Basics of Credit Reports and Credit Scores

Transcription

1 Basics of Credit Reports and Credit Scores What is a Credit Score? A credit score is a number lenders use to help them predict the likelihood (risk) that you will repay your debt as agreed. For this reason, credit scores are also called risk scores. Scores are generated by statistical models using elements from your credit report. However, scores are not stored as part of your credit history. Rather, scores are generated at the time a lender requests your credit report and then included with the report. Each of the credit bureaus, TransUnion, Experian, and Equifax, has their own scoring model and scores may differ from bureau to bureau. Each score is based on information that particular credit bureau keeps on file about you. Credit scores are fluid numbers that change as the elements in your credit report change. For example, payment updates or opening a new account could cause scores to fluctuate. Depending on the type of credit scoring model that is being used, your score may differ from lender to lender. Payment history 35% 30% Amounts owed Length of credit history New credit 15% Types of credit used 10% 10% What s Not in a Credit Score? Credit scores do not consider: Your race, national origin, religion, sex, marital status or age Whether or not you receive public assistance Your salary, occupation, title, employer, date employed or employment history. However, lenders may consider this information in making their approval decisions. Where you live Any interest rate being charged on a particular credit card or other account Any items reported as child/family support obligations or rental agreements Certain types of inquiries (soft inquiries). The score does not count requests you have made for your own credit report in order to check it. It also does not count promotional inquiry requests made by lenders in order to make a preapproved credit offer. Finally, inquiries for employment purposes are not counted. Correcting Errors on Your Report Federal law allows consumers to challenge inaccuracies and correct their credit files, and the three credit bureaus encourage consumers to dispute incorrect data. There is no fee. If you believe there is an error on your report, submit an official dispute to each of the credit bureaus for fast resolution. They will investigate your dispute with the source of the data and you will receive a response within 30 days. All consumers will receive the results of the investigation. Payment History (35%) Amounts Owed (30%) Length of Credit History (15%) New Credit (10%) Types of Credit Used (10%) Number of accounts paid as agreed Negative public records or collections Delinquent accounts: 1. Total number of past due items 2. How long you ve been past due 3. How long it s been since you had a past due payment How much you owe on accounts and the types of accounts with balances How much of your revolving credit lines you ve used looking for indications you are over-extended Amounts you owe on installment loan accounts vs. their original balances to make sure you are you paying them down consistently Number of zero balance accounts Total length of time tracked by your credit report Length of time since accounts were opened Time that s passed since the last activity The longer your (good) history, the better your scores Number of accounts you ve recently opened and the proportion of new accounts to total accounts Number of recent credit inquiries The time that s passed since recent inquiries or newly-opened accounts If you ve re-established a positive credit history after encountering payment problems In general, checking to make sure you aren t attempting to open numerous new accounts Total number of accounts and types of accounts (installment, revolving, mortgage, etc.) A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

2 Sections of the Credit Report Identifying information Name, current and previous addresses, telephone number, Social Security number, date of birth and current and previous employers Statements of dispute may also be added by you or your creditors when you challenge an account s status with them Credit information Account information (date opened, credit limit or loan amount, balance, monthly payment and payment pattern) Who is on the account (whether it is a single name, joint, or cosigned account) Active positive credit information may remain on your report indefinitely Most negative information remains up to seven years Inquiries Who has reviewed your credit report Hard inquiries Inquiries by creditors for the purpose of granting credit Soft inquiries Inquiries by creditors who viewed your credit report for marketing purposes According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may inquire about your credit information without your prior consent This section includes the date of the inquiry and may list how long it will stay on your credit report Public record information Bankruptcy information (can remain on your credit report up to 10 years) Judgment (can remain for up to 7 years) Foreclosure (can remain for up to 7 years) Unpaid tax liens (can remain for up to 15 years) Unpaid child support (in some states) Other public record information can remain up to 7 years Obtaining a Free Credit Report AnnualCreditReport.com is the official site that allows consumers to request a free copy of their credit report, once every 12 months, from each of the national consumer credit reporting companies: Equifax, Experian and TransUnion. Consumers may also call (877) to request their credit report by phone. Improving Your Score Scores reflect credit payment patterns over time, with more emphasis on recent information. Therefore, time is your ally when it comes to improving credit. In general, a score may improve, if you: Pay your bills on time. Delinquent payments and collections can have a major negative impact on a score. Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a score. Apply for and open new credit accounts only as needed. Don t open accounts just to have a better credit mix it probably won t raise your score. Pay off debt rather than moving it around. Also, don t close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score. Review your credit report regularly. Make sure everything is being reported accurately. It won t affect your score if you request and check your own credit report. The Effect of Scores on Loans No matter whether you re getting a home loan, cell phone, a car loan, or signing up for credit cards, the higher your credit score, the less you pay to borrow money. For example*, on a $150,000, 30-year, fixed-rate mortgage: If your FICO And your interest Your monthly score is rate is payment is % $ % $ % $ % $ % $ % $933 *Using national rates from myfico.com from 2nd quarter 2010 As you can see in the example above, a person with a FICO score of 760 or better will pay $150 less per month than a person with a FICO score below 639. THAT S A SAVINGS OF NEARLY $1,800 A YEAR. You can see that it pays literally to improve your FICO score!

3 How to Establish Credit Many people want to know how they can establish or re-establish their credit history. This is an important issue because credit records are essential to obtain credit. The information in your credit report is used by potential creditors to determine if you are a good risk. You can help yourself establish or re-establish a good credit history by doing the following: 1. Open a checking and savings account to establish a relationship with your financial institution. Make sure you show a savings habit and do not overdraft your checking account. Many credit applications request banking information. Lenders want to be able to research your handling of daily finances. 2. Obtain a cosigner for your first loan or charge card. A cosigner is someone who will guarantee that the note will be paid if you, the borrower, does not repay. The cosigner must have a good credit history and qualify for the loan as if he or she was the original applicant. Keep in mind that your payment history on the new loan will be reflected on your credit report and the cosigner s credit report. 3. Don t apply for credit too often. If you are not approved for the credit, the repeated inquiries on your credit report may indicate risk to the next credit you apply to. 4. Apply for a loan that has collateral. For example, a car loan is many times easier to obtain because it is a secured loan. In the event you can t pay, the creditor can take the security (car). Unsecured loans, for example credit cards, are of more risk to creditors because there is rarely merchandise to take back in the event you can no longer make the payments. 5. Apply for a secured credit card. With a secured card, the issuer allows you to deposit a certain amount of money, say $300, and in return they provide you a credit card with a limit of $300. Make sure you have investigated the institution before you send any money. Be cautious of anyone who guarantees a card but requires up-front money to process your application. A secured credit card may have a higher interest rate or annual fee, so be cautious when carrying balances over from month to month

4 2 6. Use your savings account as collateral and obtain a small loan from your financial institution. Deposit the loan amount in your checking account and use it to make payments on the loan. Prompt repayment of at least six months will indicate responsibility. 7. Open a charge account at a local department store with a small credit limit until your payment history proves your worthiness for an increased limit. Make sure that the retailer reports to the credit bureaus. 8. Make a larger down payment than required to indicate an interest in a purchase or to use as collateral. If you have a limited credit history or are trying to re-establish your credit history, you might use a paid-off car, land, rental property, stock, CDs or other savings as security for a loan. Creditors are more willing to take a risk when you have a vested interest. 9. Avoid trying to establish credit through a rent-to-own company. You will usually pay two to three times the value of the merchandise and the rent-to-own company may not report to credit bureaus. 10. Prepare to pay a higher interest rate. Financing vehicles or other large-ticket items may require you to pay a much higher interest rate because of past credit problems or a lack of credit history and the increased risk to the lender. 11. Consider payroll deducted loans or automatic bank drafts. While these methods of payment are not security for a loan, your lender may be more willing to extend credit if these methods are used especially if you have a long employment history and a good payment history on previous loans

5 Steps to Handling Debt If your goal is to reduce your debt load, here are some helpful hints to plan your strategy. Prioritize your debts Mortgages or other secured loans like auto loans should take first priority. If you default on these kinds of loans, you can face foreclosure or repossession. Use cash for new purchases Use cash for new purchases, stop using the credit cards and pay your debt down more quickly. Set your own payment Establish a budget and a tracking system for your income and expenses. Then you will know how much money you have available for credit payments. Pay more than the minimum amount due When you compare the finance charge column and the minimum payment column, you might see that most of your payment is going toward interest and little goes toward the principle. When you increase your payment, the additional funds are applied directly toward the principle. Pay off higher interest rate cards first Dedicate more money toward higher interest rate cards because you will ultimately save in interest. Pay your bills when you receive them, not when they are due Most creditors use the Average Daily Balance method of calculating interest. Reducing the average daily balance by making your payment sooner will ultimately reduce the amount of interest you pay. Don't accept your creditor's offers to skip payments Interest continues to compound while you're skipping your payment. Consider transferring balances to lower rate cards You may receive offers of credit with low-interest teaser rates. Examine the contract carefully before you apply for the card

6 GREENPATH NEWSLETTER 50 th Anniversary JANUARY 2012 ``` Make 2012 the Year You Leap Out of Debt New Year s Day is the traditional time for setting resolutions. But if you make them too lofty or unreasonable, by Valentine s Day you will wonder what went wrong. goal is to save money, try to make it specific by saying I want to save money in order to buy a new car. GreenPath Debt Solutions trainer Megan Bridgett offers up some simple and attainable ways for you to get financial goals in line in the first 60 days of the New Year. She recommends using the extra leap year day of February 29 as your financial jumping off point for the remainder of January 1-31: On January 1, come up with a projected budget of your monthly expenses, breaking them into different categories: Groceries, clothing, entertainment, dining out, utilities, household bills, debts, etc. Then, for the month of January, hold on to every receipt, said Bridgett. GreenPath has a downloadable, interactive, budget worksheet and various calculators through GreenPath University to help you set an attainable budget and goals. Log on to for more information. Each week, go through the receipts together, and place them into the different categories that you have identified. At the end of the month, tally up the totals, and compare what you have spent to what you had projected. People tend to spend 10 to 20 percent over what they anticipated and projected spending, said Bridgett. This will help you to identify areas to adjust or cut back. January 1-14: The first two weeks of January, when you are still excited about your New Year s resolution, coordinate a family meeting. It is important to keep all members of the family involved in the decision making process, said Bridgett. For instance, children can help save the family money by simply turning off lights when they leave the room. They can also monitor cell phone usage and charges. January 14-28: The second two weeks of the month, brainstorm to create short- and long-term goals. Short-term goals could occur within the next three to six months, and long-term could be within the next few years. Try to keep them SMART: measurable. One way to do this is to identify an amount that you would like to get to. I want to save $5,000 to buy a new car. become discouraged and give up. instance, if you had a goal of Never eat lunch out while at work, this might not be realistic or possible. But if I changed it to Eat out at lunch no more than once per week, you are far more likely to stick with it. goal to be accomplished. This will help you to stay focused and motivated. I want to save $5,000 by November to buy a new car. February 1-28: Start making some cutbacks. Think of areas that you feel you can cut back on, and identify how much you can cut back by, said Bridgett. Be sure to stay realistic with this and do not cut out everything. Gradually make these changes to keep yourself motivated and excited. Keep tracking your expenses. Use a notebook and compare at the end of the month. Any money that was saved possibly put in a family savings account. Each month, have another family meeting and celebrate your successes by doing something fun together as a family. This celebration does not have to be expensive. It could be renting a video and having Movie Night. February 29: Use the extra day in the 2012 Leap Year to review and adjust your budget and expenses, looking toward big 2012 financial milestones like vacations, back-to-school shopping, paying for college and more. If you are able to get through the first 60 days of attaining your goals and tracking your progress, you will find yourself saving, budgeting and tracking your way to financial success throughout the rest of the year Search greenpathdebt

7 GREENPATH NEWSLETTER GreenPath to Premiere Webinar on Wednesday, January 18 GreenPath is now featuring Webinar Wednesday, starting January 18th. Each Wednesday, we will be hosting educational webinars starting at noon EST. Each webinar will be approximately 45 minutes with time available for questions and answers. GreenPath will be featuring a different topic each week including credit reports, budgeting and homeownership. Registration is easy, simply go to Webinar Wednesday is free, so feel free to sign up today! The first webinar on January 18, will be Unlocking the Secret to Your Credit Score. This course is designed to help you gain a better understanding of what makes up your credit score and what you can do to improve it. Clear the Clutter in 2012! MONEY Magazine and Debbie Stanley, author of Organize Your House in No Time, says that investing a few hours in an overfilled file cabinet (or shoebox?) can help you start off 2012 in an uncluttered, organized way. What to keep? What to shred? DOCUMENT Tax Returns Tax backup (receipts, W-2s, statements, etc.) Year-end investment statements Pay stubs Receipts for home improvements Receipts for big-ticket purchases Know Your Score! HOW LONG TO KEEP Forever Six years (the IRS has up to this amount of time to audit returns) Until six years after you sell, for proof of gains and losses for taxes Until you get your W-2 in January Until six years after you sell the home, for tax purposes As long as you own the item, for warranty and insurance claims The National Foundation for Credit Counseling reports that only 4 in 10 Americans know their credit score. For $20, you can log on to and obtain your score along with a credit report and an explanation on the positive and negative factors affecting your score. The FICO scoring model, the one most commonly used by lenders, ranges from 300 to 850. A score of 740 or higher entitles you to the best rates. Remember, your credit score determines what interest rates you will get on loans and credit cards. New Credit Scoring System Coming in March A new credit scoring system is being developed that aims to create a more complete picture of a consumer s financial standing. The new score will include payday loan applications, rental payments in collection and judgments for child support, phone bills, property tax liens, and utility bills, among many others. CoreScore from CoreLogic, was announced in late 2011, as a means of giving lenders an opportunity to make better informed lending decisions, with the actual score coming in March CoreLogic has teamed up with FICO, which has been tweaking the formula of their credit score to accommodate the extra financial information. The score is being designed to predict how a consumer would act with different loan terms. Under the Fair Credit Reporting Act, CoreLogic is required to provide a yearly free credit report through the federally mandated AnnualCreditReport.com. The CoreLogic report is not expected to replace the credit reports available today from Equifax, Trans Union and Experian. In general, a scoring system that more accurately reflects a consumer s financial situation should be a positive development, said Rick Bialobrzeski, a director at GreenPath. But it s too early to tell how the scoring changes will have an impact on the way people are accepted or denied for loans, mortgages and other financial products. GREENPATH NOW OFFERS AN EXPANDED VERSION OF PATHWAYS Want to read more in-depth coverage? Log on to