Understanding Credit Reports Grade Level 10-12

1.4.2 Original Source: Glenda Seward, Family and Consumer Sciences Teacher, Mid-Prairie High School School, Wellman, IA, Priscilla Hedgecock, retired teacher, MT. Time to complete: 135 minutes Understanding Credit Reports Grade Level 10-12 Take Charge of Your Finances National Content Standards Family and Consumer Science Standards: 1.1.6, 2.1.2, 2.3.1, 2.3.3, 2.4.1, 2.5.4, 2.6.1, 2.6.2, 2.6.4, 3.2.5, 3.3.3, 3.5.2 National Council on Economic Education Teaching Standards: National Standards for Business Education Career Development: Economics: VII.1 Personal Finance: VII.1, VII.2, VII 3-4 Objectives Upon completion of this lesson, participants will be able to: List and describe the components of a credit report. Distinguish between actions which create negative and positive credit history. Implement strategies to develop a positive credit report. Describe steps to correct a mistake on a credit report. Understand the difference between a credit score and a credit report. Obtain a free credit report from the government sponsored Web site. Introduction Credit and credit cards have become a part of the culture in the United States. Credit card offers are sent to an individual s home, advertised on television, and are promoted via the Internet. Credit cards are accepted for payment by more than 7 million merchants in this country, and are carried by nearly 90% of all households. The abundance of credit poses significant responsibilities and potential dangers to consumers if not used correctly. Credit is derived from the Latin word credo meaning I believe. Credit is when goods, services, or money are received in exchange for a promise to pay a definite sum of money at a future date. For example, receiving a loan to pay for higher education expenses is a form of credit. A lender is the person or organization who has the resources to provide the individual with a loan. The lender trusts the borrower to repay the money. Examples of lenders include credit card companies and depository institutions. A borrower is the person or organization that is receiving the money from the lender. When the privilege of borrowing has been extended, the borrower is usually expected to pay interest in addition to the amount borrowed. Interest is the price of money. When referring to credit, interest is the charge for borrowing money. Credit Reports: A credit report is a record of a consumer s credit history. Credit history is a record of transactions involving the use of credit, which includes automobile loans, education loans, mortgage loans, credit cards and other types of loans. Credit reports show how much debt an individual has, the extent to which bills are paid on time, requests for Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 1

1.4.2 additional credit and much more. If an individual has not used credit, they will not have any information in their credit report. Not having a credit report can cause an individual to be denied credit. A credit reporting agency keeps records of a consumer s credit transactions and compiles credit reports. There are three main credit reporting agencies in the U.S.: Equifax, Experian, and TransUnion. They acquire information from several types of businesses including: Retail stores that offer credit accounts; Credit card companies; Mortgage and finance companies; Depository institutions (banks, credit unions); Landlords; Utility accounts (telephone, power, gas, and water); Cell phone companies; Collection agencies. What is Included in a Credit Report? Businesses that report information to credit reporting agencies do not always report to all three agencies. Therefore, an individual s credit history may vary in each report. Information in a credit report can be divided into four categories: 1. Personal Information a. Name and aliases, current and past addresses, Social Security Number, date of birth, and employment history. 2. Accounts summary a. Types of accounts, date the account was opened, credit limit or loan amount, account balance, and payment history, including incidence of missed or late payments b. This includes most types of credit accounts such as automobile loans, credit cards, store cards, mortgages, etc. 3. Public record items related to credit a. Accounts turned over to collection agencies, and public record information such as bankruptcy, tax liens, legal suits, and foreclosures. 4. Credit inquiries requests for an individual s credit report. Inquiries are made by a variety of businesses that have permissible purpose to view a consumer s credit report, such as insurance agencies, current and potential credit companies, depository institutions, landlords, and potential employers (with permission from the potential employee). Different types of credit inquiries impact an individual s score in different ways. a. Soft credit checks are inquiries such as those that result when consumers check their own credit report; credit card companies pre-approve consumers for a line of credit, or pre-employment checks. These do not affect an individual s score. b. Hard credit checks occur when the consumer gives permission to a company to check their credit, usually when seeking additional credit. For example if an individual applies for a new credit card, automobile loan, insurance, or opens a new cell phone account, these requests usually are recorded on the credit report. Medical information, such as the facility where an individual was treated or what was treated, is not allowed on a consumer s credit report, but late medical payments are inlcuded. 6 Information on the consumer s race, religion, gender, marital status and nationality are not used to make credit decisions under the Equal Credit Opportunity Act and are not in a consumer s credit report. But, gender and age may be found in a credit report. 5 Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 2

1.4.2 Credit Scores: A credit score is a number that summarizes an individual s credit record and history. The credit score is based upon the information in a credit report at a particular point in time. It is a numeric grade of a consumer s financial reliability and is used by lenders to determine a consumer s risk of defaulting on a loan. The most common scoring system is called the FICO score. FICO scores range from 300-850, with 850 being the best (lowest risk) score. Over a lifetime, a consumer will pay more for credit (in higher interest rates and fees) if they have a lower FICO score. The table below illustrates that if you have a lower FICO score you will have a higher interest rate which leads to a higher monthly payment. Source: The Fair Isaac Company: www.myfico.com. This is based upon a 30 year fixed mortgage rate for a $300,000 loan FICO Score Interest Rate Monthly Payment 30 Year Amount 760 5.9% $1,787 $643,320 650 7.2% $2,047 $736,920 590 9.3% $2,500 $900,000 FICO credit scores are determined entirely by the information in a consumer s credit report. A statistical model examines all of the pieces of information in the credit report to predict the likelihood that the consumer will default on a loan. The exact components of a credit score are a closely held, proprietary trade secret. But the website myfico.com reports the following five categories of factors used, and the percentage influence that each category exerts on the final FICO score: 1. 35% - Payment history: the timely manner in which a consumer did or did not pay the debt. a. This includes all types of credit accounts, late or missed payments, and public records and collection items. 2. 30% - Outstanding debt: the total dollar amount of debt currently held. a. This includes balances on all reported accounts b. For credit cards, the total amount owed across all accounts in relationship to the total amount of credit lines is an important factor. When a high percentage of a consumer s credit line is already in use this can indicate overextension and a greater likelihood of missed payments in the future. 3. 15% - Length of credit history: the amount of time the consumer has held credit accounts and how often they are used. a. This includes how long ago your credit accounts were established. A longer credit history will generally increase your credit score. 4. 10% - Pursuit of new credit: assesses how many accounts have been opened recently and the type of account. a. This includes the number of recently opened accounts as well as requests for new credit. b. Opening many new accounts in a short period of time may be detrimental to a credit score, especially if the consumer is new to using credit. 5. 10% - Types of credit in use analyzes the types of credit a person has in use comparing installment loans, credit cards, retail accounts, mortgage loans, etc. Information not calculated in a FICO credit score includes: Race, color, religion, national origin, sex and marital status; Age; Salary, occupation, title, employer, employment history; Where you live; Interest rate charges on accounts; Overall wealth (assets an individual may have). Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 3

1.4.2 A person s credit score is not the only variable that may be considered by a lender when applying for a loan. Although not included in a consumer s credit score, some of the variables noted above may still be considered when a lender reviews a loan application. Positive and Negative Credit History: It is important the information in a credit report reflects responsible credit use. A positive history informs lenders that the consumer is financially responsible and therefore poses less risk. Having a positive credit history gives the consumer the opportunity to have lower interest rates on loans, the privilege to use different forms of credit, and an easier approval process for future credit. If a consumer is irresponsible with his/her credit, he/she can develop a negative credit history. A negative credit history may prevent an individual from receiving a job, renting an apartment, or qualifying for future loans. Positive and negative credit practices include: Positive Negative Practice good banking techniques such as keeping a checkbook balanced, managing accounts online, and Having non-sufficient funds (NSF) when writing checks, also known as bouncing checks not bouncing any checks Pay bills consistently and on time Routinely paying late on credit cards, utility and cell phone bills Maintain reasonable amounts of unused credit Maxing out limits on credit cards Apply for credit sparingly, thus keeping credit inquiries to a minimum Numerous credit applications in a short period of time Check credit reports annually and search for errors Building Credit History: Building a positive credit history is very important, especially for young adults. Not having a credit history may be just as challenging to a consumer seeking a loan as having a negative credit history. Although the following may be positive financial practices, a credit history is not established if a consumer performs the following actions: Not having any credit accounts in own name; Paying cash for all major purchases; Paying phone and utility bills on time (they are only reported if an individual does not pay their bills responsibly). The 2009 Card Accountability Responsibility and Disclosure (CARD) Act changed how young adults can receive certain types of credit. Under the CARD act, consumers must generally be 21 years of age or older to receive a credit card. Consumers under 21 can still get a credit card, but they need to either have a co-signer or show documentation of sufficient income to make payments. If an individual is under age 21 and has a card with a cosigner, the cosigner must agree in writing to any credit limit increases. It is important to understand that if someone agrees to be a cosigner on an account, they are equally responsible for the loan. Therefore, the loan is also on their credit report, positively or negatively impacting it depending upon how the credit is managed. To start building a positive credit history, individuals should acquire and positively manage small lines of credit. The following are credit options for individuals who need to begin building positive credit history: Cosigner: For young adults (18 years and older), obtain a credit card with a parent or guardian as co-signer. Small loan from a depository institution: Acquire a small loan for an item for which the individual already has money available in a separate account. Then, set up automatic withdrawal to make the payments. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 4

1.4.2 Using a local bank or credit union where the individual already has a checking or savings account usually works best. Obtain a secured credit card: A credit card is pre-approved credit which can be used for the purchase of goods and services now and payment of them later. Secured cards typically require a cash security deposit to ensure payment of the credit card. The larger the security deposit, the higher the credit limit granted. 7 Often a bank does not pay interest on the deposited balance, but will allow the cardholder to graduate to a regular (unsecured) credit card after sufficient history of responsible use. Requesting Credit Reports: A consumer can request his/her credit report any time. The Fair and Accurate Credit Transactions Act entitles consumers to one free credit report each year from each of the three main credit bureaus. Consumers can access their credit reports in three different ways: By accessing the Web site www.annualcreditreport.com By calling toll free at 877-322-8228 By sending written requests to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 1 The website above is the only website supported by the Federal Government for free annual credit reports. There are other sites that use free report in their names or misspell annualcreditreport.com as their URL in the hopes that a consumer will arrive at their website instead. To acquire a credit report, individuals must provide personal information including their name, address, social security number, date of birth, and answer questions about their personal credit history. Therefore, consumers must be 100% certain that they are using a reputable site. Individuals needing more than their three free copies annually can acquire them at a price set by law, not to exceed $10.50. 2 It is recommended that consumers check each of their three credit reports once a year to make sure the information is accurate. A consumer who is concerned about being a victim of identity theft can stagger their requests from each credit reporting agency every 4 months to monitor the information. Mistakes in Credit Reports Consumer Reports cited a study in the June 2007 issue stating that consumers find more than 13 million errors on their credit reports. 3 Two main errors appearing on credit reports were fraud and mistaken identity. Mistaken identity occurs when a lender reports a credit transaction and information is recorded on the wrong person s credit report, usually of a similar name. In 1971, the Fair Credit Reporting Act (FCRA) was enacted to protect the consumer. It states consumers have the right to know what information is in their credit report and to correct any errors. 2 This legislation was designed to promote accuracy and ensure privacy of consumer information in consumer credit reports. If an error is found on a credit report, follow these steps to correct the information: Contact the particular credit bureau that has the incorrect information and/or the information provider in a written letter. The bureau has 30 days to investigate the information. If investigation is not completed within that time, the information must be dropped from the credit file. If the information is found to be in error, then it must be corrected. If the incorrect credit report has been viewed in the recent past, the consumer can request that the credit bureau send a corrected report to any creditors who viewed the incorrect report within that time or; if the credit bureau refuses to make the correction, the individual can add a consumer statement to their file, which gives the consumer s version of the dispute in 100 words or less. They can also request their report, with this statement, be sent to creditors that viewed the report in the recent past. Most negative information is usually removed from an individual s credit file after seven years; however bankruptcy is removed after ten years. 5 Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 5

1.4.2 Under the FCRA, if a company denies an individual s application for credit, they must supply the name and address of the credit bureau that the information came from. The consumer can also request a free copy of their credit report to review within 60 days of being denied credit. 5 Many credit repair agencies offer to help a consumer fix his/her negative credit report. However, the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) agree consumers can do just as good of a job repairing their credit reports as a fee-based debt repair agency. Proactive consumers can correspond with credit bureaus to correct any inconsistencies. The BBB and FTC warn consumers to be cautious of credit repair agencies promising instant help because there is no immediate fix for negative credit and credit repair agencies may just suggest bankruptcy. 2 In this lesson, participants learn how to understand a consumer s credit report, how to build a positive credit history, become familiar with credit reporting agencies, and how to request individual credit reports. After completing the discussion, participants can put their knowledge to practice by informing others of the importance of these topics and review the content in a variety of ways. Body Anticipatory Set Option 1: Show participants the video clip titled A Rock Star s Credit Score by Scott Blair from this link: http://www.whatsmyscore.org/contest/videos.php. You may have to scroll through the videos at the bottom of the page to find it, it is the last one listed and is labeled Grand Prize. a. Break participants into small groups of 2-3. In small groups, have the participants discuss the video. Discussion prompts include: 1. How having a bad credit score may negatively impact an individual? 2. If bills are not being paid, items may be repossessed such as the car, television, and couch. 3. May not qualify for additional credit. 4. What is the overall message being portrayed in this video clip? b. Individuals should check their credit report, know their score and not spend beyond their financial limits. Anticipatory Set Option 2: Find a news article relating to credit reports and credit scores. c. Break participants into small groups of 2-3. d. Provide each group with the article posted in the center of a sheet of butcher paper as well as a variety of colored markers. e. Instruct the participants to read the article to themselves and record their thinking on the butcher paper. Thinking prompts include: 1. I wonder 2. This reminds me of 3. I disagree with this passage because. 4. I don t understand because. 5. This is important because f. As a small group, instruct participants to read their peers responses and record any additional thoughts they have as a result of their peers comments. Encourage participants to begin discussing any questions they have, their thoughts about the article, etc. g. Have each group select one person to report their thinking to the large group. This should be a report about their group s reaction to the article, not a summary of what the article said. h. As a large group, create a list of question that resulted from the article which they hope to solve during the lesson plan facilitation. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 6

1.4.2 Lesson Instruction: 2. Hand out one Understanding Credit Reports note taking guide 1.4.2.L1 to each participant to complete during the PowerPoint presentation. 3. Present the Understanding Credit Reports PowerPoint Presentation 1.4.2.G1 a. Slide 1: Introduction b. Slide 2: Credit Report Detectives 1. Tell the participants that they are Credit Report Detectives and Isabella has come to them for help. c. Slide 3: The Credit Process d. Slide 4: Isabella s Story 1. Provide each participant with one copy of Isabella Langley s Story 1.14.2.E1. 2. In small groups of 2-3, read Isabella s story. e. Slide 5: Credit History Reporting 1. Emphasize this is a process where the lender reports to the CRA and the CRA creates a credit report for each consumer using credit. 2. Reinforce there are three credit reporting agencies which lenders may choose to report to (Experian, Equifax, and TransUnion). 3. Identify that not all individuals have a credit history. Only those who have previously used credit. f. Slide 6: Credit Reporting Agencies 1. Discuss the various sources that CRA s receive information from. g. Slide 7: Information in a Credit Report 1. Provide each participant with one copy of Isabella Langley s Credit Report 1.14.2.E2. 2. Stress each credit reporting agency is a different organization and an individual s credit report may be different in each report. h. Slide 8: Personal Information 1. Describe what is included in this section and have the groups find Isabella s personal information. Discuss as a small group and then as a class. 2. Explain credit history tracks individuals over a period of time. Hence, why previous addresses, employers and telephone numbers are listed for Isabella. i. Slide 9: Account Summary 1. Describe what is included in this information and have the groups find Isabella s account summaries. Discuss as a small group and then as a class. 2. Explain that for each account, several pieces of information are monitored to track what types of credit habits a consumer may have. 3. Reinforce that even if an account is closed, such as Isabella s Love to Read store credit card, that it will remain on an individual s credit report for up to 10 years. j. Slide 10: Account Summary 1. Ask participants to find Isabella s late or missed payments. Discuss as a small group and then as a class. k. Slide 11: Public Record Items Related to Credit 1. Describe what is considered public record items and have the groups identify if Isabella has any public record items. Discuss as a small group and then as a class. 2. Reinforce that this information stays on a credit report for 7-10 years. l. Slides 12-13: Credit Inquiries 1. Describe what a credit inquiry is and have groups find Isabella s credit inquiries. Discuss as a small group and then as a class. 2. Reinforce that there are different types of credit checks and each will impact an individual s credit score differently. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 7

1.4.2 m. Slide 14: Isabella s Report 1. Discuss why Isabella s potential employer may be checking her credit report. Reinforce this can only legally happen if the potential employee has given the employer permission. 2. Identify that checks such as the Very Big Bank and Need More Credit on Isabella s report are credit card companies who are sending her pre-approved credit card offers. n. Slide 15: Medical Information 1. Discuss what medical information is allowed on a credit report. o. Slide 16: Equal Credit Opportunity Act 1. Identify that age and gender may be on a credit report, but the rest of the information should not be. p. Slide 17: Credit Scores 1. Reinforce that a credit score is different than a credit report. The information on a credit report is used to generate a credit score. 2. Scores are based upon a very complicated mathematical tool at a particular point in time. So, an individual s credit score may vary from month-to-month. q. Slide 18: Credit Scores 1. Explain that the FICO score is the most common scoring system used to provide consistency among each credit applicant. r. Slide 19: Credit Score Impact 1. Reinforce that having a higher credit score can save an individual thousands of dollars over a lifetime because if an individual is less of a credit risk they may qualify for lower interest rates. s. Slides 21-22: Payment History 1. Have the groups examine Isabella s payment history and what impact it is having on her credit score. Discuss in groups and then as a class. 2. Ask the groups what Isabella should be doing in this category to improve her score? a. Begin paying her accounts on time and settle with the City of Anywhere so she is no longer in collections. t. Slides 21-24: Outstanding Debt 1. Have the groups review the total debt Isabella has in relationship to available credit and the impact this has on her credit score. Discuss in groups and then as a class. 2. Identify that Isabella is actually using more credit than she has been granted because her traffic ticket went to collections and has exceeded her credit limit with Sam s Electronic World. 3. Note that Love to Read bookstore was not included in the available credit because the account has been closed. 4. Ask the groups what Isabella should be doing in this category to improve her score? a. Begin paying down her debt. Do not acquire any additional debt until she is using a much lower proportion of her available credit. u. Slides 25-26: Length of Credit History 1. Have the groups review Isabella s credit history and assess what impact keeping her Free Money credit card account open will have if she begins managing it more wisely. Discuss in groups and then as a class. 2. Reinforce that if an individual is managing their credit well, a longer credit history typically helps increase a score. v. Slides 27-28: Pursuit of New Credit 1. Have the groups identify if Isabella has requested any additional credit. Remind them she is also receiving pre-approved offers from credit card companies as well as being interested in purchasing a new vehicle. Discuss in groups and then as a class. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 8

1.4.2 2. Reinforce seeking too much credit at once hurts an individual s score. However, credit scoring was recently changed so if someone requests multiple accounts from the same type of lender (such as a mortgage company or auto loan) in a short period of time it will only count as one inquiry to allow the consumer to shop around. 3. Ask the group what Isabella should do to improve her score in this section. a. Not seek any additional credit in the short-term. w. Slides 29: Types of Credit in Use 1. Have the groups review the types of credit Isabella currently has in use and types of credit she may seek in the future. 2. Stress that a variety of types of credit in use is good for an individual s score if they are being used and managed wisely. x. Slide 30: Credit In Use 1. Ask the group what Isabella should do to improve her score in this section. 2. At this time, nothing. Although a variety of forms of credit is good, it is not if the other categories comprising a score are negative. So, she should clean up the other categories before pursing any additional forms of credit. y. Slide 31: Information Not Included in a FICO Score 1. A credit score is comprised of only credit related items from the credit report. Therefore, the personal information section may be considered by a lender to grant an individual credit but is not included in the score. z. Slide 32: Positive vs. Negative Credit 1. Have the small groups discuss if Isabella is a positive or negative credit risk and the impact it will have. a. Negative risk. She may pay higher interest rates on any loans, may not receive her dream job, and may not be eligible for other forms of credit in the short-term. aa. Slides 33-43: Activity - What You Do Makes a Difference 1. Post the Positive and Negative Effect Activity Cards 1.4.2.H2 on opposite sides of the room. 2. Identify the action on each PowerPoint slide. a. If the instructor is not using the PowerPoint, have the Credit Scenario Cards 1.4.2.H1 available to draw out of a hat. 3. Have the participants move to the side of the room if they think it is a positive or negative action. 4. Discuss why and identify the impact the action will have on a credit report. 5. Have the group post the answer on the board under the correct heading and explain their decision. bb. Slide 44: Positive Credit Practices 1. Discuss steps an individual can take to establish a positive credit history. cc. Slide 45: Negative Credit Practices 1. Discuss steps an individual can take to establish a negative credit history. dd. Slide 46: When Credit is Not Established 1. Reinforce phone and utility bills only impact credit if they are not paid on time. ee. Slide 47: Building a Credit History 1. Explain to participants that it is important to build a good credit history. Often, individuals will be denied credit if they have none. So starting out small is a good idea. ff. Slide 48: 2009 CARD Act 1. Explain to participants that in order to receive a credit card under the age of 21 they must have a co-signer or show documentation of sufficient income to make payments. gg. Slide 49: Establishing Credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 9

1.4.2 1. Discuss strategies that can be used to build credit. 2. Explain to participants what it means to be a co-signer. Stress that co-signers credit reports are impacted, positively or negatively, depending upon how the loan is managed. 3. Have the groups identify if Isabella has any co-signers and the impact this will have on their credit scores. Discuss in small groups and then as a class. a. Yes, her parents are co-signers on her private school loan and with her Sam s Electronic World card. The Electronic World card is past due which is also impacting her parents score negatively. hh. Slides 50: Requesting a Credit Report 1. Make sure participants understand that they are entitled to one free credit report from each CRA every year. 2. Discuss the three methods used to receive a credit report. ii. Slide 51: Annualcreditreport.com 1. Reinforce that although they may see TV commercials or internet pop-ups advertising free credit reports, www.annualcreditreport.com is the only free one sponsored by the government. The other companies often end up charging in the long-term or may be fraudulent and steal their identity. jj. Slide 52: Mistakes in Credit Reports 1. Reinforce that many credit reports have mistakes which is why it is important for individuals to periodically check their report. kk. Slide 53: Fair Credit Reporting Act ll. Slide 54-55: Correcting Errors on Credit Report 1. Explain to participants that if they find an error on their credit report they should write a letter to the credit bureau and the information provider. 2. Explain to participants that negative information stays on a credit report for seven years. Bankruptcy stays for ten years. mm. Slide 56: Credit Repair Agencies 1. Stress that although there are often companies offering to fix your credit report, these companies cannot do anything that the consumer can t do themselves. nn. Slide 57: Advice Isabella was Given 1. In small groups, have the students discuss the advice Isabella was given and determine if each piece of advice was good, why or why not. a. From Angie i. Credit ratings do typically improve as people get older, but only if they are managing their overall credit wisely. Length of credit history is only one component of a score. ii. Income is not factored into a score. iii. Where people live is not factored into a score. iv. Interest rates are not factored into a score. But, they are often a result of positive financial management and a lower interest rate may mean lower payments. v. Promotions do not impact a credit score. b. From George i. Yes, shopping around too much does result in higher inquiries which negatively impacts a score if the inquiries are from multiple types of lenders such as a person seeking a car loan and credit card in a short period of time. However, FICO scoring has recently been modified to count multiple inquiries in a short span of time from the same type of lender (such as an auto dealer, mortgage company, etc) as one inquiry. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 10

1.4.2 ii. Opening new accounts may create too much available credit which does not help a score. iii. Closing old accounts may be helpful only under certain circumstances. May actually hurt a credit score because the consumers credit utilization percentage is increased. Therefore, closing of old accounts should be done with caution. iv. The slate is not wiped clean. Depending upon the type of information, it stays on a person s report for 7-10 years. c. Discuss with students that this can be helpful to learn from others. However, individuals should always double check what they are learning to ensure it positively impacts them. oo. Slide 58: Credit Report Detective s Advice 1. Have the groups analyze if Isabella will receive her dream job. a. It depends upon the company. But, her negative credit history may prevent her from receiving the job offer. 2. Discuss advice the audience suggests Isabella should do to improve her credit report and score both short- and long-term. a. Immediately i. Pay her Sam s Electric World card so it is not past-due. ii. Settle with the City of Anywhere so she is no longer in collections. iii. Stop charging anything on credit. iv. Create and use a spending plan to not rely so heavily upon credit. v. Do not pursue an automobile at this time. b. In the near future i. Contact her school loan agencies to set up a payment plan. ii. Pay down her credit card balances by paying more than the minimum payment. iii. Continue monitoring her credit reports. iv. Talk to Angie and George to educate them on what she learned. pp. Slide 59: Conclusion Conclusion Participants will participate in the activity Money World Squares. MoneyWorld Squares is played like Tic-Tac-Toe or Hollywood Squares. See the MoneyWorld Squares directions 1.4.2.E3 for preparation and room set up. Use MoneyWorld Squares questions 1.4.2.K1. OR Participants will complete the Credit Report worksheet 1.4.2.A2. Assessment Participants will have the opportunity to create a Credit Report Jingle 1.4.2.B1 or a Credit Report Comic 1.4.2.B2 to educate others about the importance of having positive credit. For an example of a Credit Report Jingle, reference www.whatsmyscore.org for additional details. For an example of a Credit Report Comic, students can reference the Credit Report Comic Example 1.4.2.E4. This assessment may be completed individually or in teams of 2-3. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 11

1.4.2 * Note to educator: The following Web site has numerous tools that are helpful when creating a comic. Follow this link: http://web2educationuk.wetpaint.com/ and on the left hand side of the tool bar click comics and cartoons. Some of the tools require a free set up, while others can be used without a registration process. OR Participants can complete the Credit Reports Scenario 1.4.2.A1. Materials Credit Report Scenario worksheet 1.4.2.A1 Credit Report Worksheet 1.4.2.A2 Understanding Credit Reports Jingle 1.4.2.B1 Understanding Credit Reports Comic 1.4.2.B2 Isabella Langley Story 1.4.2.E1 Isabella Langley Credit Report 1.4.2.E2 MoneyWorld Squares Directions 1.4.2.E3 Credit Report Comic example - 1.4.2.E4 Understanding Credit Reports information sheet 1.4.2.F1 Understanding Credit Reports PowerPoint presentation 1.4.2.G1 Credit Scenario cards 1.4.2.H1 Positive/Negative Activity cards 1.4.2.H2 X and O activity cards 1.4.2.H3 MoneyWorld Squares Questions and Answers 1.4.2.K1 Credit Reports note taking guide 1.4.2.L1 Resources 1. AnnualCreditReport.com http://www.annualcreditreport.com The Web site to obtain one free credit report each year from all three credit reporting agencies. 2. Federal Trade Commission http://www.ftc.gov/credit Information about credit, credit reports, loans and regulations. 3. What if You Find Errors in Your Credit Report? http://www.consumerreports.org/cro/money/credit-loan/credit-reports-6-07/overview/0706_credit_reports_ov.htm Defines the steps to take if you find an error in your credit report. 4. How credit scores work, how a score is calculated http://www.bankrate.com/brm/news/credit-scoring/20031104a1.asp Defines FICO and VantageScores and how credit scores are calculated according to each. 5. MyFICO Credit Education Center http://www.myfico.com/crediteducation/creditscores.aspx What is and isn t on a credit report as well as rights in the FCRA. 6. Health Insurance Portability and Accountability Act http://www.hhs.gov/ocr/privacy/hipaa/faq/providers/smaller/267.html This describes what medical information is recorded on credit reports 7. Federal Reserve Board- New Credit Card Rules http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm An overview of changes made with the 2009 Card Accountability Responsibility and Disclosure Act Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 12

1.4.2.L1 Note taking guide Understanding Credit Reports Note Taking Guide Total Points Earned 59 Total Points Possible Percentage Credit is... Name Date Class The Credit Process What they do: Additional Information: INFORMATION ON A CREDIT REPORT CAN BE DIVIDED INTO FOUR CATEGORIES: Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 13

1.4.2.L1 Note taking guide INFORMATION ON A CREDIT REPORT CAN BE DIVIDED INTO FOUR CATEGORIES Personal Information Accounts Summary Public Record Items Related To Credit Credit Inquiries CREDIT IMPACT SOFT CHECK HARD CHECK INQUIRIES EXAMPLES Medical Information NOT Allowed on a Credit Report: Medical Information Allowed on a Credit Report: EQUAL CREDIT OPPORTUNITY ACT PREVENTS DISCRIMINATION THE BASIS OF: Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 14

1.4.2.L1 Note taking guide A credit score is: Most common credit score scoring system: Range of scores is: Low High A FICO SCORE IS ONLY BASED UPON CREDIT USE! DESCRIPTION ADDITIONAL INFORMATION LENGTH OF CREDIT HISTORY DESCRIPTION OUTSTANDING DEBT ADDITIONAL INFORMATION PURSUIT OF NEW CREDIT DESCRIPTION ADDITIONAL INFORMATION PAYMENT HISTORY DESCRIPTION TYPES OF CREDIT IN USE DESCRIPTION ADDITIONAL INFORMATION ADDITIONAL INFORMATION Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 15

1.4.2.L1 Note taking guide POSITIVE AND NEGATIVE CREDIT HISTORY Impact of Positive Credit History: Lender: Impact of Negative Credit History: Lender: Borrower: Borrower: Examples of Positive Credit Use: Examples of Negative Credit Use: ESTABLISHING CREDIT When is credit not established? 1. 2. Building a credit history is important because? WAYS TO BUILD CREDIT HISTORY INCLUDE: How did the 2009 CARD Act affect how young adults receive credit? What responsibilities do co-signers have on a credit account? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 16

1.4.2.L1 Note taking guide REQUESTING A CREDIT REPORT How many per year are free? Credit scores available for: From? What are the three ways to obtain a credit report: 1. 2. 3. MISTAKES IN A REPORT What are the two most common mistakes on credit reports? Mistakes can be caught by doing this? What does The Fair Credit Reporting Act do: What do you do if a mistake is found on your credit report: How long do credit bureaus have to investigate mistakes? How long does negative information stay on a credit report? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 17

1.4.2.E1 Resource Isabella Langley s Story Isabella Langley is about to graduate from college and is excited to begin her professional career! However, as Isabella approaches graduation, her financial situation is not what she dreamed it would be. She is in debt, without savings, has a poor credit score, and is applying for jobs. To pay for college, Isabella and her parents completed the FAFSA form to receive $5,000 annually in subsidized Stafford Loans from the government totaling $20,000 over a four year timeframe. In addition, Isabella received $8,000 in private school loans from a depository institution throughout college. To earn money for basic expenses (e.g., rent, transportation, and food) Isabella plans to work part-time during the school year and full-time during the summer at Lucky s Restaurant. Unfortunately, throughout college Isabella did not have a spending plan and the money she earned was not enough to support her lifestyle. She did not save and spent most of her money on expenses such as going to the movies, new clothes and daily lattes. Isabella was supporting her lifestyle with a credit card she signed up for as a freshman. Currently, the credit card had debt close to $8,000 (at an 18% APR). To keep the card open, Isabella was paying the 4% minimum required each month. In addition, Isabella has several other cards she applied for to save an additional 15% on her purchases. In preparation for the real world Isabella has been applying for jobs with several companies. She is a finalist in her dream job working in sales with the potential to earn a great salary. As a final step in the interview process, the employers asked her to complete a form granting permission to review her credit report. Isabella provided them with the information but was a little nervous. She had never looked at her credit report and had no idea what it said. Isabella decided to check it out herself and went to www.annualcreditreport.com to request her report free of charge online. She also learned that, for a fee, she was able to request a copy of her credit score. Isabella was surprised at what she saw. Her credit score was 560 and considered to be low. Her credit report showed not only her college loans and credit card debt, but also some clothing, electronics, and an old traffic violation credit account that hadn t been paid. One evening, she was having dinner with her close friends, Angie and George. Isabella was concerned about her situation so she brought up the topic of credit reports. Angie mentioned that she thought she had heard something about credit ratings improving as people got older and as their income increased. She went on to say Isabella s credit score would probably get better once she was promoted, moved to a better side of town, or negotiated lower interest rates on her existing loans. Though he wasn t completely sure, George said that shopping around for credit was not the best idea because he thought that it led directly to more inquiries showing up on a person s credit report. He guessed that opening new credit card accounts, even if you don t plan to use them, was a healthy thing to do, since it provides evidence of credit worthiness. Finally, both George and Angie had heard that it was best to close most of her old accounts; including the loans she hadn t paid on time, in order to wipe the slate clean. Isabella always imagined that this stage of her life would look much brighter. She thought to herself, I am in huge debt, I don t have any savings, and I don t know if I will receive my dream job. She was unsure if Angie and George s advice was 100% accurate and knew she needed to learn more. She wondered where she went wrong and what she could begin doing now to fix her credit report. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 18

1.4.2.E2 Resource Isabella Langley s Credit Report ISABELLA S CREDIT REPORT HISTORY Free Credit Reporting Agency Credit Report Free Credit Score $5.95 Total $5.95 Credit reporting agency credit report prepared for: ISABELLA LANGLEY Your report number is: 0657361482 Report date: May 10, 2009 Credit reporting agencies collect and organize information about you and your credit history from public records, your creditors and other reliable sources. By law, we cannot disclose certain medical information (relating to physical, mental, or behavioral health or condition). Although we do not generally collect such information, it could appear in the name of a data furnisher (i.e., "Cancer Center") that reports your payment history to us. If so, those names display in your report, but in reports to others they display only as "Medical Information Provider." Consumer statements included on your report at your request that contain medical information are disclosed to others. Report summary: There are 2 potentially negative items in your report. You have 5 accounts in overall good standing in your report. Check the recent requests for your credit history. Check your personal information. ACCOUNT INFORMATION These items may stay on your credit report for as long as they are open. Once an account is closed or paid off it may continue to appear on your report for up to ten years. This information is generally removed seven years from the initial missed payment that led to the delinquency. Missed payments and most public record items may remain on the credit report for up to seven years, except Chapters 7, and 13 bankruptcies, which may remain for up to 10 years. Transferred accounts that have not been past due remain up to 10 years after the date the account was transferred. Company Name Sam s Electronic World City of Anywhere Account Status Number 3624 Open, past due 68274 Open, collection Date Opened Last Reported Type Monthly Payment Responsibility Credit Limit Recent Balance Account History 02/06 04/09 Revolving $22 Individual with $500 $550 90 days parents past due 03/09 02/08 04/09 Traffic ticket N/A Individual $296 $358 Past due US Dept. of Education Depository Institution School Loan 26871 Open 08/05 04/09 Installment $230 Individual $20,000 $20,000 Begin payments 10/09 658713 Open 08/06 04/09 Installment $95 Individual and Parents Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 19 $8,000 $8,000 Begin payments 06/09

Shop Til You Drop Store Credit Card Love to Read Store Credit The Free Money Credit Card 35842 Open/ Occasional Late payments 2364 Paid, never late, closed by granters request. 5698 Open/over credit limit 1.4.2.E2 Resource 09/08 04/09 Revolving $20 Individual $750 $732 04/09- $642 03/09- $740 02/09- $720 01/06 11/06 Revolving $0 Individual $1,000 $0 Account scheduled to continue on record until 11/2013 09/05 04/09 Revolving $320 Individual $8,000 $7,685 04/09- $7,698 03/09 - $8,125 02/09- $8.102 RECORD OF REQUESTS OF YOUR CREDIT HISTORY Inquiries Shared with Others We make your credit history available to your current and prospective creditors and employers as allowed by law. Experian may list these inquiries for up to two years so that you will have a record of the companies that accessed your credit information. The section below lists all of the companies that have reviewed your credit history as a result of action you took, such as applying for credit or financing or as a result of collection. The inquiries in this section are shared with companies that view your credit history. Company Date of Request Shop Til You Drop 08/10/08 Inquiries Shared Only With You You may not have initiated the following inquiries, so you may not recognize each source. We report these requests to you only as a record of activities, and we do not include any of these requests on reports to others. Company Date of Request A Very Big Bank 08/10/08 Need More Credit? Credit Card Company 04/15/09 Keeping You Insured 05/06/09 The Dream Sales Job 04/15/09 PERSONAL INFORMATION Name: Isabella G. Langley Employers: Lucky s Restaurant Addresses: 101 Hopeful Ave. Isabella Langley Date of birth: 05/04/86 Jane s Daycare Type of Residence: Apartment Telephone Numbers: 555.354.2368 Addresses: 695 Parent Street 555.198.2358 Type of Residence: Multi-family Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 20

1.4.2.H1 Activity Cards Credit Scenario Cards UNDERSTANDING CREDIT REPORTS 1.4.2.H1 #1: Joey rented a TV from The Best Deal rent-to-own store during college. The TV was never returned or paid for as stated in the contract. UNDERSTANDING CREDIT REPORTS #2: Sally pays the total amount due on her credit cards each month. 1.4.2.H1 Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona UNDERSTANDING CREDIT REPORTS #3: Fernando rented a DVD from Busting Bronco Rental and never returned the movie. 1.4.2.H1 UNDERSTANDING CREDIT REPORTS #4: Cassie has received three parking tickets throughout the past year and has not paid them. 1.4.2.H1 Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona UNDERSTANDING CREDIT REPORTS #5: Sam acquired a loan from Buy More Credit Union for $1,000 to purchase a motorcycle. He paid the loan back in full in time. 1.4.2.H1 UNDERSTANDING CREDIT REPORTS 1.4.2H1 #6: Corey s credit card bill is paid in monthly installments. However, it is due on the 15 th and usually paid a few days late. Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Family Economics & Financial Education Revised April 2009 Credit Unit Understanding Credit Reports Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Page 21