© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Understanding Credit Reports
Family Economics & Financial Education
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Credit Reports◊ Credit report - a record of a consumer’s
transactions involving credit
◊ No credit report if you have never used credit
◊ Affects your ability to acquire credit◊ Bad credit history stays with your for 7-10 years
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Why is it important to Building a Credit History◊ To be able to
◊ purchase items on credit◊ house, vehicles, appliances
◊ Renting an apartment◊ Emergencies
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
General Rule
◊ Keep the amount of debt currently held at 25% of the total amount of available credit◊ For example - if Sue’s total
amount of credit available is $1,000, her current amount of debt should not exceed $250
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
How can you harm your credit?Debit/Credit cards over
the limitRoutinely paying bills lateHaving a criminal recordHolding a large amount of
debtHolding an unreasonable
amount of unused credit
Defaulting on a loanObtaining a high number
of credit inquiriesCarrying many credit/store
cardsHaving a public record of
bankruptcy
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Bankruptcy When a person or company does not
have the financial means to pay their debts as they come due
Secured debt- creditor has the legal right to something of yours if you fail to make proper payments Example: mortgage- bank can reposes
your home Unsecured debt- loans made without the
security of assets Example: credit cards- not always
possessions to take back Secured debt gets paid first in bankruptcy
cases
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of Personal Bankruptcy Chapter 7- Liquidation Bankruptcy
Sell all assets to repay creditors May reaffirm some debt- house, car Some debt discharged- no repayment Must have an average monthly income less
than medium income of family of the same size Example: family of 4 median income $64,427 or
$5,368.92 per month If salary is higher, must file Chapter 13
Must get budget management and debt counseling before debt discharged
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of Personal Bankruptcy Chapter 13
Restructuring of debt Debtor retains assets Plan of repayment created with a trustee of the
court 3-5 years Pays only $.30 to $.50 on the dollar of debt value
Chapter 12 Same as 13 but for farmers
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Credit Reporting Agencies◊ Keep a record of a consumer’s credit transactions
and compiles credit reportsThe three main credit reporting agencies are:◊ Equifax
www.equifax.com (800) 685-1111
◊ Trans Union www.transunion.com (800) 888-4213
◊ Experian www.experian.com
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Requesting Credit Reports◊ Consumers can request his/her credit
report any time◊ Can obtain one free credit report annually
from all three credit agencies www.annualcreditreport.com
◊ Additional copies can be purchased for no more than $9.50
◊ Consumers should check credit report once a year for accuracy◊ Mistakes are common
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Who can Request your report?
This may include:◊ Insurance agencies◊ Current and potential
credit companies◊ State/local child support
agencies◊ Government agencies
◊ Financial institutions inquiring for lines of credit
◊ Landlords◊ Potential employers
◊ Only with applicant’s written request
◊Credit inquiry- and entry on a credit report that shows a business has requested a copy of your report
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Mistakes in Credit Reports◊ More than 50% of the credit reports
checked in a study contained errors◊ Source: Consumer Reports (July 2000)
◊ The two main errors are:1) Mistaken identity – occurs when a lender
reports a credit transaction and information is recorded on the wrong person’s credit report, usually of a similar name
2) Fraud
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Fair Credit Reporting Act 1971Consumers have the right:
◊ To know the information in their credit report ◊ To have errors corrected in their credit report
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Correcting Errors on Credit ReportsSteps include:
◊ Contact the credit bureau that has the error◊ CRA must report to the consumer within 30
days◊ If the CRA can’t verify the information,
◊ must be removed from the file ◊ Corrected in file
◊ If a consumer disagrees with result◊ right to submit a 100 word explanation◊ stays in the consumer’s file
◊ Negative information is usually removed from credit file after seven years, ◊ except bankruptcy- removed after 10 years
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Credit Scores◊ A mathematical tool created
to help lender evaluate the risk associated with lending a customer money
◊ Not listed on a credit report◊ It takes 6 months of using credit to get a
credit score◊ If you pay on time for 1st 6 months, score
should me 650-700 range
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
FICO Score 700 and above – Very good to excellent 680 to 699 – This credit score puts you in
the "Good" category. 620 to 679 – If your credit score falls into
this range, you fall into the "Okay" category.
580 to 619 – plan on paying a higher interest rate
500 to 580 – can still get credit, but expect to pay a very high interest rate
499 and below – you can still be extended credit, but with very high interest rates
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Five Standard Categories of Scores1. 35%-Payment history
- Timely manner in which a consumer pays debt2. 30%-Outstanding debt
-Amount of debt currently held3. 15%-Credit history
-How long the consumer has held credit accounts and how often they are used
4. 10%-Pursuit of new credit-How much credit is acquired over the length of the
consumer’s credit history5. 10%-Types of credit in use
-May include credit cards, gas cards, store cards or accounts, loans, etc.
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Effect of Credit Scores on Consumers◊ Interest rate of loans
◊ High score – can insure a lower interest rate on credit◊ Low score– can cause a higher interest rate on credit
◊ Ability to receive future loans/credit◊ Financial lending institutions have guidelines of
what score will qualify for a loan◊ Reflection of risk of borrower to the lender
◊ The lower the score, the higher the possibility the consumer pays bills late
◊ Financial security for lifetime◊ Takes time to improve credit, which could take time
from building financial security
1.4.2.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Conclusion
Build and maintain positive credit!
Check credit reports annually for errors!
Act financially responsible!
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