Managing Your Credit Report and Scores. Apprisen

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1 Managing Your Credit Report and Scores Apprisen

2 Managing Your Credit Report and Scores Your credit score is one of the most important aspects of your personal finances. From credit approval to interest rates you are charged, your credit score can either hurt you or help you. Find out how your credit score is generated and reported. With that knowledge you can take steps to positively influence your credit history, obtain credit approval, and receive better interest rates. Contents Credit Reporting Bureaus 3 Why Having Good Credit Is Important 4 Why You Need to Know What is on Your Credit Report 5 Information on Your Credit Report 6 Your FICO Credit Score 11 What Your Credit Score Means 13 Rebuilding Your Credit 14 Establishing Credit 15 How Long Something Stays on Your Credit Report 16 Correcting Errors on Your Credit Report 17 Apprisen Can Help You. 18

3 Credit Reporting Bureaus A credit report is like a financial report card. It contains information that creditors report to the credit bureaus regarding your accounts. The credit bureaus act as a library that houses the information that the creditors send. They do not put anything on the report that the creditors haven t provided. There are three major credit bureaus Experian, Equifax and TransUnion. One is not better than the others and creditors can choose to report to as many as they elect or none of them. If you are applying for any type of credit and want to ensure it is being reported, ask. This holds especially true for car loans secured from buy here pay here car lots. Many consumers wrongly assume that their payments are being reported, but find out later, they are not. 3

4 Why Having Good Credit Is Important The information contained on your credit report is used in many different ways. Creditors use it to evaluate your credit worthiness when determining credit limits, interest rates and whether you will qualify for the credit at all. Service providers, such as utility companies and cell phone carriers, use it to determine if you could be at risk of defaulting on your payments. Based on the information on the report, deposits could be required before the service will be provided. Some employers pull a credit report before making a job offer. However, you will need to sign a release to give them authorization to do so. Your house and car insurance premiums could be higher if you have bad credit. Even many car rental businesses will pull your credit report if you don t have a major credit card, denying you the rental if your credit is not up to par. The bottom line is if you have bad credit or no credit, you could be spending more money on higher interest rates than you need to be. Let s look at the impact on interest rates, payments, and ultimately the cost of a car loan based upon different credit scores: LOAN AMOUNT $25,000 $25,000 $25,000 LENGTH OF LOAN 48 Months 48 Months 48 Months INTEREST RATE 4% 10% 17% MONTHLY PAYMENT $ $ $ TOTAL INTEREST ON LOAN $2, $5, $9, EXTRA INTEREST CHARGED - $3, $7,

5 Why You Need to Know What is on Your Credit Report You need to know what s on your report for three reasons: 1. Get your head out of the sand. The only way you can get a realistic view of your finances is to have a clear picture of what you owe. Your credit report will give you a summary of how many open accounts you have and their balances. You might not be aware of some outstanding debts that are being reported. 2. Check for inaccuracies. Looking at your report, you might find accounts that are not being reported correctly. You may have paid off a balance that is not reflected or find that a creditor is reporting a late payment when it wasn t. We will discuss in detail later how to dispute inaccurate information on your report. 3. Guard against identity theft. Unless you are getting phone calls or letters from a collection company trying to collect on a debt that isn t yours, you may not realize that your identity has been stolen and used to open up accounts. By checking your report, you can determine whether all the accounts listed are ones that you are responsible for. How do you get a copy of your credit report? You are entitled to one free copy of your credit report from each of the three credit bureaus every 12 months through annualcreditreport.com. A good suggestion would be to pull a copy from a different bureau every four months so you will be looking at your credit on a consistent basis. For example, pull an Equifax report today, four months from now an Experian report and four months after that a TransUnion report. In addition, under federal law you are entitled to a free credit report if a company takes adverse action against you, such as denying your application for credit, insurance or employment from the credit bureau of which the decision was made. If a credit score was a factor in the decision to deny you credit or receive less favorable terms, the report will also include the credit score. You can request the report up to 60 days after you receive notification. You can also receive a free report every year if you re unemployed and plan on looking for a job within 60 days, if you are on welfare, or if your report is inaccurate because of fraud. Credit Score Myth I don t need to check my credit report if I pay my bills on time. Even if you pay your bills on time, creditors make mistakes or you could be a victim of identity theft. It is important to regularly check your credit report for accuracy. 5

6 Information on Your Credit Report Identifying Information and Employment Your identifying information listed will include all names, aliases, and addresses, as well as current and previous employers. Name Jane Doe Social Security Number Birthdate 4/15/1965 Address 123 Apple Lane Anywhere, OH Current employer Previous employer 456 Dove Street Flying High, CA Pretend Manufacturing Nice Time Employer Credit Score Myth All credit reports are the same. Creditors can choose what bureau, if any, to report your credit information. Therefore, each report could contain different information. 6

7 Credit Summary Your credit summary is a listing of all accounts, balances, payment history and inquiries listed on the report. This example shows 4 revolving accounts that total $5,678 and one is at least 30 day past due. A revolving account is an account where you have a different payment each month depending on the account balance. You have the option to pay off the account or revolve the balance to the following month. The account remains open until the consumer or creditor closes it. There are a total of 6 accounts on this summary and the other two accounts are most likely installment loans, for example, mortgage, car or student loans. An installment loan, unlike a revolving account, has the same monthly payment until the balance is paid off. The total debt included in this report is $127,428. All accounts are open and there have been 4 inquiries. Revolving Accounts Count 4 Balance 5678 Current 3 Total Accounts Count 6 Balance 127,428 Current 5 Account Summary Open 6 Closed 0 Public Records 0 Inquiries (Prev 2 years) 4 7

8 Account History Your account history indicates the creditor s name, partial account number, date opened, balance, account ownership, your responsibility on the account, high balance, last date reported, payment history, past due amount and remarks. In this example, the account is held by XYZ Bank and is a revolving account with a current balance of $2,750 and a minimum monthly payment of $55. The account was opened September of 1998, has a credit limit of $5,000 with the highest balance being $3,500. The account is current but was 90 days delinquent from June through August of 2011 and was delinquent again in January Creditor Name - Account Number (i.e XYZ Bank) 1234-XXXX-XXXX-XXXX Account Type Revolving Responsibility Individual Monthly Payment $55 Date Opened 9/1998 Balance $2750 Credit Limit $5000 High Balance $3500 Past Due $0 Remarks Current, was 90 days past due Payment History Year One 2012> 2011> OK OK OK OK 30 OK Ok OK OK OK OK OK OK OK OK OK OK 8

9 Public Records A public record is a legal document that is issued by a state or federal court and is accessible to the public. Documents such as foreclosures, bankruptcy, judgments, and tax liens could be listed on the credit report. The example below shows a bankruptcy was filed on 3/25/2006 and discharged on 5/25/2006 for $65,700. The reference number would indicate the bankruptcy case number in the county the individual filed in. Bankruptcy Type Chapter 7 Bankruptcy Status Discharged Date Filed 3/25/2006 Reference Number B Closing Date 5/25/2006 Court County Exempt amount 0 Asset amount 0 Remarks Inquiries Your inquiry section contains a list of everyone who accessed your credit report within the last two years. It contains both your hard and soft inquiries. A hard inquiry is one where you have requested credit and a soft inquiry could be when lenders access your report to make you a pre-approved credit offer or increase your credit score. Many service providers, for example, cell phone or utility companies, pull a credit report before opening an account. It is a good practice to ask if that is a hard or soft inquiry. Creditor Name Date of Inquiry Bank of USA 9/7/2009 Orange Mortgage Company 10/1/2011 9

10 Your Credit Score Your credit score is a number which many creditors and service providers use to assess your credit worthiness. The higher the score the more likely you will receive lower interest rates or be asked to make smaller deposits. There are many different scoring models; however, the most widely used is the FICO score, developed by Fair Isaac. This is the scoring model we will cover. The FICO score ranges from and is calculated by the information listed on your report payment history, amounts owed, length of credit history, new credit, and types of credit. This is the scoring model we will cover. Amount of Debt 30% Payment History 35% 35% New Credit 10% Types of Credit Used 10% Length of Credit History 15% Credit Score Myth Closing accounts helps your score. In actuality, closing accounts can affect your credit utilization which could hurt your score. 10

11 Your FICO Credit Score Payment History 35% Your FICO score considers payment history as the most important factor in determining your credit score. It takes into account:: 1. Recency How long since the most recent delinquency, collection or public record items 2. Severity What was the highest level of delinquency reached 30, 60, 90 days + 3. Frequency How many credit obligations have been delinquent Amount of Debt 30% Your FICO score considers the amount of debt you owe in relation to the amount of credit you have available. This is referred to as your credit utilization. FICO recommends that your credit card utilization ratio (CUR) be kept below 30%. For example, if you have a credit card limit of $1,000 you should keep a balance of $300 or less on that card. The following example illustrates how closing an account can impact your CUR. There are 5 open credit cards with a total credit limit of $25,000. Total balances are $7,500 leading to a CUR of 30%. However, if you closed out a card with a $10,000 limit that has a zero balance you see that your CUR increased to 50%. To figure your credit utilization take the amount of credit you are using and divide that by the amount of credit you have available. Total credit limit of 5 cards is $25,000. Close one zero balance credit card with a limit of$10,000 Total credit limit of 4 cards is $15,000. Total Balances of $7,500. Total Balances of $7, % Credit utilization 50% Credit utilization 11

12 Length of Credit History 15% Your FICO score considers how long all of your accounts have been open, including the age of your oldest account, the age of your newest account and an average age of all your accounts. It also looks at how long it has been since you used certain accounts. Inquiries 10% Your FICO score considers how many hard inquiries have been made to your credit file in the past two years. However, it also allows for rate shopping for mortgages, cars or student loans. Any of those types of inquiries made within 30 days counts as just one inquiry when determining your score. Types of Accounts 10% Your FICO score considers the mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Closing out an account does not prevent it from being part of that percentage. Maintaining a Good Credit Score The factors in determining your credit score are only guidelines. Your overall credit score is determined by the information in your report. It is impossible to measure how your credit score will be affected by a single factor without looking at the whole report. Because of the combined information on the report differs between individuals, a change in one factor could impact two people very differently. To maintain a good credit score: 1. Pay your bills on time. 2. Keep your balances low. 3. Leave your accounts open, even if you are not using the card. 4. Only open up credit when you need it. 5. Have a variety of credit accounts credit cards, car loans, retail cards, mortgage loans. Credit Score Myth Checking my credit report will hurt my score. Your score will not be affected when you pull your credit report. 12

13 What Your Credit Score Means A low credit score can be an obstacle in obtaining credit or services. But what constitutes a low credit score is very subjective. One lender might approve applicants with a score of 650 or higher, while another lender might not issue credit for scores below 700. Often, if approved, the higher the credit score the better the terms and conditions on the account. The FICO score operates within the range of The following gives a general breakdown on what your credit score means. Bad Credit Poor Credit Fair Credit Good Credit Excellent Credit < > % 51% 31% 14% 5% 2% <500 83% 1% Based upon data from Fair Isaac. This illustration shows the different FICO credit score ranges and the probability that a person whose credit score falls within that range will default on a credit obligation according to Fair Isaac s calculation. FICO s data indicates that people with higher credit scores are more likely to repay their debt then those with lower credit scores. For example, a person with a credit score of 560 defaults on a loan 51% of the time while a person with a credit score of 720 only 5%. Lower credit scores mean higher risks to lenders. In the event a loan is approved, lenders will often charge higher interest rates to cover their loss in the event the loan is not repaid. 13

14 Rebuilding Your Credit If you have gone through a difficult financial situation and your credit has suffered as a result, don t throw up your hands and assume you will always have bad credit. What you are doing today has more impact on your credit score than what you did last month. Here are some things that you can begin to do to help bring up that credit score: 1. Pay your bills on time. Establish a system to ensure your bills are paid in a timely manner. Have them paid automatically out of your account, set up online reminders, or do it the old fashioned way, write due dates on a calendar. 2. Reduce debt. Create a monthly spending plan by reviewing your current spending and identifying your priorities. Cut back on things that are less important to free up extra income to apply towards reducing your debt. Then, make a list of all your creditors, outstanding balances, minimum payments and interest rates on your accounts so you have a clear picture of your total debt obligations. A good strategy to help pay off debt more quickly is to make minimum payments on all your accounts except for the account with the lowest balance (or highest interest rate) and apply any additional money you have in your budget to that account. Once that is paid off, take that payment and apply it to the next account. 3. Keep balances low. Make sure you are using less than 30% of your available credit. 4. Apply for credit only when you need it. Don t be tempted to save 10% at your favorite retail store to open a credit card. Not only does the inquiry affect your score, you might be tempted to make an impulsive purchase in the future. Credit Score Myth A divorce decree automatically severs joint accounts. If you are a joint holder on an account, you are responsible for the balance of that account, regardless of what the divorce decree states. If your ex-spouse refuses to pay what the court ordered, contact your attorney for legal advice. 14

15 Establishing Credit Establishing credit can be tricky. Sometimes lenders won t give you credit because you don t have any, but how are you going to get it if they don t give it to you? Here are a few ideas to help you get started: 1. Open a bank account. Although that alone won t provide you a credit history, it will allow you to begin a relationship with a financial institution. Maintain that account in good standing- don t overdraw it. Most banks offer overdraft protection. If approved, this line of credit is often reported to the credit bureaus. 2. Open a credit builder loan at a bank or credit union. Many financial institutions have loans available that will help establish credit. One type of loan is a savings loan. With this loan you would make payments to yourself which is deposited into a savings account. The financial institution would report your payment to the credit bureaus. When the loan is paid off, the balance of the savings account is yours. This type of loan will not only help you establish credit, it will help you build an emergency savings account. 3. Pay all your bills on time. Even though your rent, electric and cell phone bills are not reported on your credit report, those types of payments are considered service credit and could help you when applying for traditional credit. Sometimes, you might be able to provide creditors with statements showing on time payments for these accounts that will support your credit worthiness. Keep in mind, although making on time payments on these accounts don t get reported, it s possible that if these accounts go past due and are sent into collections, they may be. 4. Apply for a credit card. If you have an account at a financial institution, that would be a good place to start. If you are not successful, shop online for credit cards for which you are most likely to qualify. Creditcards.com is a good source that will outline your options. Don t apply for too many cards at one time, multiple inquiries to your report could hurt, not help, your credit chances. Also consider a department store card. Often, their credit requirements are lower than a financial institution. When applying for any type of credit, make sure you ask if the creditor reports to the credit bureaus. 5. Open a secured card. Many financial institutions offer secured credit cards. These cards are guaranteed by a deposit that you make into a savings account; if you don t make a payment, they withdrawal the funds from your account. 6. Become an authorized user on an existing account. In this case, someone who has an established credit card account can add you as an authorized user. The activity on the account is reported to both credit reports. 15

16 How Long Something Stays on Your Credit Report Most things fall off the credit report after a given period of time. However, student loans, taxes, and judgments can be listed longer per individual state statutes. But, if you haven t paid the debt, just because it is not listed on the report doesn t mean you still don t owe it. In most instances: Negative account information - 7 years after the date of delinquency Paid/Closed accounts no delinquencies 10 years from paid/closed status Chapter 7 bankruptcy 10 years after it s been discharged Chapter 13 bankruptcy 7 years after it s been discharged Judgments 7 years from filing date Foreclosures 7 years from the filing date Hard inquiries 2 years If you believe something should have fallen off the report, you can dispute the information with the credit bureaus. 16

17 Correcting Errors on Your Credit Report Under the Fair Credit Reporting Act, you have the right to dispute anything you believe is inaccurate information on your credit report. The credit bureau and the organization that provided the information are responsible for correcting inaccurate or incomplete information. Tell the credit reporting agency what you believe is inaccurate. Send a letter explaining your dispute. Provide as many details as possible and enclose copies of paperwork that will support your claim. State what action you want them to take. It is a good idea to enclose a copy of your credit report highlighting the inaccurate information. Send your letter, return receipt requested, so that you can confirm that the credit bureau received your request. Keep copies for your records. All three bureaus are accepting disputes online with Experian accepting only online disputes. For a sample of a dispute letter, click here. The agency has 30 days to respond back to your request and report the inaccuracy to the other bureaus. Equifax Equifax Disputes P.O. Box Atlanta, GA Experian Experian Disputes All disputes with Experian are handled online. TransUnion TransUnion Disputes 2 Baldwin Place, P.O. BOX 1000 Chester, PA

18 Apprisen Can Help You. Financial Stress Test Apprisen created the Financial Stress Test to help you measure your level of financial stress. Just answer some easy questions about your financial habits and in less than five minutes you will have a clear indication of whether your finances are healthy or require immediate action. The test it free and painless. Take the Financial Stress Test. Credit Health Education Session Apprisen will pull your tri-merge credit report and review it with you. We ll help you understand your report as well as the effects that your behavior can have on your credit score. Together, we will create an action plan to ensure your personal finances stay on track. Financial Counseling Apprisen has provided non-profit financial counseling to thousands of consumers for almost 60 years and we can help you as well. From basic personal finances to HUD approved housing counseling and bankruptcy counseling, our certified Financial Services Specialists can help you get your finances on the right track. Find out more about Apprisen s services by calling: Or, by visiting our website: apprisen.com/get-started Apprisen apprisen.com