FIXING Your Credit FIXING Your Credit

Objectives:

•Understanding how credit scores are determined.

•Understanding how consumers actions impact their credit scores.

Do NowDo Now

• What is a FICO Score and why is it important that we have a “good” credit score?

What is a FICO scoreWhat is a FICO score

• Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time - the higher your score, the less risk you represent.

• When you’re applying for credit– Whether it’s a credit card, a car loan, a personal loan or a mortgage – lenders want to know your credit risk level.

What is a FICO Score?What is a FICO Score?

• A FICO score is a credit rating developed by Fair Isaac & Company.

• Method was developed in the late 1950’s and is now widely accepted by lenders, insurance companies, employers, landlords, and others as a reliable means of credit evaluation.

• FICO scores are 3 digit numbers ranging from 300-850.

• A person has 3 different FICO scores from three different credit bureaus.

The Three Credit BureausThe Three Credit Bureaus

1. Equifax2. Experian3. TransUnion

• Each bureau produces a number based on scoring models and mathematical tables.

• These numbers are not necessarily the same due to the different methods used by each bureau.

• Most lenders use the middle score of the three as the recognized credit score.

For a $216,000 30-yearFor a $216,000 30-year

• 760-850 5.96% $1,289• 700-759 6.18% $1,320• 680-699 6.36% $1,345• 660-679 6.57% $1,376• 640-659 7% $1,437• 620-639 7.55% $1,517

Employment DecisionsEmployment Decisions

• According to the federal Fair Credit Reporting Act (FCRA), a company has the right to obtain credit reports and use that information when considering a candidate for a position in which the information may be applicable, – such as jobs that require an employee to handle a

significant amount of money or – deal with sensitive information.

What is in your score?What is in your score?

What is in your score?What is in your score?

1. Payment History (35%)• Number of past due items on file. • Severity of delinquency (how long past due) • Presence of adverse public records

(bankruptcy, suits, liens, delinquency)– 7 years for bad credit, late payments or collections. – Lawsuits and judgments 10 years or until the

statute of limitations runs out in the state. 3 years for inquiries.

What is in your score?What is in your score?

2. Amounts Owed (30%)• Amount owed on accounts.• Number of accounts with outstanding balances.• Proportion of credit lines used (How much credit is tied

up in credit cards)• Proportion of installment loans (How much do you have

left to pay on specific loans)

3. Length Of Credit History (15%)• Time since accounts opened• How long it has been since you used certain accounts.

What is in your score?What is in your score?

4. New Credit (10 %)– How many new accounts you have. (how many newly

opened credit cards)– How long it has been since you opened a new account– Length of time since credit report inquires were made by

lenders.

5. Types of Credit in Use (10 %)– Is it a healthy mix? – Do you have a mix of credit cards, installment loans, and

mortgage loans.– What kinds of credit accounts you have.

Check for Understanding Check for Understanding

• What is good/bad for your credit score activity.

What’s in Your What’s in Your Credit Report?Credit Report?

1. Personal Information: – Name, address, Social Security number

2. Accounts:– Type of accounts: bankcard, auto loan, mortgage, the date

you opened the account, your credit limit, payment history

3. Inquiries:– When you apply for a loan, you authorize your lender to

ask for a copy of your credit report

4. Negative Items– Lenders report delinquency information when you have

missed a payment. Overdue debt from collection agencies.

• Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these

facts

Your age. Other types of scores may consider your age, but FICO® Scores don’t.

Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information

Where you live.

Any interest rate being charged on a particular credit card or other account.

Any items reported as child/family support obligations

What FICO Score Ignores:

What’s Not Included in Your What’s Not Included in Your FICO ScoreFICO Score

• Certain types of inquiries (requests for your credit report or score).– Your FICO® Score does not count any inquiries you initiate, any inquiries from employers, or any inquiries lenders make without your knowledge.

–Any information not found in your credit report.

–Any information that is not proven to be predictive of future credit performance.

Protect Your CreditProtect Your Credit

• Protect your credit. • Order and review your credit reports looking

for information you do not recognize. • If you see fraudulent activity you should file a

dispute with the credit bureaus. • If you believe a thief is opening credit in your

name, you might want to consider a fraud alert or credit freeze.

SummarySummary

• Your FICO Score is based on a snapshot of information in your credit report at a point in time.

• Your FICO Score can change whenever your credit reports change.

• Bankruptcy or late payments can lower your FICO Score fast, improving your score takes time.

• Check your credit report for free at least once a year.

• Don’t close credit cards or open too many in a short period of time.

ResourcesResources

• www.annualcreditreport.com • www.myfico.com

VideoVideo

• https://www.youtube.com/watch?v=F6b2XoeQV2I

• https://www.youtube.com/watch?v=gWQiABf3oO0

Scenario ActivityScenario Activity

• Carolina wants to lease a car. The dealership says “no problem, let me just run your credit first.”

• Should the car dealership lease the car to Carolina based on her credit report?

• How can you improve your FICO Score.

Discussion Questions/Exit Discussion Questions/Exit TicketTicket

1. What does a credit report tell potential creditors?

2.Describe why it is important to check all three credit reports?

3.What are three ways a consumer can harm his/her credit score?