worthiness” a necessity.


Credit Concepts


The Cost of Bad CreditThe Cost of Bad Credit

These figures are based on a mortgage loan of $100,000 for 30 years


Credit Concepts


The Role of the Credit BureausThe Role of the Credit Bureaus

TransUnion, Equifax, & Experian TransUnion, Equifax, & Experian – Profit-making companiesProfit-making companies

– Gather data about consumers from creditors and public records depts.Gather data about consumers from creditors and public records depts.

– Sell consumer data to the financial industry in the form of credit reports.Sell consumer data to the financial industry in the form of credit reports.

Their Affiliation with the Financial Industry Their Affiliation with the Financial Industry – The credit bureaus’ customers are financial institutions (banks, creditors).The credit bureaus’ customers are financial institutions (banks, creditors).

– Financial Institutions want to avoid lending to bad credit risks.Financial Institutions want to avoid lending to bad credit risks.

– Credit bureaus protect financial institutions by reporting ANY “potentially” Credit bureaus protect financial institutions by reporting ANY “potentially” negative credit data about consumers – often resulting in credit reporting errors.negative credit data about consumers – often resulting in credit reporting errors.

What Does This Mean?What Does This Mean?– Credit bureaus have no incentive to correct errors (which hurt scores). Creditors Credit bureaus have no incentive to correct errors (which hurt scores). Creditors

prefer more errors than less to assure they are lending to good credit risks.prefer more errors than less to assure they are lending to good credit risks.


Credit Concepts


Errors In Your Credit ReportErrors In Your Credit Report

30% of all credit reports contain 30% of all credit reports contain “serious” errors that result in the denial “serious” errors that result in the denial of credit, such as:of credit, such as:

– Paid items still showing an unpaid balancePaid items still showing an unpaid balance

– Medical items sent to collection prior to Medical items sent to collection prior to insurance paymentinsurance payment

– Someone else’s items reporting; people with Someone else’s items reporting; people with similar names or family memberssimilar names or family members

– Items reported in bankruptcy still showing Items reported in bankruptcy still showing balances owedbalances owed


Credit Concepts


What’s In Your Credit Report?What’s In Your Credit Report? Personal InformationPersonal Information

– SSN, Driver’s License, Birth Date, Employment SSN, Driver’s License, Birth Date, Employment Information, Previous Addresses, and Name AliasesInformation, Previous Addresses, and Name Aliases

Trade LinesTrade Lines – Open and Closed accountsOpen and Closed accounts

Collections, Bankruptcies, Judgments, & Collections, Bankruptcies, Judgments, & Late PaymentsLate Payments

InquiriesInquiriesAll positive and negative accounts All positive and negative accounts report for report for 7 years from the 7 years from the date of last date of last activityactivity, excluding bankruptcies (10 yrs) , excluding bankruptcies (10 yrs) and unpaid tax liens (15 yrs)and unpaid tax liens (15 yrs)


Credit Concepts


Credit ScoresCredit Scores

Scores range between Scores range between 300-850300-850

Excellent Credit:Excellent Credit: 700 and above700 and above, excellent , excellent interest ratesinterest rates

Mediocre Credit:Mediocre Credit: ~600~600 to to ~700~700, loan qualify , loan qualify cutoffcutoff

Bad Credit:Bad Credit: ~600 and below~600 and below, need restoration, need restoration

Score distribution among U.S. populationScore distribution among U.S. population


Credit Concepts


Who Is FICO?Who Is FICO?

Fair Isaac Corporation (FICO)Fair Isaac Corporation (FICO) – Established in 1956 Established in 1956

– Creates risk models (formulas) used by the Creates risk models (formulas) used by the financial industry to generate credit scoresfinancial industry to generate credit scores

– Risk model formulas are trade secrets of Risk model formulas are trade secrets of FICO and are not shared with financial FICO and are not shared with financial institutions or credit bureausinstitutions or credit bureaus

– Different risk models (formulas) are used Different risk models (formulas) are used for different types of financing, generating for different types of financing, generating different scoresdifferent scores


Credit Concepts


Key #1 - Payment HistoryKey #1 - Payment History

Payment History Payment History

– How well we make payments on time in the past How well we make payments on time in the past 24 months24 months

– 35% of score35% of score

– Considers positive accounts Considers positive accounts • Such as:Such as: auto loans, credit cards, mortgage loans, etc. auto loans, credit cards, mortgage loans, etc.

– Considers negative accountsConsiders negative accounts• Such as:Such as: collections, judgments, bankruptcies, late collections, judgments, bankruptcies, late

pays, etc.pays, etc.


Credit Concepts


Key #2 - Utilization RatioKey #2 - Utilization Ratio

Ratio of total credit card debt to credit Ratio of total credit card debt to credit limit should limit should be no more than 30%.be no more than 30%.

Closing accounts with high credit limits Closing accounts with high credit limits willwill increase increase your utilization ratio andyour utilization ratio and decrease decrease your credit scoreyour credit score

Example: $3,000 of debt with a $10,000 Example: $3,000 of debt with a $10,000 credit limitcredit limit == 30% utilization ratio 30% utilization ratio


Credit Concepts


Key #3 - Credit InquiriesKey #3 - Credit Inquiries Inquiries that Inquiries that DODO affect credit score: affect credit score: HARDHARD

inquiries”inquiries”– Reported when applying for credit Reported when applying for credit

– Auto and mortgage inquiries in any 14 day period count as one Auto and mortgage inquiries in any 14 day period count as one inquiryinquiry

– Recent inquiries (prior 1-2 months) have the most impact on Recent inquiries (prior 1-2 months) have the most impact on scoresscores

– Impact score less than 5%. Impact score less than 5%. (Rarely more than 10-15 points)(Rarely more than 10-15 points)

Inquiries that Inquiries that DON’T DON’T affect credit score: affect credit score: SOFTSOFT inquiriesinquiries– Your own requests for your credit reportYour own requests for your credit report

– Promotional offersPromotional offers

– Your current lenders and collection agenciesYour current lenders and collection agencies

– Prospective employers and insurance companiesProspective employers and insurance companies


Credit Concepts


Credit Counseling Ruins ScoresCredit Counseling Ruins Scores

Credit Counseling Companies:Credit Counseling Companies:– Negotiate with creditors to make partial payments Negotiate with creditors to make partial payments

and lower interest ratesand lower interest rates– Stop credit harassment through the limited power of Stop credit harassment through the limited power of

attorneyattorney

The Problem: The Problem: – Part of each payment pays counseling fees, so less Part of each payment pays counseling fees, so less

money is used to pay down the balance money is used to pay down the balance – Payments Payments REPORT AS LATE REPORT AS LATE on credit reportson credit reports– Viewed as a chapter 13 bankruptcy by many lendersViewed as a chapter 13 bankruptcy by many lenders– IT IS NOT DEBT CONSOLIDATION IT IS NOT DEBT CONSOLIDATION


Credit Concepts


Thank You For Your Time!Thank You For Your Time!

Opt-In FormOpt-In Form- Fill out top half of form to receive our newsletterFill out top half of form to receive our newsletter- Fill out bottom half if you’d like to meet about any of the Fill out bottom half if you’d like to meet about any of the

related topics.related topics.

QUIZ ANSWERSQUIZ ANSWERS

1.1.(B) & (C) Credit scores affect interest rates and (B) & (C) Credit scores affect interest rates and down payments. down payments. Income is not reported.Income is not reported.

2.2.(C) Character, Capacity, Collateral (C) Character, Capacity, Collateral

3.3.(D) Fair Isaac Corporation(D) Fair Isaac Corporation

4.4.(C) 1 free credit report every 12 months(C) 1 free credit report every 12 months

5.5.(C) Most items remain for seven years.(C) Most items remain for seven years.6.6.(A), (B), (D) Investing does not require credit.(A), (B), (D) Investing does not require credit.

Next Workshop:Next Workshop:–How to Improve Your How to Improve Your Credit ScoreCredit Score

–How to Protect Your Credit How to Protect Your Credit and Identityand Identity

Your Name – Your Business Helping People Improve & Protect Their Credit Credit Concepts I.

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