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1 CREDIT REPORTS & SCORES: A Guide to Understanding and Improving Your Credit NYLAG Financial Counseling Division Workshop Financial Counseling Division New York Legal Assistance Group (212)

2 NYLAG The New York Legal Assistance Group (NYLAG) is a non-profit organization that offers low-income and other vulnerable New Yorkers the legal help they critically need. NYLAG provides free civil legal services New Yorkers who would otherwise be unable to access legal services.

3 Agenda What is a credit report and score How to get a credit report and score How to read a credit report What goes into a credit score Factors that hurt and help a score Disputing errors on a report Rebuilding credit

4 WHAT IS A CREDIT REPORT? A credit report is a record of how you have borrowed and repaid credit. Whenever you get credit, that lender reports information about your account to credit reporting agencies. This information is used to create your report and credit a Credit Score Governed by the Fair Credit Reporting Act

5 Why Do I Care? Credit scores determine the availability, price & terms of credit Credit reports can be used by employers, landlords, lenders, insurance companies, government agencies and YOU Credit reports list all open accounts and who can access the credit Credit reports may contain judgments and liens (which you might now know exist) Credit reports can help expose identity theft

6 Factors Not Included In Score Income Race Religion Gender Marital status Nationality Age Receipt of public assistance

7 Your Rights Fair Credit Reporting Act See what s in your report Have an accurate report Have mistakes corrected Tell your side of the story See who has requested your report

8 Get Your Report: Free (or ). The ONLY government mandated web site. Annual Credit Report Request Service, P.O. Box , Atlanta, GA The form can be printed at Avoid despite cute ads it isn t free

9 Get Your Score: FICO Score (or similar)- Costs about $8-$15; Avoid fee based plans. Free Score Estimates*: * These companies may require you to sign up for other services or use your info for marketing purposes

10 Credit Agencies: Big Three: Experian, Trans Union, Equifax (calculate FICO differently). FICO- Fair Isaac Company, most common score- range FICO varies by agency Other Scores: A - F

11 Reading a Report 1. ID Section 2. Credit History Section 3. Collections Account Section 4. Courthouse Records Section 5. Additional Information Section 6. Inquiry Section

12 Key Information Your name, birthdate, past addresses, employers Credit Accounts-company, account number, date opened, date closed, months reviewed, last activity, high credit, terms, balance, past due, status, date reported, payment history Inquiries- companies that requested your file

13 Public Records Bankruptcy Property tax liens Court judgments Past due child support

14 SAMPLE CREDIT REPORT

15 SAMPLE CREDIT REPORT

16 FICO Score Distribution ( )

17 Factors Affecting Score: Positives and Negatives

18 FACTORS AFFECTING YOUR SCORE Payment history (approximately 35% of your score is based on this category): Payment information on accounts such as Visa, MasterCard, American Express, and Discover; retail department store accounts; installment loans; finance company accounts, and mortgage loans Public record and collection items such as bankruptcies, foreclosures, wage attachments, liens, judgments, and delinquencies reported to collection agencies Details on late or missed payments, public record items, and collection items (particularly how late the payments were, how much was owed, and how recently and frequently it occurred) How many accounts show no late payments

19 FACTORS AFFECTING YOUR SCORE Amounts owed (approximately 30% of your score is based on this category): The amount owed on all accounts The amount owed on different types of accounts Whether you are showing a balance on certain type of accounts The number of accounts with balances How much of the total credit line is being used on credit cards and other revolving credit accounts How much of the installment loan account is currently owed, compared with the original loan amount

20 FACTORS AFFECTING YOUR SCORE Length of credit history (approximately 15% of your score): How long your credit accounts have been established (the score considers both the age of your oldest account and an average age of all your accounts) How long specific credit accounts have been established How long it has been since you used certain accounts New credit (approximately 10% of your score): How many new accounts you have How long it has been since you opened a new account How many recent requests for credit you have made, as indicated by inquiries to credit reporting companies, in connection with transactions initiated by you (the score does not take into account requests a creditor has made for your credit file or score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your request for a copy of your credit file) Length of time since creditors made credit file inquiries Whether you have a good recent credit history, following past payment problems Type of credit used (approximately 10% of your score): What kinds of credit accounts you have and how many of each

21 One Event Impact Example A B Current FICO score Maxing out a credit card A 30-day delinquency Settling a credit card debt Foreclosure Bankruptcy

22 Impact on Credit Costs Auto Loan Rate Example Experian Fico Score Avg. Car Loan Rate % % % % % % Note: Experian s average US score is 693- It will differ across rating agencies.

23 VANTAGE SCORE DESIGN: THE FINAL MODEL Available Credit 1% Recent Credit 30% Payment History 28% Length and Type of Credit 9% Total of Balances 9% % of Credit Limit Used 23% Recent credit behavior, such as inquiries and newly opened loans, is highly predictive of the consumer s likelihood to maintain good debt management performance Payment history and the percentage of credit card and credit line limits used by consumers also continue to provide significant insight into consumer performance VantageScore Solutions, LLC

24 UNDERSTANDING THE SCORE ( ) SCORE GRADE CONSUMERS WHO ARE: LIKELY TO CHARGE-OFF LIKELY TO PAY ON TIME 900 A B C D F 1 1 A credit score of 900 means that for every ONE consumer who is likely to charge off, there are 300 consumers that are likely to pay on time. A score of 501 means that for every ONE consumer who is likely to charge off, there is likely just ONE who will pay on time. VantageScore Solutions, LLC

25 DETAILED IMPACT OF ACTIONS ON TWO CREDIT SCORE SCENARIOS Missed payments and Defaults have a significant negative impact STARTING SCORE Janet James SCENARIO SCORE DROP RANGES Missed payments Bankcard 30 days Bankcard 60 days Auto 30 days Auto 60 days Mortgage 30 days Mortgage 60 days Charge-off or foreclosure Charge-off, placed at collections agency Filing bankruptcy VantageScore Solutions, LLC

26 DETAILED IMPACT OF ACTIONS ON TWO CREDIT SCORE SCENARIOS Opening new accounts will have a minor temporary impact on a score while poor credit card management results in a deeper drop to a credit score STARTING SCORE SCENARIO Obtaining credit Janet James SCORE DROP RANGES Making an inquiry Opening a new account (additional) Opening a new mortgage (additional) Opening a new auto loan (additional) Using credit cards Using all available credit on one credit card Spreading credit usage over multiple credit cards Closing an old credit card account VantageScore Solutions, LLC

27 DETAILED IMPACT OF ACTIONS ON TWO CREDIT SCORE SCENARIOS Proper credit management will improve a credit score STARTING SCORE SCENARIO Score improvements Janet James SCORE INCREASE RANGES Paying down the mortgage by $25, Accounts age by one year Reducing the percentage of credit card limit used by % VantageScore Solutions, LLC

28 American Working Age Adults With Any Bill Problems or Medical Debt Source: The Commonwealth Fund Biennial Health Insurance Survey (2010).

29 Medical Bill Collections In 2010, 30 million American adults were contacted by a collection agency for unpaid medical bills Source: The Commonwealth Fund Biennial Health Insurance Survey (2010)

30 Medical Collections and Credit Reports More than half (52%) of accounts in collection are medical bills More than one-third (36%) of medical collections had balances due, when reported, of $100 or less More than 70% of medical collections had balances due when reported, of $250 or less An Overview of Consumer Data and Credit Reporting, Avery et al Federal Reserve Bulletin, Summer 2010

31 Collection Accounts Weigh Heavily on Credit Scores Discrepancies on Medical Bills Can Leave a Credit Stain New York Times, May 4, Ray White, Lewisville, TX had a $200 ambulance bill which he paid despite the assurances from the insurer that it was covered. It was only when he and his wife went to refinance the $240,000 mortgage on their home, nearly six years later, that he learned the bill had shaved about 100 points from his credit score. With no other debts, a healthy income and otherwise pristine credit, the couple had to pay an extra $4,000 to secure a lower interest rate.

32 Medical Collections, Credit Scores and Access to Credit Medical bills can cause lingering credit pain Growing number of Americans finding this out when applying for loans Associated Press, March 4, Matt Ernst, a vice president at Mortgage Lenders of America in Overland Park, KS said Medical collections frequently turn up on credit reports. "We see a ton of them," Ernst said. They have an impact on financing, he said, but even he didn't realize how much until he learned that someone with a FICO score of 680 which is considered good, but not excellent will see their score drop up to 65 points because of a medical collection. "I didn't know a medical collection would hammer it that hard," Ernst said. "Our investors require a 620 to even get a loan.

33 Inconsistent Reporting of Medical Accounts TransUnion states that medical debts are not typically reported unless they become delinquent and are assigned to collections

34 Filing a Dispute Correcting Credit Report Data Many credit reports contain accounts sent to collection in error or are duplicate listings for the same account - Burden on consumer to correct information Removing Fully Paid or Settled Accounts Many consumers believe that paying off collection accounts will result in deleting from credit report. They must be removed from a report in order for a score to improve Credit Reporting Agency must respond in 30 days If after hearing back you still disagree, you may attach up to 100 word statement

35 Sample Dispute Letter ( Date Your Name Your Address, City, State, Zip Code Complaint Department Name of Company Address City, State, Zip Code Dear Sir or Madam: I am writing to dispute the following information in my file. I have circled the items I dispute on the attached copy of the report I received. This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be removed (or request another specific change) to correct the information. Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records and court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible. Sincerely, Your name Enclosures: (List what you are enclosing.)

36 Help Your Score By: Pay Bills On Time- most important factor and will keep score stable Pay Down Balances On ALL Cards- higher scores for low balance vs line Pay Delinquencies First- impact of delinquencies fade with time Correct errors on report with letters to agencies via dispute process Get access to AFFORDABLE CREDIT and opportunities to make on time payments: secured cards, good debt like student, mortgage, utilities and rent (

37 Hurt Your Score By: Missing Payments- FICO considers frequency, how late, and recency of missed payments Max Out Your Cards- high utilization hurts and maxing out is the worst Bankruptcy(?), Foreclosure, Judgments Tax Liens Closing Accounts(?)- raises utilization rate Applying for Credit(?)- Hard vs Soft Pulls

38 IMPROVING YOUR CREDIT DO NOT: Close unused credit cards as a short-term strategy to raise your score. Open a number of new credit cards that you do not need, just to increase your available credit. This approach could backfire and actually lower your score. If you have had credit for a short time, do not open a lot of new accounts too rapidly. New accounts could lower your average account age, which will have a larger effect on your score if you do not have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user. Do your rate shopping for a given loan within a short period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

39 WILL I BE PENALIZED FOR LOAN SHOPPING? Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries for your credit score from auto or mortgage lenders within a short period of time. The FICO score treats these as a single inquiry, which will have little or no impact on your credit score. The FICO score ignores all auto- or mortgage-related inquiries that occur within the 30-day period previous to an inquiry from an auto or mortgage lender (called the buffer period). And prior to that buffer period, the scoring software also notes when earlier inquiries were made, if any, and counts back 14 days from each one. The score then counts all auto- or mortgage-related inquires made within any 14-day period as just one inquiry.

40 Understanding Credit Reports, Scores, and Improving Your Credit Rating Thank you! Questions???? New York Legal Assistance Group (NYLAG) (212)

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