Understanding Credit Reports Family Economics Financial Education Family

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

1. 4. 2. G 1 Credit 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 © Family Economics & Financial Education – Revised October 2004 – 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

Information on a Credit Report ◊ ◊ ◊ 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. 1. 4. 2. G 1 Payment history ◊Credit card, store card, book clubs, music clubs, etc. © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Information 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. © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Building 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Building Credit History continued ◊ ◊ Store accounts (Jc. Penny 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 No Credit History While the following are all positive financial practices, a credit history is not built if a consumer performs the following actions: s Having no history of credit use s Not having any credit accounts in own name s Paying cash for all major purchases s Paying phone and utility bills on time © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Positive Credit ◊ Being responsible with credit and finances can lead to good credit ◊A consumer may develop and keep good credit by: ◊ 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 General 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Negative Credit ◊ Being irresponsible with credit and finances can lead to poor credit ◊ A consumer may develop or keep poor credit by: Bouncing checks Routinely paying bills late Obtaining a high number of credit inquiries Having a criminal record Carrying many credit/store cards Holding a large amount of debt Having a public record of bankruptcy Holding an unreasonable amount of unused credit Defaulting on a loan Not paying utility or cell phone Having cards over the limit accounts consistently and on time © Family Economics & Financial Education – Revised October 2004 – 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

Credit Reporting Agency (CRA) ◊ ◊ ◊ 1. 4. 2. G 1 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 CRA’s continued The three main credit reporting agencies are: ◊ Equifax s s ◊ Trans Union s s ◊ www. equifax. com (800) 685 -1111 www. transunion. com (800) 888 -4213 Experian s s www. experian. com (800) 397 -3742 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Requesting 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Requesting continued ◊ Any time a consumer requests credit from a business, they are able to review his/her credit report. This may include: ◊ ◊ 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Mistakes 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) 2) 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 Fraud © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Fair 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Correcting Errors on Credit Reports 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 © Family Economics & Financial Education – Revised October 2004 – 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

Correcting Errors on Credit 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 © Family Economics & Financial Education – Revised October 2004 – 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 1. 4. 2. G 1

1. 4. 2. G 1 Credit 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Five Standard Categories of Scores 1. 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. © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Credit Scores continued Other 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Financial Effect of Credit Scores ◊ Interest rate of loans ◊ ◊ ◊ 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 ◊ ◊ High score – can insure a lower interest rate on credit Low score– can cause a higher interest rate on credit 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 © Family Economics & Financial Education – Revised October 2004 – 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

1. 4. 2. G 1 Conclusion Build and maintain positive credit! Check credit reports annually for errors! Act financially responsible! © Family Economics & Financial Education – Revised October 2004 – 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