Credit 101

Lekeisha VeasleyOperation Threshold

Lead Housing & Fair Lending Counselor

P.R.O.U.D Homeownership Program

Operation Threshold

PROUD Housing Counseling Program Home-buyer Education Classes Financial Education Classes Credit Counseling Pre-Post Homeownership Counseling Foreclosure Prevention Counseling

Iowa Mortgage Help Hotline Partner

Overview

What is credit? Why is good credit important? Credit Reports and Credit Bureaus Anatomy of a Credit Score Rebuilding Credit

What is Credit?

In it’s simplest form…it’s using someone else’s money to pay for things

Contractual agreement to repay the money to the person or company that loaned you the money.

Why is Good Credit Important?

Good credit is an asset!! Good Credit allows you to access

to: Lower Cost Credit Better Insurance Rates Better Employment Homeownership Entrepreneurship

Brainstorm

What type of information would you want to know before you lend someone money?

The 5 C’s of Credit

Capacity Ability to repay or sources of income (i.e. job)

Collateral Usually House or Auto

Capital Amount of cash or liquid assets

Credit History (Character) How have you handled credit? Who do you currently have credit with?

The 5 C’s of Credit

Conditions Conditions that may affect the borrowers

ability to repay: Change in the economy/Cost of Credit Loss of job/job stability Divorce Emergency medical bills

Who’s Keeping the Records and How?

Credit Bureaus: Only 3 major credit bureaus: Experian, Equifax, TransUnion

How are the Records Kept?

Credit Reports: lists all past and present debts and, the timeliness of your repayment; It documents an individual's credit

story.

What’s On Your Credit Report?

Identifying Information Name (s), employment record,

address record

Trade Lines Installment Credit: Loans Revolving Credit: Credit Cards

Collection Accounts

What’s On Your Credit Report?

Inquiries. When you apply for credit, you authorize your lender

to ask for a copy of your credit report. Soft Inquiries vs. Hard Inquiries

Public Record Credit reporting agencies also collect public record

information from state and county courts. Small Claims judgments, tax liens, bankruptcy

Trade LinesYour Credit Report will tell you…

Original and/or Current Creditor Acct. number Open date Type of credit acct

Installment Revolving

Credit limit or orig. loan amount

Trade LinesYour Credit Report will tell you…

Current Balance 30-60-90 day late payments Current account status

Open vs. Closed (by creditor or borrower)

Individual or Joint acct.

How Long Can Information Stay on my credit report?

Negative accounts such as (collections/

charged-offs/paid judgments) will remain for approximately 7 years and +/- 6 months.

Collection agencies cannot re-age (change open date) your account when they buy it.

Original creditor report the open date in 2000/1st date of delinquency 2001, that is when the clock begins ticking.

How Long Can Information Stay on my credit report?

Chap. 7 Bankruptcy may remain for 10 years (Chap 13- 5 years)

Positive account information may remain as long as it has a positive contribution to credit.

Correcting Inaccuracies

Dispute account with all three of credit bureaus Ideally send proof of action/payment

Credit Bureaus have 30 days to respond The law that governs is Fair Credit Reporting Act Creditors have burden of proof

If not validated the acct must be deleted from report

Negative entries may appear as: 30/60/90 = 30, 60, 90 Days delinquent or past due. P&L = Profit and Loss (Creditor considers debt

uncollectible) C/O = Charged Off (Bad Debt, Balance still owed.) COLL = Seriously Delinquent, (usually sold to a

collection agency). REPO = Voluntary or involuntary repossession of

merchandise. (usually associated with a vehicle) BANKRUPTCY = Chapter 7 , 11 , 13. SETTLEMENT = Paid less than full amount of debt

owed. JUDGMENTS, GARNISHMENTS, LIENS = Legally

recorded.

Decoding Your Credit Report

Negative entries may appear as: DEBT MANAGEMENT/CREDIT COUNSELING =

Enrollment in a financial help program that reduces interest rates and fees, implying you may be having financial difficulty,

may also be reported as a third party paying your bills. Many prospective lenders will view this as a chapter 13

bankruptcy or hardship program. Duplicate accounts = (Same account reported

more than once.) This will imply that you have more outstanding debt then

you actually owe, and may lower your credit rating

Decoding Your Credit Report

Consumer Protection Laws: Know Your Rights! The Federal Fair Credit Reporting Act

What is on your credit report Access to your file is limited Dispute inaccurate information Receive a free credit report annually

The Fair Debt Collection Act Governs the collection of 3rd party collectors only Can’t threaten or harass Can’t call before 8 am and after 9 pm Validation of Debt

Credits Scores

What’s in your score?

What is FICO?

Credit Scoring Model: risk-scoring model:

Lenders determine how much risk they are taking by granting credit to a borrower.

Examine contents of credit report Determine your credit worthiness and

the timeliness of loan repayment.

Credit Scores

3 Credit Scores Range Beacon 300-850 Experian 330-830 Trans Union 150-934

According to the scoring model, as your score increases, your risk of default decreases.

Who is FICO? All 3 credit bureaus determine a

credit score based upon a formula developed by the Fair Isaac Corporation (FICO).

Each credit bureau uses a different term for their credit score. Equifax calls their score “Beacon” Experian calls their score “FICO” Trans Union calls their score “Empirica."

What is this score all about? A credit score may impact

whether or not you receive credit credit terms: interest rate, terms etc.

Credit Scores give a snapshot of your credit worthiness at that point in time.

Lenders consider several factors, including a credit score, when extending credit.

Credit Scores The scoring only uses things that are

predicative to credit performance Equal Credit Opportunity Act: you

can’t be denied credit due to the following:

Race or national origin Age Job Neighborhood Public Assistance Gender Religion

The Anatomy of a Credit Score

The Anatomy of a Credit Score

Payment History: Approximately 35% of a credit score

may be based upon payment history. Amounts Owed/Credit Usage

: Approximately 30% of a credit score

may be based upon amounts owed or other outstanding debt.

The Anatomy of a Credit Score

Length of Credit History: Approximately 15% of a credit score

may be based upon length of credit history.

Taking on More Debt: Approximately 10% of a credit score

may be based upon how much new debt a consumer is incurring.

The Anatomy of a Credit Score

Types of Credit in Use: Approximately 10% of a credit score

may be based upon the types of credit currently in use by a consumer.

A credit score is usually negatively impacted by loans from finance companies.

CITI Financial Wells Fargo Financial

Payment History Tips

Pay your bills on time. 35% Delinquent payments and collections can have a major

negative impact on your score.

If you have missed payments, get current and stay current.

The longer you pay your bills on time, the better your score or the score will rebound from the late pays.

Pay the minimum on time rather than nothing or a larger payment later .

A Note about Inquiries

30-day window to do Rate Shopping Multiple inquiries in a 30 day period = 1 inquiry

A large number of inquiries mean greater risk = Desperate for credit

Inquiries made by landlords/employers don’t counted against you =Soft inquiries

Debt: Amount Owed Tips

Keep balances low on credit cards and other “revolving credit”. High outstanding debt can affect a score. Available credit vs. balance

Don't close unused credit cards as a short-term strategy to raise your score. Change ratio of available credit vs. usage

Don't open a number of new credit cards Lowers average account age

Remember… Lenders consider other things besides

your credit score when deciding whether to extend credit—5 C’s of Credit Amount of debt you can handle given your income, your employment history, your credit history, Conditions (affect risk, credit market, economic factors), As well as staying within their institutional

underwriting policies. Lenders call these Compensating

Factors

Credit RepairHOUSTON WE HAVE A

PROBLEM!!

Credit Repair Scams

Does these some FAMALIAR??? “Erase Bad Credit 100%!” “Bad Credit-No Problem!” “Remove Bankruptcies and Liens

from your credit file!!!”

Credit Repair

You can’t erase bad credit, You can… Ensure info is correct/updated Take time to rebuild/repair

Companies charge to do things you can do yourself. (Dispute items on Credit Report)

Correct negative information will stay on your credit report.

Buyer Beware

Credit Repair Company over-promises Only Creditors/Credit Bureaus can remove

information Some Companies offer to help you

get a new identity Apply for an EIN, It is Illegal! Engaging in identity theft, its illegal too!

Buyer Beware

Some companies advise you to dispute all neg. info on credit file. Negative info can be put back on you

report. You ss# is put in a special review

department Credit Repair Company make you

pay upfront Violation of Credit Repair Org. Act

The Credit Repair Organizations Act

Credit repair companies must provide a written contract that also spells out: what services are to be performed, how long it will take to achieve results, the total cost, and any guarantees

Under the law, these contracts also must explain that consumers have three days to cancel at no charge.

Using Credit Repair Companies

Using credit repair companies is a choice

People usually make that choice because: Don’t want to take the time to do the work

themselves. Have the money to pay for the services; Understand the services offered/the cost

related.

Bad Credit is not a Life Sentence !!

Credit Recovery

Review your credit report before applying for credit.

Free credit reports www.annualcreditreport.com

Equifax, Experian and TransUnion.

Credit Recovery

Ensure Accuracy Are they any accounts beyond 7+yr ? Is the account yours? Not sure?

Send certified mail a “Validation of Debt Letter” to Creditor

Examine Finances Stop charging on your credit cards Can you afford debt repayment?

Credit Score Boosters Here's the stuff that's usually worth

the effort of correcting with the bureaus: Late payments, charge-offs,

collections or other negative items that aren't yours.

Credit limits reported as lower than they actually are.

Credit Score Boosters Here's the stuff that's usually worth the

effort of correcting with the bureaus: Accounts listed as "settled," "paid

derogatory," "paid charge-off" or anything other than "current" or "paid as agreed" if you paid on time and in full.

Accounts that are still listed as unpaid that were included in a bankruptcy.

Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your report.

Credit Recovery

Third-Party Collection Companies Purchase debt for cents on the dollar. For example, suppose you owed ABC Lender

exactly $1,000. ABC Lender wrote off the account Sold it over to the 1st debt collection agency,

who couldn't collect from you. Now, ABC Lender has sold it to a “scavenger”

debt collection firm for about $70.00. The scavenger debt collector is going to

come after you for the entire $1,000 plus interest.

Credit Recovery

Negotiate Settlements w/ Creditors Check see if Statute of Limitations has

expired—No threat of legal issues Start at 30% if 3rd collection agency Start at 40-50% if 2nd collection agency Original creditor 75%-100% Remove from credit report-

Pay for Deletion Letter Get every thing in writing first!!

From Repair to Rebuilding

Credit Rebuilding Tools Use Secure Credit Cards Use Secure Loans Credit Unions

“Payday Alternative Loan” Get a co-signor

The Word…BUDGET!!!

Budgeting and Good Credit go hand and hand.

65% of your credit score are tied to budgeting skills Pay bills on time—35% Low Amounts of debt/credit usage—

30%

Summary

What is credit? Why is good credit important? Credit Reports and Credit Bureaus Anatomy of a Credit Score Rebuilding Credit

Thank You!!

Contact Information

Lekeisha VeasleyOperation Threshold402 East 4th St.Waterloo, IA 50703lveasley@operationthreshold.org