© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded 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

Family Economics & Financial Education

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Credit ReportsCredit Reports

◊ Credit report - a record of a consumer’s credit history ◊ Credit history - a record of transactions

involving credit use

◊ Individuals do not have a credit report if they have not previously used credit

◊ Affects one’s ability to acquire credit

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Information on a Credit Information on a Credit ReportReport

◊ Name and aliases◊ Current and past

addresses◊ Marital status◊ Date of birth◊ Employment history◊ Public records

◊ Judgments, criminal, and bankruptcy

◊ Credit card, store card, book clubs, music clubs, etc.

Payment history ◊Credit card, store card, book clubs, music clubs, etc.

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Information continuedInformation continued◊ Financial records

◊ Loans, bounced checks, closed accounts, etc.

◊ Loans/leases◊ Rent-to-own contracts,

payday loans, lease agreements, etc.

◊ Credit inquiry-

◊ Number of credit inquiries◊ Credit inquiry -a

request for your credit. Can be done by businesses you apply to for credit or whom pre-approve you for credit

*Medical information is not on a consumer’s credit report, but late medical payments are.

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Building Credit HistoryBuilding Credit History◊ Important for consumers to build a credit

history to be able to purchase items on credit◊ For example – house, vehicle

◊ Affects a young adult’s ability to make a purchase on credit in the immediate future including:◊ Renting an apartment◊ Buying a car◊ Purchasing electronics or other merchandise

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Building Credit History Building Credit History continuedcontinued

◊ Store accounts (JcPenny or Sears charge accounts)

◊ Credit card accounts◊ Even with a co-signer

◊ Loan from financial institution◊ Acquire a small loan from a financial institution

and pay the loan off in timely payments to develop a positive credit history

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

No Credit HistoryNo Credit History

Having no history of credit use Not having any credit accounts

in own name Paying cash for all major

purchases Paying phone and utility bills

on time

While the following are all positive financial practices, a credit history is not built if a consumer performs the following actions:

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Positive CreditPositive Credit

◊ Practice good banking techniques

◊ Keep checkbook balanced, do not bounce checks

◊ Pay bills consistently and on time

◊ Keep public records free of bankruptcy

◊ Have no criminal record◊ Keep a reasonable or small

amount of debt

◊ Apply for credit sparingly, keeping credit inquiries low

◊ Hold a low number or credit/store cards

◊ Check credit report annually to remove errors

◊ Maintain reasonable amount of unused credit

◊ Being responsible with credit and finances can lead to good credit◊A consumer may develop and keep good credit by:

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

General RuleGeneral Rule

◊ Percentage of current debt compared to the total credit available is reviewed by potential lenders

◊ Keep the amount of debt currently held at 25% of the total amount of available credit◊ For example - if Sue’s total

amount of credit available is $1,000, her current amount of debt should not exceed $250

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Negative CreditNegative Credit

Bouncing checksRoutinely paying bills lateHaving a criminal recordHolding a large amount of

debtHolding an unreasonable

amount of unused creditNot paying utility or cell

phone accounts consistently and on time

◊ Being irresponsible with credit and finances can lead to poor credit◊ A consumer may develop or keep poor credit by: Obtaining a high number of

credit inquiriesCarrying many credit/store

cardsHaving a public record of

bankruptcyDefaulting on a loanHaving cards over the limit

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Credit Reporting Agency Credit Reporting Agency (CRA)(CRA)

◊ Keeps a record of a consumer’s credit transactions and compiles credit reports

◊ Acquires information from several different types of lending companies

◊ Information on credit reports differ between each individual agency◊ Lenders may only report to one credit agency◊ Consumers should contact all agencies when

checking their credit report

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

CRA’s continuedCRA’s continued

The three main credit reporting agencies are:◊ Equifax

www.equifax.com (800) 685-1111

◊ Trans Union www.transunion.com (800) 888-4213

◊ Experian www.experian.com (800) 397-3742

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Who Reports to CRA’s?Who Reports to CRA’s?◊ Store accounts◊ Credit card companies◊ Mortgage and other loan

lenders◊ Financial institutions◊ Landlords◊ Courts◊ Utility accounts◊ Cellular phone companies◊ Delinquent accounts

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Requesting Credit ReportsRequesting Credit Reports◊ Consumers can request his/her credit

report any time◊ Can obtain one free credit report annually from

all three credit agencies www.annualcreditreport.com

◊ Additional copies can be purchased for no more than $9.50

◊ Consumers should check credit report once a year for accuracy◊ Mistakes are common

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Requesting continuedRequesting continued

◊ Insurance agencies◊ Current and potential credit

companies◊ State/local child support

agencies◊ Government agencies

◊ Financial institutions inquiring for lines of credit

◊ Landlords◊ Potential employers

◊ Only with applicant’s written request

◊ Any time a consumer requests credit from a business, they are able to review his/her credit report. This may include:

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Mistakes in Credit ReportsMistakes in Credit Reports◊ More than 50% of the credit reports

checked in a study contained errors◊ Consumer Reports (July 2000)

◊ The two main errors commonly appearing in a consumer’s credit report are:

1) 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

2) Fraud

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Fair Credit Reporting ActFair Credit Reporting Act◊ Enacted to protect the consumer in 1971◊ Designed to promote accuracy and ensure

privacy of information in credit reports◊ Consumers have the right:

◊ To know the information in their credit report ◊ To have errors corrected in their credit report

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Correcting Errors on Credit Correcting Errors on Credit ReportsReports

Steps include:◊ Contact the particular credit bureau that has the error◊ CRA must report to the consumer within 30 days◊ If the CRA can’t verify the information, then it must

be removed from the file or if in error it must be corrected

◊ If a consumer disagrees with result of CRA investigation, they have the right to submit a 100 word explanation which stays in the consumer’s file

◊ Negative information is usually removed from credit file after seven years, except bankruptcy which is removed after 10 years

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Correcting Errors on Credit Correcting Errors on Credit Report Cont.Report Cont.

◊ According to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC):◊ Consumers can do just as good of a

job repairing their credit report errors as a fee based debt repair agency

◊ Be cautious of debt repair agencies promising instant help because there is no immediate fix for poor credit

◊ Be proactive and correspond to CRA’s if an error is found

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Credit ScoresCredit Scores◊ A mathematical tool created

to help lender evaluate the risk associated with lending a customer money

◊ Scores range from 150-950, with 950 being the best score

◊ Not listed on a credit report◊ Each CRA has an independent scoring

system based upon a standard percentage of five different categories

◊ Consumer’s scores can differ between each CRA

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Five Standard Categories of Five Standard Categories of ScoresScores1. 35%-Payment history

- Timely manner in which a consumer pays debt

2. 30%-Outstanding debt-Amount of debt currently held

3. 15%-Credit history-How long the consumer has held credit accounts and how often

they are used

4. 10%-Pursuit of new credit-How much credit is acquired over the length of the consumer’s

credit history

5. 10%-Types of credit in use-May include credit cards, gas cards, store cards or accounts,

loans, etc.

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Credit Scores continuedCredit Scores continuedOther factors calculated into a credit score

may include:◊ Length of time at current address◊ Current income◊ Financial information◊ Late payments◊ Amount of outstanding credit◊ Amount of credit in use◊ Length of time credit has been established

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Financial Effect of Credit Financial Effect of Credit ScoresScores

◊ Interest rate of loans◊ High score – can insure a lower interest rate on credit◊ Low score– can cause a higher interest rate on credit

◊ Ability to receive future loans/credit◊ Financial lending institutions have guidelines of

what score will qualify for a loan

◊ Reflection of risk of borrower to the lender◊ The lower the score, the higher the possibility the

consumer pays bills late

◊ Financial security for lifetime◊ Takes time to improve credit, which could take time

from building financial security

1.4.2.G1

© Family Economics & Financial Education – Revised October 2004 – Credit Unit –Understanding Credit ReportsFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

ConclusionConclusion

Build and maintain positive credit!

Check credit reports annually for errors!

Act financially responsible!