© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Understanding

Credit Reports

Family Economics & Financial

Education

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Credit Reports

◊ Credit report - a record of a consumer’s credit history

◊ Credit history - a record of transactions involving credit use

◊ Individuals do not have a credit report if they have not

previously used credit

◊ Affects one’s ability to acquire credit

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Information on a Credit

Report

◊ Name and aliases

◊ Current and past addresses

◊ Marital status

◊ Date of birth

◊ Employment history

◊ Public records

◊ Judgments, criminal, and

bankruptcy

◊ Credit card, store card, book

clubs, music clubs, etc.

Payment history

◊Credit card, store card, book clubs, music clubs, etc.

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Information continued

◊ Financial records

◊ Loans, bounced checks, closed

accounts, etc.

◊ Loans/leases

◊ Rent-to-own contracts, payday

loans, lease agreements, etc.

◊ Credit inquiry-

◊ Number of credit inquiries

◊ Credit inquiry -a request

for your credit. Can be

done by businesses you

apply to for credit or whom

pre-approve you for credit

*Medical information is not on a consumer’s credit report, but

late medical payments are.

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Building Credit History

◊ Important for consumers to build a credit history to be

able to purchase items on credit

◊ For example – house, vehicle

◊ Affects a young adult’s ability to make a purchase on credit

in the immediate future including:

◊ Renting an apartment

◊ Buying a car

◊ Purchasing electronics or other merchandise

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Building Credit History

continued

◊ Store accounts (JcPenny or Sears charge accounts)

◊ Credit card accounts

◊ Even with a co-signer

◊ Loan from financial institution

◊ Acquire a small loan from a financial institution and pay the loan off

in timely payments to develop a positive credit history

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

No Credit History

Having no history of credit use

Not having any credit accounts in own

name

Paying cash for all major purchases

Paying phone and utility bills on time

While the following are all positive financial practices, a credit history is not built if a consumer performs the following actions:

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Positive Credit

◊ Practice good banking techniques

◊ Keep checkbook balanced, do not

bounce checks

◊ Pay bills consistently and on time

◊ Keep public records free of

bankruptcy

◊ Have no criminal record

◊ Keep a reasonable or small amount of

debt

◊ Apply for credit sparingly, keeping

credit inquiries low

◊ Hold a low number or credit/store

cards

◊ Check credit report annually to

remove errors

◊ Maintain reasonable amount of

unused credit

◊ Being responsible with credit and finances can lead to good credit

◊A consumer may develop and keep good credit by:

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

General Rule

◊ Percentage of current debt compared to the total credit available is reviewed by potential lenders

◊ 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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Negative Credit

Bouncing checks

Routinely paying bills late

Having a criminal record

Holding a large amount of debt

Holding an unreasonable amount of unused credit

Not paying utility or cell phone accounts consistently and on time

◊ Being irresponsible with credit and finances can lead to poor

credit

◊ A consumer may develop or keep poor credit by:

Obtaining a high number of credit inquiries

Carrying many credit/store cards

Having a public record of bankruptcy

Defaulting on a loan

Having cards over the limit

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Credit Reporting Agency

(CRA)

◊ Keeps a record of a consumer’s credit transactions and

compiles credit reports

◊ Acquires information from several different types of

lending companies

◊ Information on credit reports differ between each

individual agency

◊ Lenders may only report to one credit agency

◊ Consumers should contact all agencies when checking their credit

report

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

CRA’s continued

The 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

(800) 397-3742

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Who Reports to CRA’s?

◊ Store accounts

◊ Credit card companies

◊ Mortgage and other loan lenders

◊ Financial institutions

◊ Landlords

◊ Courts

◊ Utility accounts

◊ Cellular phone companies

◊ Delinquent accounts

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Requesting continued

◊ 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

◊ Any time a consumer requests credit from a business, they are able to review his/her credit report. This may include:

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Mistakes in Credit Reports

◊ More than 50% of the credit reports checked in a study contained errors

◊ Consumer Reports (July 2000)

◊ The two main errors commonly appearing in a consumer’s

credit report 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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Fair Credit Reporting Act

◊ Enacted to protect the consumer in 1971

◊ Designed to promote accuracy and ensure privacy of

information in credit reports

◊ Consumers 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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Correcting Errors on Credit

Reports

Steps include:

◊ Contact the particular credit bureau that has the error

◊ CRA must report to the consumer within 30 days

◊ If the CRA can’t verify the information, then it must be

removed from the file or if in error it must be corrected

◊ If a consumer disagrees with result of CRA investigation, they

have the right to submit a 100 word explanation which stays in

the consumer’s file

◊ Negative information is usually removed from credit file after

seven years, except bankruptcy which is removed after 10 years

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Correcting Errors on Credit

Report Cont.

◊ According to the Better Business Bureau (BBB)

and the Federal Trade Commission (FTC):

◊ Consumers can do just as good of a job repairing

their credit report errors as a fee based debt repair

agency

◊ Be cautious of debt repair agencies promising instant

help because there is no immediate fix for poor credit

◊ Be proactive and correspond to CRA’s if an

error is found

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Credit Scores

◊ A mathematical tool created to help lender evaluate the risk associated with lending a customer money

◊ Scores range from 150-950, with 950 being the best score

◊ Not listed on a credit report

◊ Each CRA has an independent scoring system based upon a standard percentage of five different categories◊ Consumer’s scores can differ between each CRA

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Five Standard Categories of

Scores

1. 35%-Payment history- Timely manner in which a consumer pays debt

2. 30%-Outstanding debt-Amount of debt currently held

3. 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 history

5. 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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Credit Scores continued

Other factors calculated into a credit score may include:

◊ Length of time at current address

◊ Current income

◊ Financial information

◊ Late payments

◊ Amount of outstanding credit

◊ Amount of credit in use

◊ Length of time credit has been established

1.4.2.G1

© Family Economics & Financial Education – Revised April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Financial Effect of Credit

Scores

◊ 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 April 2005 – Credit Unit –Understanding Credit Reports

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Conclusion

Build and maintain positive credit!

Check credit reports annually for errors!

Act financially responsible!