Samantha Davis State Farm Financial Literacy Lab Credit Basics April 21, 2011

Samantha Davis State Farm Financial Literacy Lab Credit Basics April 21, 2011

FIU EMPLOYEE FINANCIAL LITERACY PROGRAM

The financial downturn of the United States is linked to the careless lending practices of the financial institutions.

CREDIT

300

822

850720

433

650

369

569

487

502

679750

WHAT IS A CREDIT REPORT AND WHAT DOES IT INCLUDE?

A credit report contains detailed information on a person’s credit,

including identifying information, credit and loans, bankruptcies and

late payments, and recent inquiries. It can be obtained by prospective

lenders with the borrower’s permission, to determine his or her

credit worthiness.

http://money.howstuffworks.com/personal-finance/debt-management/credit-report1.htm


CONTENTS OF A CREDIT REPORT

Personal IdentifyingInformation

name, current and previous address, social security number, telephone number, birth date, your current and previous employers, and your spouse's name may be included as well

Credit History

Bill-paying history with companies that have granted you credit. Account information such as: date opened, type of account, credit amount extended, monthly payment amount, etc. Information about late payments, closed, charged off, or paid off account.

Public Records

Information that might indicate your credit worthiness, such as tax liens, court judgments and bankruptcies.

Report Inquiries

All credit granters who have received a copy of your credit report and others who were authorized to view it. Lists of companies that have received your name and address in order to offer you credit.

Dispute Statements

The report may also include any statements you've made disputing information on the report. Most credit bureaus allow both the consumer and the creditor to make statements to report what happened if there is a dispute about something on the report.



WHAT A CREDIT REPORT DOES NOT INCLUDE

A credit report does not include: information about your income checking or savings accounts bankruptcies that are more than 10 years old charged-off or debts placed for collection that are more than

seven years old, gender ethnicity religion political affiliation medical history driving record criminal records

Your credit score is generated by information on your credit report, but is

not part of the report itself.

http://www.equifax.com/credit-information/credit-report

http://www.equifax.com/credit-information/credit-report

WHO CALCULATES CREDIT SCORE?

Fair Isaac Corp. developed the first credit score as well as the Classic FICO score.

There are currently three major credit bureaus in the United Sates. They provide different credit scores as the data they collect are different and their method of FICO scoring is also different.

Equifax Experian Transunion

Beacon Score/ Pinnacle Score

Experian/Fair Isaac Risk Model

Empirica Score

Classic FICO Score

Plus Score Transunion score

300 to 850 330 to 830 150 to 934

http://www.scoretruth.com/basics/range.php

CLASSIC FICO SCORE ALLOCATION

35% How you pay your bills.

30% Amount of money you owe and the amount of available credit.

15% Length of credit history

10% Mix of credit

10% New credit applications or inquires.

100% TOTAL

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Credit-Scoring-101-START-HERE/m-p/8169

GENERAL CREDIT SCORES STATISTICS

Score Percentage of Population

Delinquency Rate

300-499 1 87%

500-549 5 71%

550-599 7 51%

600-649 11 31%

650-699 16 15%

700-749 20 5%

749-799 29 2%

800 and higher 11 1%


FICO SCORE AND LOAN RATES

FICO Score Grade Typical Mortgage Rates *

720-850 Excellent A (e.g., 6.2%)

700-719 Very Good A + 0.13%

675-699 Good A + 0.65%

620-674 Fair A + 1.80%

560-619 Bad A + 4.30%

500-619 Very Bad A + 5.00%


CREDIT RATING ALTERNATIVE!!!!!!!!

The three major credit reporting bureaus are currently involved developing

and allowing for restricted use of an alternative credit rating system called

Vantage score. It ranges from 501 to 900. Your personal score is transformed

into a letter grade. Score Grade

901 – 990 A

801 – 900 B

701 – 800 C

601 – 700 D

501 – 600 F


AUTO INDUSTRY OPTION SCORE

About 90% of auto lenders do not actually use classic FICO credit scores.

Instead they use auto credit score. Due to this, there are individuals with

car loans that are not necessarily eligible for credit cards. The theory behind

this is that, people are more inclined to maintain good payment history in

regards to auto loans. Studies have shown that individuals with low credit

scores will continue payments while deteriorating their classic FICO score by

defaulting on other payments.

http://www.smartcredit.com/blog/2010/05/01/what-is-an-auto-credit-score/


AUTO CREDIT SCORE CALCULATION AND SCORING.

Great or Excellent 775-850

Good or Very Good 685-774

Normal or Average 615-684

Below Normal or Poor 515-614

Bad or Very Bad 350-514

Factors affecting auto score

An auto loan or lease sent to collections

Any late payments on an auto loan or lease

An auto loan or lease settled for less than owed

A repossession by the lender

Previous two year overall credit



INSURANCE CREDIT SCORE

An insurance credit score is not a measure of credit worthiness but instead a assessment of risk. Some information from your credit report such as (age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) are included in the calculation of the insurance credit score. The remainder of insurance score is calculated by insurance claims and profitability data.

Insurance credit scores are unique to the insurance company and each line of business (example auto or home).

It is very possible for someone with a high classic FICO score to have a low insurance credit score.

http://en.wikipedia.org/wiki/Insurance_score

HELPFUL INFORMATION………..

Everyone is entitled to a free annual credit report or a free credit report after being denied credit.

You can retrieve your credit report and credit score at Myficoscore.com or at the major credit bureaus

Before shopping for credit, pull your own free credit report (it does not affect your score negatively) and show lenders to see if you are credit worthy according to their lending standards.

If your shopping around for lenders through different companies in the same industry over a span of 14 days then the inquiries will only affect your credit score as if it was only one inquiry.

Closing unused accounts lowers your credit score so its best just to leave it open.



MORE HELPFUL INFORMATION …….

Diversifying your types of credit will improve your score.

The fastest way to increase your credit score is by staying within the 10% margin of utilization. Balance (divided) by Credit Limit = percentage.

To establish credit it is a good idea to become an authorized user on a responsible person’s account. The authorized user has no legal responsibility for the debt as oppose to a Joint or Co-Signer accounts. If this account starts to report negatively it is also easier to remove these types of credit from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs. Be certain that the lender reports this information to the credit bureaus.



MORE HELPFUL INFORMATION…….

Do not apply for credit you do not need or apply for credit if you know you will be denied.

If your credit life is relatively new do not open numerous accounts in order to build credit. This looks risky to lenders. It will also lower your average account age which has an effect on your total credit score.

If you find yourself unable to pay back your debt be careful of debt consolidation or debt settlement companies. If you decide to settle your debt the negative report will take seven years to be removed from your credit report and your credit score will be substantially lowered. You may also have to pay income taxes at the end of the year for the discounted portion (balance – settlement = discounted portion) if the amount is $600 or greater. If you decide to declare bankruptcy it will take 10 years for the negative information to be removed from your credit.



HELPFUL WEBSITES

For your free credit report go to: https://www.annualcreditreport.com/cra/index.jsp

For more information on credit go to: http://www.myfico.com/Default.aspx

You can access your credit score at either website with the conditions of a 7 day free trial of credit monitoring. They will ask for your credit card information in the event you do not call to cancel during the free trial period.


https://www.annualcreditreport.com/cra/index.jsp

https://www.annualcreditreport.com/cra/index.jsp

http://www.myfico.com/Default.aspx

http://www.myfico.com/Default.aspx


SAVINGS & BANKING

DIFFERENT TYPES BANK ACCOUNTS

Checking Accounts Savings Account Money Market Accounts CD’s, Certificate Deposit, Time Deposits Basic or no frill accounts - Many institutions offer a type

of bank account that provides you with a limited set of services for a low price

Totally Free Accounts Interest Bearing Accounts

BE AWARE OF…………………

Availability of funds disclosures. Extended Hold Cut over time/ Turnover Posted Balance and Available Balance Maintenance Fees Minimum balance accounts Interest Bearing accounts NSF, O/D, and Unavailable Overdraft fees. Return item fees Debit and Credit charges posted to debit cards. ATM charges International charges. Fraud or Identity theft.

Documents

Samantha Davis State Farm Financial Literacy Lab Credit Basics April 21, 2011