Understanding a Credit Report! April 21, New York City Department of Consumer Affairs. All rights reserved.

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1 Understanding a Credit Report!

2 Questions to Think About What are the different types of credit and why is credit important? What is a credit report? How does credit impact future financial goals?

3 3 What is Credit? Credit is a trust relationship. A party such as a lender, a bank, merchant or credit card company, known as a creditor, gives you, the debtor, funds or makes payment on your behalf so that you can make a purchase or payment, with expectation that you will pay the creditor back in accordance with your agreement.

4 4 Why is Credit Important? Credit is used to judge character and level of risk Potential employers and mangers Housing and rental decisions Lenders (home, car or business) Lack of credit Inconvenience No emergency options Bad credit Everything costs you more Fewer loan options

5 5 What Does Credit Actually Cost You? AMOUNT OF PURCHASE MINIMUM MONTHLY PAYMENT 4% INTEREST YOU WILL PAY FINAL COST OF PURCHASE Assume an 18% interest rate TIME TO PAY OFF $500 $20 $ $ Mos. $2,000 $80 $ $2, Mos. Assume an 18% interest rate

6 6 Real Cost of Credit Terminology Interest: The amount a borrower pays to use someone else s money Annual Percentage Rate (APR): The annual cost of using the credit for the year; the figure includes interest, transaction fees and service charges if any. This is the charge when a borrower carries a balance Annual Fee: The cost of having the use of a credit card, or having access to the use of the credit per year

7 7 Terminology Finance Charge: This is the actual amount the borrower pays for using the credit for the year Origination Fee: The cost of setting up a loan; this usually applies in the case of a mortgage or real estate loan Loan Term: The period of time over which the borrower has to repay the loan Late Fees: The penalty that a borrower must pay if a payment is made late. This is in addition to the interest that is calculated.

8 8 Terminology Minimum Payment: Usually at least 2% of the outstanding balance. Most creditors will set a minimum of $15 or $20/ month. Minimum payments have been rising recently. Grace Period: The number of days that a borrower will not have to pay interest. A good strategy is to pay off the balance within the grace period whenever possible.

9 9 Benefits of Credit Emergencies Safety and Convenience Extras bonus points/miles Tool for Managing Your Money

10 10 Types of Credit Credit Cards/Revolving Credit: Credit limit decreases as account is used, and increases as balance is repaid. Installment Loan: Usually for larger purchases such as car loan or appliances. Payments are set at a fixed amount payable monthly until the full amount and interest are paid in full. Mortgages: A loan made in which the borrower s collateral securing the loan is real estate. Student Loans

11 11 Establishing Credit How to Build Credit History Establish savings and checking accounts Obtain credit cards and installment loans Establish a Banking Relationship for the Long-Term Will products and services offered fit my future plans? Handle your accounts responsibly Get to know your branch manager

12 Potential Lenders & Creditors Triple C s Character Capacity Capital

13 13 CHARACTER Does the Borrower Appear Fiscally Responsible? A good credit report and score A good past history of paying on time A set of good financial and personal references CAPACITY Does the Borrower Have the Ability to Repay? Is the applicant employed? Are there other sources of income? What are the applicant s expenses (is there net income after expenses refer to budget form from Session I, i.e. cash flow)? CAPITAL Does the Borrower Have Capital? Does the applicant have any savings, or investments? Does the applicant have any collateral such as real estate?

14 14 Your Free Credit Report Mail Write letters to the three credit bureaus: Experian, Equifax, and TransUnion requesting a free copy of your credit report. Your letter should include your: Full name including middle initial and suffix (Jr., Sr., II, etc.) Date of birth Social Security number Current mailing address A prior address if your current address is less than 2 years If you are married, separate requests should be made for husband and wife. Proof of mailing address by copy of 2 utility bills. Telephone Online:

15 15 To Obtain Free Credit Report CREDIT REPORTING AGENCY EXPERIAN EQUIFAX TRANSUNION ADDRESS EXPERIAN P.O. Box 2104 Allen, TX EQUIFAX INFORMATION SERVICES LLC P.O. Box Atlanta, GA TRANSUNION CONSUMER SOLUTIONS P.O. Box 2000 Chester, PA TELEPHONE NUMBER To obtain a report To request a report Customer Service To request a report Customer Service WEBSITE ADDRESS

16 16 Credit Score Score is not free FICO Score Fair Isaacs Company Score Three Credit Bureaus Scores

17 17 Score Determines Interest Rates FICO scores range Each credit bureau uses slightly different system, but are generally based on FICO

18 18 Calculating Your Score 35%: Punctuality of payment in the past (only includes payments later than 30 days past due) 30%: The amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits) 15%: Length of credit history 10%: Types of credit used (installment, revolving, real estate) 10%: Recent search for credit and/or amount of credit obtained recently

19 19 Reviewing a Sample Credit Report Merged report shows information from all 3 bureaus Summary page

20 20

21 21 Check to make sure addresses are yours Check employer information Aliases maiden name, nicknames, adopting name upon citizenship, name changes

22 22 Sample Credit Report Scores given by each company may vary based on scale and information available to them

23 23 Sample Credit Report Merged credit score was 615 when information from all 3 reports aggregated

24 24 Sample Credit Report Factors impacting score Balance on revolving loans too high Short credit history Too many active accounts with balance Not enough Installment Debt Experience

25 25 Strategies for Credit Repair Immediately report any errors Start paying on time Severely delinquent payments talk to creditors Obtain secured credit card

26 26 Correcting Errors To dispute or correct credit reports, make sure you utilize your 100-word statement Write to the Credit Bureau that supplied the information In your letter be sure to include: Full name including middle initial and suffix (Jr., Sr., II, etc.) Date of birth Social Security number Current mailing address If applicable, the name and account number of the creditor and item in question The specific reason for your disagreement with the disputed item Your signature

27 27 How to Repair Credit Passage of Time: Negative information reported for 7 years Bankruptcies reported for 10 years Criminal records no time limit

28 How Do Credit Decisions Affect Financial Goals? Credit cards / Revolving credit; Installment loans; Mortgages; Student loans Creditors look for triple C s Character, Capacity & Capital Lack of credit allow for fewer loan options and no emergency outlet Credit provides safety and convenience and tools for managing your money

29 42 Broadway, New York, NY 10004!

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