1 Solving the Credit Puzzle L G & W Federal Credit Union
2 Knowledge Check How much do you already know about credit scoring?
3 Sample Credit Report
4 Credit Bureaus Equifax TransUnion Experian
5 Who Can Pull Your Credit? Creditors considering granting you credit Employers considering you for employment, promotion, retention, etc. Insurers considering you for insurance Government agencies reviewing financial status or benefits Others with legitimate business need (landlords)
6 Who Can Pull Your Credit? Court orders or jury subpoenas Any third party you request in writing
7 Monitor Your Credit Get copy of your credit report one from each national bureau free annually Check at least once each year
8 Your Credit Report Identifying Info: Names, addresses, birth year, employers Credit Info: Loan accounts by type, date opened, credit limit or loan amount, payment pattern of 2 years Public Record Info: Bankruptcy, tax lien, judgements Recent Inquiries: Names of those who have obtained copies of your report
9 Correcting Your Report If you find errors on your credit report, you must contact the bureaus directly to file a dispute Contact information for each bureau found on Credit Resources handout
10 Your Credit Score
11 What is a Credit Score? A 3-digit score that helps lenders determine the likelihood of timely repayment FICO scores range from 300 to 850 (best) a snapshot of your credit risk at a specific moment in time
12 Importance of Credit Score Can determine your ability to make important purchases such as house and car Can determine how much you pay (interest rates) Can even affect hiring decisions
13 How Fast Does Score Change? Typically, scores do not change quickly Bankruptcy, late payments will drop score fast Improving score takes time
14 Credit Scoring Benefits Speeds lending process Older credit problems count less, won t haunt you forever Lowers rates credit process less expensive for lenders Fair lending decisions formulas eliminate bias
15 What Doesn t Count Race, color, religion, national origin, sex, and marital status Age Salary, occupation, title, employer, etc. However, salary, etc. is used by lenders in making final decision Where you live
16 Scoring Formula Payment History = 35% Capacity (Amount Owed) = 30% Length of Credit History = 15% Types of Credit = 10% New Credit = 10%
17 Payment History 35% - Most important factor Pay bills on time! Never get to 30 days late!
18 Payment History Frequency How many times late? Recency When? Recent events carry more weight. Severity 30 days? 60 days? 90 days? More?
19 Payment History Most recent 12 months 40% Prior 12 to 24 months 30% Prior 24 to 36 months 20% Prior 36 to 48 months 10% Older than 4 years 0%
20 How Long? Bankruptcy information remains on the report for 10 years Most other negative information (collection items, charge offs) remains on the report for 7 years
21 Payment Tips Use online Bill Pay with reminders and/or recurring payments Set up automatic payments Use Outlook reminders for due dates Bring delinquent accounts current Again, don t get to 30 days late One late payment can lower 50 to 100 points
22 Amount Owed (Capacity) 30% - second most important Current installment balances to original loan amounts Revolving account balance to credit limit (by individual accounts) Total revolving account balance to total revolving limits* #1 Bankruptcy Predictor Cards get maxed out, get in over head, bankruptcy
23 Amount Owed (Capacity) Keep balances low aim for less than 35% of credit limit Don t close good accounts kills your capacity and lowers your score!
24 Capacity Example #1 4 credit cards $40,000 combined limit $10,000 combined balance $30,000 or 75% of limit is available
25 Capacity Example #2 1 credit card $10,000 total limit $10,000 total balance 0% available
26 Length of Credit 15% Again, don t close old accounts in good standing shortens reportable credit history Good accounts open at least 2 years help your credit score
27 Types of Credit 10% Aim for a good mix of revolving debt (credit cards) and installment debt (same payment amount for set period like auto loan, mortgage, etc.)
28 New Credit 10% Be conservative new accounts lower your average account age Avoid card-hopping and credit binges Lots of new accounts in a short period of time is also a major bankruptcy indicator
29 The Truth About Inquiries
30 Inquiries Checking your own credit report is not counted Promotional inquiries (pre-approval offers, etc.) that you do not initiate are not counted Inquiries made by employers are not counted
31 Inquiries Inquiries made within 30 days of opening a new car or home loan are not counted Two or more inquiries in the same 14-day are counted as one inquiry Inquiries are tracked for 24 months, but only last 12 months is used in score calculation
32 Inquiries So, don t panic over inquiries For most people, one additional credit inquiry takes less than 5 points off the score Just avoid multiple inquiries (not rate shopping), especially if you have a limited credit history or applications are denied
33 Other Frequently Asked Questions
34 FAQs How can I establish credit if I don t have a credit history? Develop a good history with your credit union (checking account, etc.) Start small (small loans, low credit limits) Department store or gas card Check rates and fees, use only to establish credit Secured credit
35 FAQs Who reports to the credit bureaus? Parties that have extended credit to you in the form of loans or credit cards such as department stores, credit unions, banks, etc. Rent and utilities not reported, but if not paid will report as negative items.
36 FAQs How often is payment history reported? Every 30 days
37 FAQs I have always paid cash in full for everything. Now that I need a car loan, I am considered risky. Why? Without a solid credit history to review, lenders don t have a good way to evaluate your risk.
38 FAQs My insurance company didn t pay one of my medical bills and now there s a collection item on my credit report. Why? You are listed as the responsible party on your medical bills. Follow up with your insurance company, then file disputes with all credit bureaus (Equifax, TransUnion, Experian) listing the collection item.
39 FAQs If I am joint on a loan or credit card that is paid late, will it hurt my score? Yes! Be very careful about co-signing on a loan or credit card. Your credit score will be damaged if payments are late.
40 FAQs Are student loans included in my credit score? Not during the deferred payment period (if any). Once you enter the repayment period, they are included.
41 Repairing Credit
42 Repairing Credit Bring accounts current Use reputable, non-profit services Advise you on managing money and debt Help develop a budget Educational materials and workshops Avoid debt settlement (not the same as debt management) Beware of shady credit repair services
43 Counseling Services Memphis Consumer Credit Education Association (901) or (901) $20.00 for counseling session Must bring copy of report (annualcreditreport.com) Consumer Credit Counseling Services helpingfamilies.org (901)
44 Resources Review Credit Resources Handout
45 Final Do s and Don ts
46 Do: Pay bills on time Keep good accounts open, especially older accounts Keep revolving credit balances low Pay down installment loans Limit rate shopping to a 14-day period Check your credit report regularly Dispute errors
47 Don t: Close good accounts Max out your available credit Go on a new account binge File for bankruptcy (stays on record 7 to 10 years) Use shady credit repair services Forget to check your credit report at least once a year
48 Knowledge Check Review correct answers
49 Questions? Any questions? Thank you for your participation! To receive electronic versions of PowerPoint presentation and handouts, fill out sign up sheet