REVIEW.The Credit Process

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1 REVIEW.The Credit Process Credit when goods, services, and/or money are received in exchange for a promise to pay back a definite sum of money at a future date. Wants to acquire an item Does not have enough money and wants to borrow from a lender Borrower Lender Person or organization with resources to provide a loan Credit card company, depository institution, etc. If approved by the lender, receives credit Pays the lender interest for the privilege of borrowing Borrower Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 1

2 Credit History Reporting Additional Information What they do Lender Report consumer s credit transactions to CRA s store accounts, credit card companies, utility companies, etc. Credit Reporting Agency (CRA) Keep a record of consumer s credit transactions (credit history) Agencies include: Equifax TransUnion, Experian Credit Report Record created by the CRA of an individual s credit history If an individual has not acquired credit, they will not have a report Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 2

3 Credit Reporting Agencies Acquire information from: Retail stores that offer credit accounts Credit card companies Mortgage and finance companies Utility accounts Landlords Depository Institutions Cell phone companies Collection agencies Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 3

4 Information can be divided into 4 categories: Personal Information Accounts Summary Public record items related to credit Credit Inquiries Information in a Credit Report Lenders may or may not report information to all three credit reporting agencies. An individual s information may be different in each report. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 4

5 Personal Information Personal Information Name and aliases Current and past addresses Social Security number Date of birth Employment history FIND ISABELLA S PERSONAL INFORMATION Isabella s Personal Information: Name Isabella G. Langley or Isabella Langley Addresses 101 Hopeful Ave. & 695 Parent Street Date of birth 05/04/86 Telephone numbers & Employers Lucky s Restaurant & Jane s Daycare Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 5

6 Accounts Summary Accounts Summary Types of accounts Date the account was opened Credit limit or loan amount Account balance Payment history, including missed or late payments WHAT LENDERS DOES ISABELLA HAVE ACCOUNTS WITH? Isabella s Accounts Sam s Electronic World City of Anywhere U.S. Department of Education Financial Institution School Loan Shop Til You Drop Store Credit Card Love to Read Store Credit Card The Free Money Credit Card Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 6

7 Accounts Summary DOES ISABELLA HAVE ANY LATE OR MISSED PAYMENTS ON ACCOUNTS? Isabella s Late or Missed Payments Sam s Electronic World Past due Store Credit Card Occasional late payments Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 7

8 Public record items Public Record Items Accounts turned over to collection agencies Public records Bankruptcy Tax liens Legal suits Foreclosures IDENTIFY PUBLIC RECORD ITEMS IN ISABELLA S REPORT related to credit Isabella s Public Record Items City of Anywhere In Collection Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 8

9 Credit Inquiries Requests for an individual s credit report Completed by: Insurance agencies Potential credit companies Financial institutions Landlords Potential employers, etc. WHAT INQUIRIES DOES ISABELLA HAVE ON HER REPORT? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 9

10 Equal Credit Opportunity Act Prohibits credit discrimination on the basis of: Race Religion Marital status Nationality Gender Age Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 10

11 Credit Score Impact THIS IS BASED UPON A 30 YEAR FIXED MORTGAGE RATE FOR A $300,000 LOAN FICO Score Interest Rate Monthly Payment 30 Year Amount % $1,787 $643, % $2,047 $736, % $2,500 $900,000 $256,680 saved over the lifetime of this loan because of a good credit score! Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 11

12 How Credit Scores are Determined Five categories of information from a credit report are used: Payment history Outstanding debt Length of credit history Pursuit of new credit Types of credit in use Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 12

13 Payment History The timely manner in which a consumer did or did not repay debt Includes: Several types of credit accounts Late or missed payments Public records and collection items Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 13

14 Payment History WHAT IS ISABELLA S PAYMENT HISTORY? WHAT IMPACT DOES THIS HAVE ON HER CREDIT SCORE? Found in status column Payment history Sam s Electronic World is past due City of Anywhere is in collection Shop Til You Drop has occasional late payments Love to Read was closed and never late The Free Money Credit Card is paid on time Credit score impact Negative Too many late accounts Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 14

15 Outstanding Debt The total dollar amount of debt currently held Includes balances on all reported accounts When a high percentage of debt is used, then it negatively impacts a score Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 15

16 Outstanding Debt HOW MUCH TOTAL DEBT DOES ISABELLA HAVE? HOW MUCH AVAILABLE CREDIT IS ISABELLA USING? WHAT IMPACT DOES THIS HAVE ON HER CREDIT SCORE? Total debt Found in recent balance column $37,325 Available credit Found in credit limit column $37,546 Impact Negative $37,546-$37,325 = $221 she is using almost all her available credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 16

17 Length of Credit History Length of time a consumer has held credit accounts Includes how long ago credit accounts were established A longer credit history will generally increase a credit score Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 17

18 Length of Credit History WHEN DID ISABELLA FIRST BEGIN HER CREDIT HISTORY? IF ISABELLA KEEPS HER FREE MONEY CREDIT CARD OPEN FOR ANOTHER 10 YEARS AND PAYS OFF THE BALANCE, WHAT WILL HAPPEN? Credit history Found in date opened column 08/05 U.S. Dept. of Education Free Money Credit Card Score will improve Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 18

19 Pursuit of New Credit Assesses how many accounts have been opened recently and the type of account Includes the number of recently opened accounts as well as requests for new credit Opening too many types of accounts in a short period of time has a negative affect Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 19

20 New Credit HAS ISABELLA PURSUED ANY ADDITIONAL CREDIT SINCE JANUARY 2008? IF ISABELLA ACQUIRED ANOTHER CREDIT CARD AND SHOPPED FOR AN AUTOMOBILE LOAN, WHAT WOULD HAPPEN TO HER SCORE? Additional credit Shop Til You Drop in August 2008 Impact of seeking additional credit Credit score will go down Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 20

21 Types of Credit in Use Analyzes the types of credit in use Credit cards, retail cards, mortgages, automobile loans, etc. Variety is generally good to have Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 21

22 Credit in Use WHAT TYPES OF CREDIT DOES ISABELLA HAVE? WHAT ARE ADDITIONAL FORMS OF CREDIT SHE MAY SEEK? Types Credit card (revolving) School loan (installment) Private school loan (installment) Store cards (revolving) Additional forms Mortgage Automobile loan Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 22

23 Mistakes in Credit Reports Important to check each credit report annually to correct mistakes Two common errors Fraud (identity theft) Mistaken identity When a lender reports a transaction on the wrong person s credit report Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 23

24 Fair Credit Reporting Act Gives consumers the right to review and correct their report If a person is denied credit, they have the right to request their credit report from the credit reporting agency If within 60 days it is free of charge Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 24

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