personal finance: all about credit reports and credit scores by @phroogal

All About Credit Reports and Credit ScoresHow to Build, Maintain and Repair Your Credit

Jason Vitug@jasonvitug

Credit rating is a reflection of how you manage credit.

Don’t like what you’re seeing?

----You have the power

to fix it.

Introduction

• The plan is to introduce credit reports and credit score fundamentals.

• The goal is to understand the important role of credit and how it impacts your financial future.

• The takeaway is to know important concepts, factors that impact credit scores, how to establish, maintain and repair credit, and know available resources.

www.phroogal.com@phroogal

Credit 101

1. Consumer Rights2. Credit Basics3. Advantages and

Disadvantages of Credit4. 3 C’s of Credit5. Types of Credit6. Credit Vocabulary7. How Lenders Use Credit8. The Cost of Credit


9. Why Credit is Important10. Credit Bureaus11. Credit Reports12. Credit Scores13. Establish Credit14. Maintain Credit15. Rebuild Credit16. Dispute Inaccurate

Information

Consumer Rights

• Fair Credit Reporting Act– The Fair Credit Reporting Act (FCRA) is a federal law that

regulates how consumer reporting agencies use your information.

• Fair and Accurate Credit Transactions Act– FACT Act contains provisions to help reduce identity theft,

such as the ability for individuals to place alerts on their credit histories if identity theft is suspected, or if deploying overseas in the military, thereby making fraudulent applications for credit more difficult. Further, it requires secure disposal of consumer information.


Credit Basics

• Credit Rating– A creditor’s evaluation of a person’s willingness and ability to pay debts as

judged by character, capacity, and capital; a mathematical model used by lenders to predict the likelihood that bills will be paid as promised.

• Credit History– Another term for the information on your credit report. A record of how a

person has borrowed and repaid debt. A record of an individual that lists all debts and the payment history for each.

• Credit Report– The report generated from credit history is called a credit report. Lenders use

this information to gauge a potential borrower's ability to repay a loan.• Credit Score

– A credit score is a numerical representation of your credit profile. It makes it easier for lenders to make loan decisions.


Advantages of Using Credit• Purchase Power and Ease of Purchase

– Credit can make it easier to make purchases. If you don't like to carry large amounts of cash with you or if a company doesn't accept cash purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying things easier.

– Provides the ability to make large ticket buys such as auto or home purchases.• Protection of Purchases

– For instance, credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases.

• Building a Credit Line – Having a good credit history is important, not only when applying for credit cards, but also when

applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build good credit.

• Emergencies – Credit cards can also be useful for emergencies. While you should avoid spending outside your

budget (or money you don't have), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car).


Disadvantages of Using Credit


• Lead to Debt– The biggest disadvantage of credit is that they encourage people to spend money that they don't

have. – While this may seem like 'free money' at the time, you will have to pay it off and the longer you wait,

the more money you will owe.– Credit card companies charge you interest each month on the money you have borrowed.

• Pay Interest Rates– Interest is the amount you pay to carry a balance and increases the total cost of the items purchases. – Creditors charge you interest on each balance that you don't pay off at the end of each month. – How creditors make their money and this is how most people get into debt and possibly bankruptcy.

• Overspending– People often use credit to buy things they can’t afford. Sometimes friends or flashy advertising

pressure us to buy things we know we shouldn’t.

The 3 C’s of Credit

• Character– From your credit history, lenders may decide whether you possess the

honesty and reliability to repay debt. Creditors will consider if you’ve used credit before, paid your bills on time and how long you’ve been in your residence or employed.

• Capital– A lender will want to know if you have valuable assets such as real estate,

personal property, investments or savings to repay debt if income is unavailable.

• Capacity– Referring to your ability to repay debt. Lenders will look on how long you’ve

worked in your occupation and likelihood it will lead to higher income in the future.


Types of Credit Available

• Fixed Credit– Personal Loans– Home Loans (Mortgages, Home Equity)– Student Loans

• Variable Credit– Credit Cards– Personal Lines of Credit– Home Equity Line of Credit

• Secured Credit– Mortgages– Auto or Recreational– Secured Credit Cards– Secured Loans


Credit Vocabulary

• Annual Fee– A yearly charge by a lender for the right to use a line of credit, such as a credit card,

home equity line of credit or personal credit line.

• Finance Charge– The total cost of credit a customer must pay on a consumer loan, including interest.

The Truth in Lending Act requires disclosure of the finance charge.

• Grace Period– Grace period in reference to a loan is the period of time where payments maybe made

without interest accruing. The amount of time is determined by the issuer of the loan.

• Minimum Payment– The minimum amount that a lender requires you to pay toward your debt each month.


Credit Vocabulary

• Billing Cycle– The time interval between the dates on which regular periodic statements are issued.

• Credit Limit– The maximum amount of credit that is available on a credit card or other line of credit account.

• Cash Advance– A cash loan requested from your creditor, usually by using your credit card at an ATM machine or

through a loan advance on your paycheck. These loans include special interest rates charged on the amount of the advance. A cash advance fee typically applies.

• APR– A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other

charges.

• Late Payment Fee– A fee charged if your payment is received after the due date.


How Lenders Use Credit Rating

• A lender requests credit reports from one of three credit bureaus.

• In addition to the report, a lender will request a credit score to help with the evaluation of your loan application.

• The report informs lenders on the likelihood you’ll repay the loan in full.

• The better your credit report and higher your credit score, the more likely you will be approved and the lower interest rate you may be offered.


The Cost of Credit

• If you don't pay off your credit card balance every month, the interest assessed on your account means you’re paying more for the purchase .

• The longer you hold onto debt means you’ll also be paying more.

• Without credit or having a low credit score means you’ll pay more to finance purchases.


Auto Financing


Sample $25,000, 60-Month New Car Loan Purchase

Credit Tier APR Monthly Pmt Total Interest PaidA+ 5.75% $475 $4,327A 6.25% $484 $4,669B 8.00% $513 $5,888C 11.25% $547 $8,236D 14.25% $598 $10,498E 17.00% $616 $12,651

• A+ to E-paper difference in payment: $139 a month.• A+ to E-paper difference in total interest paid: $8,324!

Mortgage Financing


Sample $250,000, 30-Year First Mortgage Loan

Credit Tier APR Monthly Pmt Total Interest Paid A+ 5.75% $1459 $275,216 A 6.25% $1539 $304,145 B 6.75% $1622 $333,738 C 7.25% $1705 $363,959 D 8.50% $1922 $442,022 E 9.50% $2102 $506,768

A+ to E-paper difference in payment: $643 a month.A+ to E-paper difference in total interest paid: $231,552!

Why is Credit History Important?

• Credit history is reviewed by different groups to evaluate your financial behavior:– You– Banks and Credit Unions– Credit Card Companies– Mortgage Lenders– Cell Phone Companies– Insurance Companies– Landlords– Collection Agencies– State and Local Child Support Enforcement Agency– Employers (must have written consent)


Why Do Employers Check Credit?

• Some employers review credit reports as part of their hiring process.

• An employer can get a copy of your credit report only if you agree.

• A credit bureau cannot provide information about you to your employer or prospective employers without your written consent.

• Credit report seen by employers is not the same credit report seen by lenders and does not include a score.

• Employers cannot check your credit scores.• Employment based inquiries do not impact credit scores.


The Credit Bureaus


ExperianP.O. Box 9595Allen, TX 75013888-397-3742www.experian.com

EquifaxP.O. Box 740241Atlanta, GA 30374800-685-1111www.equifax.com

TransUnionP.O. Box 2000Chester, PA 19022800-916-8800www.transunion.com

• Credit bureaus are private companies and not government agencies that collect information on individual credit history and financial relationships.

• A credit bureau may collect information from banks, credit unions, financing companies, credit card companies and others who may provide credit to you.

• Credit Bureaus do not share information with each other.

http://www.experian.com/

http://www.equifax.com/

http://www.transunion.com/

What’s in a Credit Report?

• Credit Reports include:– Personal Information

• Your Name, Current and Previous Addresses, Birthdate, Social Security Number, Current and Previous Employers

– Public Records • Judgments, Bankruptcies, and Liens

– Collection Accounts• Open or Paid

– Trade Lines• Installment and Revolving

– Inquiries • Soft and Hard


What is NOT in a Credit Report?

• Credit Reports do not include:– Banking History (checking or savings)– Interest Rates– Race or Ethnicity– Religion– Sexual Orientation– Political Affiliation– Income or Salary History– Marital or Parental Status– Criminal Record– Immigration Status– Medical History


What’s Reported To Credit Bureaus

• Inquiries• Credit Accounts• Date Opened and Closed• Payment History• Balance• Credit Limit or Loan Amount• Payment Terms• Account Status: Open vs. Closed• Account Type: Individual, Joint or Authorized User• Age of Account• Delinquencies, Charge-offs and Collections


Inquiries and Public Record


How often do creditors report?

• Credit card companies and lenders report account information electronically.

• There’s no fixed schedule for reporting but most companies send monthly updates.

• Service providers such as utility companies, cell phone companies and medical services do not report positive payments only uncollected payments.


Factors Impacting Credit Score


Credit Score Range


FICO® is the most commonly used credit score. The name comes from the Fair Isaac Corporation, which developed the scoring model. They are used to predict the likelihood that a person will pay his or her debts. The scoring system uses information only found in credit reports.

Why do I have different credit scores?

• There are many credit scoring algorithms.• Many of the credit scores you get online or through mobile apps

are simulated credit scores. – These scores help you determine where you fall within the credit score

range.– They take information from the credit reports and use their own

methods to calculate the score.• Credit scores you purchase online and the credit scores seen by

lenders could vary as well. – The reason is that not all information is reported to all credit bureaus or

reported consistently. – Additionally, credit bureaus may use slightly different algorithms to

calculate your credit score. www.phroogal.com@phroogal

FICO vs. VantageScore vs. FAKO

• FICO®– FICO credit scores was created by Fair Isaacs Corporate (now

called FICO) to help lenders determine credit worthiness and likelihood of default.

• VantageScores®– VantageScore credit scores were created by the partnerships of

the 3 major credit bureaus (Experian, Equifax and TransUnion) to provide more consistency and standardization in scoring.

• FAKO scores– Credit scores created by the individual credit bureaus or other

third parties use similar credit scoring algorithms to create a score and dubbed FAKO scores.


Establish Credit

• Without an established credit history, creditors are unable to view your history of making on-time payments for an extended period of time.

• Get a secured credit card or secured loan– A secured credit card works like a regular (unsecured) credit card except but it requires a

security deposit. For example, a $500 deposit gives you access to a $500 credit limit. Secured credit cards are offered by many banks and credit unions.

• Get a department store credit card– Some retailers have easier approval terms. The limits tend to be small such as $100 but

by using the credit card and paying the balance in full each pay period you’re establishing a history of on-time payments.

• Need to build both types of credit (credit card and loans).• Need more credit information and longer credit history to be approved for

larger loan amounts for car or home purchases.


Maintain Good Credit

• Keep track of your spending.• Don’t exceed your credit limit or lines of credit.• Pay what you owe on time every time.• Keep a good mix of credit cards and loans.• Limit applications for new credit.• Don’t close old credit cards.• Review your credit report annually and use free credit

report monitoring tools. • Have an emergency fund to limit reliance on credit.


Repair and Rebuild Credit

• Get delinquent accounts current.• Payoff or settle collection accounts and request for deletion.• Charge Offs and Liens impact your score within 24 months of

reporting but has no impact past 24 months. Pay off all due balances.

• Request a good faith adjustment from creditors to remove late payments reported on your credit report.

• Check credit limits. Pay off balances or open new credit to improve your capacity.

• Don’t close your credit cards. Keep them open.• Keep your oldest credit cards active.


Boost Your Credit Score


1. Pull your credit report2. Review the inquiry section3. Check account accuracy4. Remove negative trade lines5. Settle collection accounts and remove false collections.6. Push delinquencies further in time.7. Increase your available credit.8. Add new credit or loans

Is credit necessary?

The Cost of Not Having Credit History

• Higher deposits to move into an apartment or denial of an apartment.

• Higher interest rates and fees on credit cards and loans.

• Deposit requirements for utilities, cell phone companies and other providers.

• Higher auto insurance premiums.• Possible difficulty in getting a job.


Having credit does not mean you need to be in debt.

Disputing Inaccurate Information

• Inaccuracies can include misspelled names, merged sibling information, incorrect addresses or social security number, employment history and credit information.

• Dispute Inaccurate information – Contact lender and creditor to resolve inaccuracies on credit history or credit limits.– Dispute inaccurate information with the credit bureau online or through courier mail.

• Keep track of your dispute and log conversations for future reference. • Creditors and credit bureau must respond within 30 days of receipt of

letter. • If you disagree with result, submit additional information until resolved.• Add a 100 word statement on your credit report to explain any periods of

unemployment or extraneous circumstances that contributed to credit issues.


Debunking Credit Report Myths


• Credit bureaus report consumers as having either good or bad credit. (False)

• Once credit report is bad, it can’t be fixed. (False)• Paid off delinquent accounts are automatically removed from

credit reports. (False)• If bills aren’t paid in time because of a dispute, consumer can’t

be held accountable. (False)• You should wait until you’re much older to start your credit

history. (False)• Closing accounts with late payments will remove negative

information. (False) • Married couples share the same credit report. (False)

Debunking Credit Score Myths


• Paying cash helps credit scores. (False)• Debit cards, check cards or ATM cards help credit scores. (False)• Pulling your own credit report impacts your credit score. (False)• Education level can affect credit scores. (False)• There is only one credit score that lenders use. (False)• Best way to improve credit scores is to pay off debt entirely and

close credit cards. (False)• Closing old accounts help your score. (False)• Credit repair companies can increase your credit score. (False)

Credit Repair Companies

• No one can remove accurate information from your credit report.

• You can repair your credit with proper knowledge.• Repairing credit requires time.• Rebuild credit with positive credit use.• No one can create a new identity or new credit report

for you.• Legitimate services provide services before requesting

payment.


What can you do today?

Access Your Free Credit Report


• AnnualCreditReport.com is the official website for obtaining your free credit report from the credit bureaus Equifax, Experian and TransUnion.

• You have the right to request your credit reports online, by phone or by mail for free once every 12 months under FACT Act regulations.

• Does not include your credit scores.

http://www.annualcreditreport.com/

Access Free Credit Report and Score


• Many companies offer access to your credit report along with a free credit score.

• Be mindful of companies that require you to input your credit card information. Unless you want to subscribe to a credit monitoring service.

• Check out these free services (no credit card required):– Quizzle – get access to an Equifax credit report and free

VantageScore® credit scores. You’ll receive emails for offers ranging from mortgages to credit cards in return for the free access.

– Credit Karma - Start with a free credit score. They make money from credit offers based on your credit profile.

http://goo.gl/o8c51s


http://www.creditkarma.com/

Action Plan


1. Pull one credit report from AnnualCreditReport.com.2. Get your credit score from Quizzle or CreditKarma.3. Review your information for accuracy and ensure

your identity is protected.4. Dispute incorrect information with the credit bureau.5. Rebuild or repair your credit report and credit score

accordingly.6. Use a credit monitoring service to track your credit

rating.

http://www.annualcreditreport.com/



http://www.creditkarma.com/

Learn more about credit reports and credit scores on

www.phroogal.com

http://www.phroogal.com/

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