credit scores: what's new?

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  • Credit Scores: Whats New?


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  • Dr. Barbara ONeill

    Financial Resource Management Specialist for Rutgers Cooperative ExtensionHas been a professional financial educator and author for more than 35 years. Has written more than 1,500 articles for academic journals, conference proceedings & other professional publications.

    Todays Presenters Rod Griffin

    Director of Public Education for ExperianLeads Experians national consumer education program and supports the companys community involvement and corporate responsibility efforts.Works with consumer advocates, financial educators and others to increase consumers ability to understand and manage personal finances, credit reporting and credit scoring to protect themselves from fraud and identity theft.



  • Part 1Credit Score Basics*

  • Question #1: How often do you check your credit report and how?*

  • Credit Reports are Like a Financial Report Card

    Its just like you are back in schoolYou are still being evaluated with written commentsThe results are still critical for your future


  • What is a Credit Report?A summary of someones history of paying debts and other bills Prepared by credit reporting agencies (a.k.a. CRAs or credit bureaus)Used by those who have a legitimate need for the informationLendersInsurance companiesPotential employersPotential landlords


  • The Better Your Credit History, the Better Your Chances of...Obtaining a loan or credit cardObtaining lower-cost credit terms and saving hundreds/thousands of dollars of interestObtaining a low-cost insurance policyRenting an apartmentBeing hired for a job


  • Three Major Credit BureausEquifax:



    Different pieces of data about borrowers in their databases

    Social Security number acts as a magnet to assemble data and create a credit report*

  • Four Key Credit Report SectionsIdentifying Information: Name, SS number, current/previous addresses, birthdate, employerPublic Record Information from Local Courthouse: Liens, foreclosures, bankruptcy, etc. Other Credit History Information: List of loans and credit cards, timeliness of payments, highest and current balance, negative information (7 years)Inquiries: Self-initiated, promotional (for marketing purposes), and periodic creditor reviews


  • Free Credit Reports by Federal Law*

  • Credit Scores Are Like a Financial GPA

    Three-digit number calculated by statistical analysis An important barometer of financial healthBased on credit report data at a point in time


  • More About Credit ScoresPredictive tool that measures the risk of a borrowers delinquency or defaultDetermines who qualifies for credit, at what interest rate, and at what credit limitsGenerally, higher credit scores indicate lower risk


  • How to Get a Credit ScoreRequest score from a prospective lender, landlord, or insurance companyUse a credit card that provides a free credit score (online or on billing statement)Via the FICO web site:


  • Free Credit Report and Credit Score ProvidersCredit.comCredit KarmaCredit SesameQL CreditQuizzleWise Piggy

    Beware: solicitations for products, services, upgradesBeware: free scores will likely vary from FICO scores


  • About Credit ScoringClassic FICO score range: 300 (worst) to 850 (best)Speeds up loan approvalsObjective focus on credit risk factors1989: Fair, Isaac Corp. introduced FICO score2002: FICO scores became available to consumers at 2016: Not required for free upon request by federal law (like credit reports are) BUT many creditors are providing for free (marketing and retention tool)


    *Borrowers credit scores determine whether or not they are considered a subprime (less than A risk tier) borrower. In recent years, the number of Americans with credit blemishes that result in lower credit scores has been increasing.Credit scores are a three digit number that range from the 300s (worst) to the 800s (best). They are sometime called FICO scores. FICO is an abbreviation for Fair, Isaac, and Company, a California company that develops credit risk-scoring models. Most (80% to 85%) consumers score between 600 and 800 (Kiplingers Personal Finance, Keeping a Tally, May 2000, p.30).The exact threshold for an A (prime) borrower varies among lenders but is typically between 620 to 660. Many lenders also divide consumers with prime credit scores into several different tiers (e.g., A1, A2, A3) and charge each a different interest rate.Credit scores are determined by statistical risk models. FICO develops models that determine bill-paying behavior. Factors that are associated with how well people pay bills (e.g., previous timely payments) increase credit scores and factors associated with poor payment patterns (e.g., previous late payments) decrease credit scores. Each of these factors are given a weighting in the statistical model based on how much they influence payment behavior.Credit scores are, thus, a mathematical gauge of creditworthiness. The days are long past where lenders know most of their borrowers personally so credit scoring helps them make objective decisions and determine the amount of risk associated with lending to a particular borrower. Credit scoring systems also reduce lenders exposure to fair lending complaints.

  • Sample Credit Score Data for Consumers by a Creditor *

  • What a Credit Score MeansSource: *

  • Question #2: How often do you check your credit report and how?*

  • Credit Scoring FactorsBill payment history, weighted for recent months (35%)Proportion of outstanding debt to available credit limits (30%)Length of credit history (15%)Number of recent credit inquiries (10%)Mix of types of credit used (10%)


    *This slide lists seven factors that affect credit scoring models: Previous Payment History- On-time payments enhance a persons credit score while late payments subtract points. The more bills that are late (e.g., 3 creditors versus 1) and the later the payments (e.g., 90 days instead of 30 days), or charged-off debts, the worse a credit score. A borrowers previous payment history accounts for 35% of his or her credit score (Kiplingers Personal Finance, The Secret Mix, September 2000, p. 104). Amount of Money Currently Owed- Potential lenders dont like to see high amounts of debt. In addition, scoring models take points away from people who have a lot of open credit lines with zero balances (e.g., credit cards they dont use) because they could go out tomorrow and borrow against them. Proportion of Balances to Credit Limits- Maxing out credit lines (i.e., borrowing up to the credit limit) can decrease your credit score. How Long Youve Been a Borrower- Credit scoring models give more weight to people who have successfully used credit for longer periods of time. Number of Recent Credit Inquiries- Scoring models take points away from people who have applied for a number of new credit lines within a short time period (e.g., six months to a year). Inquires made by lenders in advance of pre-approved offers are ignored and do not count against you. Types of Credit Used- Credit scores can increase with a mix of credit (e.g., mortgage, car loan, credit cards) instead of just one type of credit. Stability of Job and Home Address- Scoring models give more weight to stability as indicated by length of time at current job and current address.

  • Credit Scores Can VaryInformation in your credit report may vary across the Big Three credit reporting agencies (CRAs)Reporting to CRAs by creditors is voluntaryData that each CRA compiles about you may be differentImplication: To get a complete picture of what lenders see, check credit reports from all 3 bureausIf credit report information is very similar, so, too, will be credit scores


  • Credit Scores Can VarySome large lenders still build their own scoring modelsCustom models based on data from a lenders own account holdersThese scores are generally not disclosed to consumersEach of the Big Three CRAs sells their own generic score built internally on their own dataExample: Experians score is called the Plus Score


  • Credit Scores Can VaryVantageScore (introduced in 2006) is a FICO score competitor: *

  • Information That is NOT Included in a Credit ScoreYour ageYour incomeYour employment statusCaveat: Lenders will consider employment statusYour marital statusInterest rates (APRs) paid on existing debtsChild support and alimonySoft and promotional inquiriesCredit counseling participation *

  • Good Credit Scores Save MoneySource: *

  • Damage Points: How