Understanding Your Credit Score and Credit Report. George Williams, CPA, JD, LLM Ross, Rosenthal & Company, LLP June 21, 2012

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1 Understanding Your Credit Score and Credit Report George Williams, CPA, JD, LLM Ross, Rosenthal & Company, LLP June 21, 2012

2 What is a Credit Score? What is a Credit Report? A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. Credit reports are a laundry list of your credit accounts, payment history and other information, that create your credit score

3 FICO What is a Credit Score? The most widely used credit scores are FICO Scores FICO is named after the company that developed it, Fair Isaac & Company and is one number between 300 and 850

4 Importance of Your Credit Score Over 80 percent of mortgage lenders and 90 percent of the largest financial institutions use FICO scores in their evaluation and approvals process for credit applications. The higher your number, the better the chance you will make your loan payments and make them on time, lenders believe. It's much easier for lenders to look at this number than analyze your credit reports to come up with their own risk evaluation.

5 Importance of Your Credit Score Lenders can buy your FICO scores from all three major credit reporting agencies Your credit score influences the credit that s available to you in terms of: Amount of credit extended Terms of the credit Interest rate charged Overall, a better FICO score means better financial options available for you!

6 Importance of Your Credit Score Most lenders use your FICO score to make credit decisions. Other factors that lenders also review: Amount of new debt that one can handle based on present income Aggregate amount of outstanding debt of applicant Employment history Credit History

7 Importance of Your Credit Score How does YOUR credit score help YOU? A perspective applicant can get an answer quicker and obtain loans faster Credit decisions are fairer (lenders can focus on the facts rather than personal opinions and biasesobjective versus subjective. Older credit issues and problems count for less (Impact of past problems/issues fades as time passes). Polling Question # 1

8 What s in a Credit Report? Your credit report details your credit history as it has been reported to the credit reporting agencies by lenders who have extended credit to you. Your credit report list the following information: 1. What types of credit you use (installment, revolving, bankcard, auto, mortgage etc) 2. The length of time your accounts have been open 3. How many accounts you have open 4. Whether you paid your bills timely-usually on a month-bymonth basis 5. How much credit you have available 6. How much of your credit you ve utilized 7. Whether you re seeking new credit

9 What s in a Credit Report? Collected Information 1. Personal Information (Name, Address, Date of Birth. Social Security Number, Employment Information-current and past) 2. Accounts established (both current and past and the status of each) 3. Inquiries (list of lenders who accessed your report within the last 24 months) 4. Negative items -Lenders report delinquency information when payments are missed. Credit agencies also collect information from collection agencies, state and county courts, bankruptcies, foreclosures, tax liens, garnishments, lawsuits and judgments.

10 What FICO Scores Ignore FICO scores do not take into account the following information: Race, color, religion, sex or marital status Age Occupation, Title, dates employed or employment history Where one lives Any interest rates charged in credit or loans Child Support or family support obligations Any information NOT found in your credit report

11 How is Your Credit Score Calculated? percent Payment History: Its important to have a long history making of payments on time and no missed payments on all credit accounts percent Amount Owed: Its the measurement of the amount you owe relative to the total amount of credit you have available. A person who has leveraged or is close to maxing out all their credit limits is deemed to be a higher risk of late payments percent Length of Credit History: Having a credit report containing a list of accounts opened for a long time will help your credit score. Your FICO score considers your oldest account and the average age of all accounts.

12 How is Your Credit Score Calculated? (cont d) percent New Credit: "Opening new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry percent Types of Credit in Use: "Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered."

13 Importance of Your Credit Score Although banks and other financial institutions have been using FICO scores for years, only in the past decade have individual been allowed to learn their score. FICO resisted releasing scores for some time, afraid that consumers would use the data to artificially inflate their scores and thus make them less useful. However, pressure from Congress and consumer groups has changed that. But to most people, the revelation that they even have a FICO score is still news.

14 Three Different FICO Scores? There are three different FICO scores developed by FICOone for each of the three main US reporting agencies: Equifax (BEACON) Experian (Experian/FICO Risk Model) TransUnion (FICO Risk Score Classic) The FICO scores from each agency consider only the data in your credit report from THAT agency

15 Three Different FICO Scores? (cont d) Each reporting agency may have different information about you, and that means the score may vary. FICO makes the scores as consistent as possible between the three reporting agencies Lenders may review your SCORE and credit report from any of the three reporting agencies. Therefore, it s a good idea to check the credit report of all three agencies Polling Question # 2

16 Interpreting Your FICO Score A FICO score can range from 300 (very bad) to 850 (superb). The median is 704, according to Fair Isaac statistics. FICO Score Percent of Population % % % % % % % %

17 What is a GOOD FICO Score? FICO score from 500 to 580 is where the trouble starts. Your credit is bad, period. You'll get a loan and you won't like it. But it could be the beginning of your fresh start for someone with poor credit. FICO score from 580 to 619 is considered a low score. Credit teams may place you at a disadvantage FICO score from 620 to 679 is OK. You won't be denied but the terms are not going to be too generous. FICO score from 680 to 719 means Good. Pretty much you can get a normal loan. Translating in layman terms you won't be robbed too bad. FICO score of 720 means Very Good credit. Certain lenders offer better rates and/or discounts if you are over 720 The Top 13% of individuals have FICO above 800.

18 What if You re Turned Down for Credit? If you ve been turned down for credit, a Federal Law, The Equal Credit Opportunity Act (ECOA), gives you the right to obtain the reasons why you were turned down within 30 days. You are also entitled to a free credit report within 60 days, which you can request from the credit reporting agencies. If your FICO score was the primary reason for the lenders decision, the lender may use the score to explain why you didn t qualify for the credit.

19 What if You re Turned Down for Credit? One of the changes implemented by the Dodd-Frank financial reform bill that took effect, July 21 st, 2011 if you re denied a credit card or asked to accept an aboveaverage interest rate, you have a right to know how your credit score influenced the decision. This new protection applies not just to credit card issuers, but to utilities, insurance companies, landlords and anyone who falls under the designation of creditor. If you re turned down or if you are issued a credit card with a higher interest rate, the issuer will have to detail exactly why you have these adverse terms.

20 What if You re Turned Down for Credit? The new disclosure law is tacked on to the Fair and Accurate Credit Transactions Act of 2003 (also known as the FACT Act). The FACT Act addresses risk-based pricing: people who are considered risky get charged higher interest rates to compensate for the chance that they ll default. It says that if you get terms that are worse than the most favorable terms available to a substantial proportion of consumers, the lender has to tell you about the negative information on your report.

21 How Long Does Information Stay on a Credit Report? The three credit reporting agencies store information from credit grantors and public records, including bankruptcies, judgments and liens. Missed payments and most public record items remain on the credit report for seven years Exceptions: Chapter 7, 11 and 12 bankruptcies, which remain for 10 years, and unpaid tax liens, which remain for up to 10 years. Active positive information may remain on the report indefinitely. Requests for your credit history remain on the credit report for up to two years. Polling Question # 3

22 Fixing Errors on a Credit Report Governed by the Fair Credit Reporting Act Nobody can legally remove accurate and timely negative information from a credit report. However, the law does allow you to request a reinvestigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this, so you may want to go the self-help route and consider credit repair independently. You can dispute mistakes or outdated items for free. Ask the reporting agency for a dispute form or submit your dispute in writing, along with any supporting documentation. Do not send them original documents.

23 Fixing Errors on a Credit Report (cont d) Clearly identify each item in your report that you dispute, explain why you dispute the information, and request a reinvestigation. If the new investigation reveals an error, you may ask that a corrected version of the report be sent to anyone who received your report within the past six months Job applicants can have corrected reports sent to anyone who received a report for employment purposes during the past two years. When the reinvestigation is complete, the reporting agency must give you the written results and a free copy of your report if the dispute results in a change.

24 Fixing Errors on a Credit Report (cont d) If an item is changed or removed, the credit bureau cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the credit bureau gives you a written notice that includes the name, address, and phone number of the provider. You also should tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any bureau or reporting agency, it must include a notice of your dispute. In addition, if you are correct the information provider may not use it again.

25 Identity Theft: Security Freeze New Jersey Consumers Have The Right To Obtain A Security Freeze. You may obtain a security freeze on your credit report to protect your privacy and ensure that credit is not granted in your name without your knowledge. You have a right to place a "security freeze" on your credit report pursuant to New Jersey law. The security freeze will prohibit a consumer reporting agency from releasing any information in your credit report without your express authorization or approval.

26 Identity Theft: Security Freeze The security freeze is designed to prevent credit, loans, and services from being approved in your name without your consent. When you place a security freeze on your credit report, within five business days you will be provided a personal identification number or password to use if you choose to remove the freeze on your credit report or to temporarily authorize the release of your credit report for a specific party, parties or period of time after the freeze is in place. To provide that authorization, you must contact the consumer reporting agency and provide the following: (i) The unique personal identification number or password provided by the consumer reporting agency; (ii) Proper identification to verify your identity; and (iii) The proper information regarding the third party or parties who are to receive the credit report or the period of time for which the report shall be available to users of the credit report.

27 How to Get Your Free Credit Report? Federal law allows you to get at least one credit report each year from each of the three credit bureaus. You can also get a free credit report in certain situation, for example, if you re unemployed and preparing to look for a job. Some states have laws that allow you to get a free credit report. These states include: Colorado - one free per calendar year, then $8 Georgia - always free Maine - one free per 12 months, then $5 Maryland - one free per 12 months, then $5 Massachusetts - one free per calendar year, then $8 New Jersey - one free per 12 months, then $8 Puerto Rico - always free Vermont - one free per 12 months, then $7.50

28 NJ Law on Credit Reports As a New Jersey resident, you are entitled to one free copy of your credit report from each of the three nationwide credit reporting agencies (Equifax, Experian and TransUnion) once a year. Under the 2003 Fair and Accurate Credit Transactions Act, every American has the right to a copy of their credit report from each of the nationwide agencies. AnnualCreditReport.com is the official site to help consumers to obtain their free credit report from the nationwide agencies. This central site allows you to request free reports once every 12 months.

29 NJ Law on Credit Reports NJ Consumers should request their free reports in one of these three ways: 1. Go to (the only authorized source for consumers to access their annual credit report online for free). 2. Call toll free Complete a form, available from the Federal Trade Commission (FTC), and mail it to: Annual Credit Report Request Service, P.O. Box , Atlanta, GA You'll be able to order all three credit reports at one time, or you may consider staggering the reports at different times throughout the year. You should review your credit report from each credit reporting agency at least once a year.

30 How to Get Your FICO Score The Web site will sell you a comparison of your three credit reports from the three main companies: Experian, Equifax and TransUnion along with your FICO score for $40. For this price you also gain access to a feature on the site that lets you create hypothetical situations, such as paying off a particular debt or paying credit card bills on time, etc., and see how such actions will affect your score.

31 FICO Improvement Tips Amounts Owed 1. Keep balances low on credit cards and other revolving credit 2. Pay off debt rather than moving it all around 3. Don t close unused credit cards as a strategy to raise your FICO score (actually owing the same amount but having fewer open accounts can actually lower your FICO score 4. Don t open a number of new credit cards that you just don t need, just increase your available credit on existing cards. 5. AVOID credit repair agencies that charge a fee to improve your FIO score. Polling Question #4

32 FICO Improvement Tips Amounts Owed 1. Keep balances low on credit cards and other revolving credit. 2. Pay off debt rather than moving it all around. 3. Don t close unused credit cards as a strategy to raise your FICO score (actually owing the same amount but having fewer open accounts can actually lower your FICO score!). 4. Don t open a number of new credit cards that you just don t need, just increase your available credit on existing cards. 5. AVOID credit repair agencies that charge a fee to improve your FICO score.

33 FICO Improvement Tips Establishing New Credit 1. If you ve been managing credit for a short period of time, don t open new accounts too rapidly (will hurt your average account age). 2. Do your rate shopping for any given loan 3. Be careful for opening accounts you do not need 4. Be cognizant of discount and low-interest rate being offered to entice you to open a new account 5. Re-establish your credit history if you ve had prior problems 6. Check your own credit reports and your own FICO score (will not effect your score if ordered directly from the credit reporting agency)

34 FICO Improvement Tips Existing Credit 1. Making a habit of paying other bills and payments timely-even if the minimum amount (Because payment history comprises the largest part of your FICO score, it is obviously going to have the largest positive impact. 2. Rotate and use all of your cards - a dormant credit account will not help your score 3. Many recommend not having more than five credit cards. If you decide to close some credit accounts, close the newer accounts first 4. Don't close more accounts than necessary because this lowers your ratio of debt to available credit. Polling Question #4

35 Three Major Credit Reporting Agencies-Contact Information Equifax Experian TransUnion

36 Conclusion Because of Dodd-Frank, lenders will have to disclose your credit score and any relevant information. This is intended to increase transparency around the FICO score, one of the most important numbers in your life. It affects your interest rate, of course, but also whether you ll be approved for a mortgage, how much you pay for insurance, how you pay your phone bill and in some cases whether you ll get a job. However, Fair Isaac (the company that issues your FICO score) makes its money off of having a secret formula to calculate your creditworthiness. You can get your credit report for free once a year, but you need to do some legwork to get your credit score for free. And once you do get your score, you won t get to see the exact formula used to calculate it.

37 Question and Answer Session George Williams, CPA, Esq. Ross Rosenthal & Company, L.L.P CONNECT WITH MONEYMATTERSNJ.COM: MONEYMATTERSNJ.COM FACEBOOK TWITTER BROUGHT TO YOU BY THE NEW JERSEY SOCIETY OF CPAS