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Credit Scores-The Basics
This document discusses credit scores and reports. It begins by defining credit reports and explaining how they contain a person's history of paying debts and bills. It then discusses the three major credit bureaus, the sections of a credit report, how to obtain free credit reports annually, and how credit scores are calculated based on credit report data. The document provides tips for maintaining good credit by paying bills on time, keeping balances low, and having a variety of credit types. It also notes factors that are not included in credit scores and ways that mistakes can negatively affect scores.
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Credit Scores-The Basics
- 1. Credit Scores: What’sNew? https://learn.extension.org/events/2488 This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587. Barbara O’Neill, Extension Specialist, Rutgers Cooperative Extension Rod Griffin, Director of Public Education, Experian
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- 3. Question #1: How OftenDo You Check Your Credit Report and How?
- 4. Credit Reports areLike a “Financial Report Card” • It’s just like you are back in school • You are still being evaluated with written comments • The results are still critical for your future
- 5. What is aCredit Report? • A summary of someone’s history of paying debts and other bills • Prepared by credit reporting agencies (a.k.a., CRAs or credit bureaus) • Used by those who have a legitimate need for the information – Lenders – Insurance companies – Potential employers – Potential landlords
- 6. The Better YourCredit History, The Better Your Chances of... • Obtaining a loan or credit card • Obtaining lower-cost credit terms and saving hundreds/thousands of dollars of interest • Obtaining a low-cost insurance policy • Renting an apartment • Being hired for a job
- 7. Three Major CreditBureaus Equifax: www.equifax.com Experian: www.experian.com TransUnion: www.transunion.com • Different pieces of data about borrowers in their databases • Social Security number acts as a “magnet” to assemble data and create a credit report
- 8. Four Key CreditReport Sections • Identifying Information: Name, SS Number, current/previous addresses, birthdate, employer • Public Record Information from Local Courthouse: Liens, foreclosures, bankruptcy, etc. • Other Credit History Information: List of loans and credit cards, timeliness of payments, highest and current balance, negative information (7 years) • Inquiries: Self-initiated, promotional (for marketing purposes), and periodic creditor reviews
- 9. Free Credit Reportsby Federal Law
- 10. Credit Scores AreLike a “Financial GPA” • Three-digit number calculated by statistical analysis • An important barometer of financial health • Based on credit report data at a point in time
- 11. More About CreditScores • Predictive tool that measures the risk of a borrower’s delinquency or default • Determines who qualifies for credit, at what interest rate, and at what credit limits • Generally, higher credit scores indicate lower risk
- 12. How to Geta Credit Score • Request score from a prospective lender, landlord, or insurance company • Use a credit card that provides a free credit score (online or on billing statement) • Via the FICO web site: http://www.myfico.com/
- 13. Free Credit Reportand Credit Score Providers • Credit.com • Credit Karma • Credit Sesame • QL Credit • Quizzle • Wise Piggy • Beware: solicitations for products, services, upgrades • Beware: free scores will likely vary from FICO scores
- 14. About Credit Scoring •Classic FICO score range: 300 (worst) to 850 (best) • Speeds up loan approvals • Objective focus on credit risk factors • 1989: Fair, Isaac Corp. introduced FICO score • 2002: FICO scores became available to consumers at www.myfico.com • 2016: Not required for free upon request by federal law (like credit reports are) BUT many creditors are providing for free (marketing and retention tool)
- 15. Sample Credit ScoreData for Consumers by a Creditor
- 16. What a CreditScore Means Source: http://www.myfico.com/fico-score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 17. Question #2: How OftenDo You Check Your Credit Score and How?
- 18. Credit Scoring Factors •Bill payment history, weighted for recent months (35%) • Proportion of outstanding debt to available credit limits (30%) • Length of credit history (15%) • Number of recent credit inquiries (10%) • Mix of types of credit used (10%)
- 19. Credit Scores CanVary • Information in your credit report may vary across the “Big Three” credit reporting agencies (CRAs) – Reporting to CRAs by creditors is voluntary – Data that each CRA compiles about you may be different • Implication: To get a complete picture of what lenders see, check credit reports from all 3 bureaus – If credit report information is very similar, so, too, will be credit scores
- 20. Credit Scores CanVary • Some large lenders still build their own scoring models – Custom models based on data from a lender’s own account holders – These scores are generally not disclosed to consumers • Each of the “Big Three” CRAs sells their own generic score built internally on their own data – Example: Experian’s score is called the Plus Score
- 21. Credit Scores CanVary VantageScore (introduced in 2006) is a FICO score competitor: http://your.vantagescore.com/interpret_scores
- 22. Information That isNOT Included in a Credit Score • Your age • Your income • Your employment status – Caveat: Lenders will consider employment status • Your marital status • Interest rates (APRs) paid on existing debts • Child support and alimony • “Soft” and “promotional” inquiries • Credit counseling participation https://www.experian.com/ask-experian/20080625-the-impact-of-credit-counseling-on- credit-scores.html
- 23. Good Credit ScoresSave Money Source: http://www.myfico.com/crediteduc ation/calculators/loanrates.aspx
- 24. Damage Points: HowMistakes Affect FICO Credit Scores Action Decline from 680 Score Decline from 780 Score Maxed-Out Credit Card 10-30 points 25-45 points 30 day-late payment 60-80 points 90-110 points Debt Settlement 45-65 points 105-125 points (Less than full balance) Foreclosure 85-105 points 140-160 points Bankruptcy 130-150 points 220-240 points Source: http://www.creditcards.com/credit-card-news/fico-credit-score- points-mistakes-1270.php
- 25. Ways To ImproveYour Credit Score • Pay your bills on time (#1 weighted factor) • Keep debt-to-available credit ratio routinely low (< 30%) • Keep accounts open: – Older accounts establish length of history • Get points for variety (mix of types of credit) – Revolving and installment • Avoid “hard” inquiries: supply own report to lenders
- 26. Other Credit ScoreTips • Only apply for new credit when needed • Pay or settle old collection accounts – Accounts with a “0” balance no longer hurt FICO score • Check credit report for errors that affect score • Correct errors and dispute evidence of fraud – Focus on negative factors provided with FICO score • Reduce balances on credit cards • Pay off debt rather than moving it around
- 27. FICO High Achievers •96% have no late payments • Use, on average, only 7% of credit limit • Owe < $3,500 on credit cards • Have average credit history length of 25 years http://www.myfico.com/fico- score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 28. Question #3: Any OtherCredit Score Tips?
- 29. Credit Score Resource: •The Credit Score Quiz: http://www.creditscorequiz.org/ • Print copy of the quiz with answer key: http://www.creditscorequiz.org/CreditScoreQuiz_AnswerKey _Eng.pdf
- 30. Credit Score Resource:Credit Score Game (University of Idaho) • Description: http://www.extension.uidaho.edu/impacts/Pdf_13/18- 13lerickson-creditscore.pdf • Game: http://www.uidaho.edu/extension/4h/programs/nw-youth-financial- ed/credit-score-millionaire
- 31. FICO Credit ScoreEstimator Resource: http://whatsmyscore.org/estimator/
- 32. Rutgers Cooperative Extension WiseCredit Management Quiz http://njaes.rutgers.edu/money/wise-credit/
- 33. Question #4: Any OtherGood Credit Score Resources?
- 34. Key Take-Aways • Acredit score is a “snapshot” of your credit performance at a point in time. • It changes over time as your credit behavior changes • Helpful credit score factors: – Timely payments (“current” or “paid as agreed”) – Old credit accounts (show lengthy history) – Low balances (<30% of credit card limit) – Variety (bankcards, car loans, mortgages)
- 35. Key Take-Applications • Reviewyour credit report from each “Big Three” CRA annually • Obtain your FICO credit score; for free, if possible • Take steps to raise your credit score, if needed • Check out alternative credit scores, if interested • Check out suggested online resources
- 36. Part 2 Credit Scores: Beyondthe Basics
- 37. Find all upcomingand recorded webinars covering: Personal Finance Military Caregiving Family Development Family Transitions Network Literacy Nutrition & Wellness Community Capacity Building This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587. www.extension.org/62581