©2006 CCCS of South Florida


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©2006 CCCS of South Florida

  1. 1. Financial Prosperity Understanding the Terms and Conditions of Credit Part I Life Stages Employee Assistance Program
  2. 2. Four Parts <ul><li>This course is broken down into four separate parts: </li></ul><ul><li>The Credit Reporting Process </li></ul><ul><li>Credit Rights & Responsibilities </li></ul><ul><li>Credit Scores </li></ul><ul><li>Credit Counseling Services </li></ul>
  3. 3. Part I The Credit Reporting Process <ul><li>In this session, participants will learn: </li></ul><ul><li>How the “credit society” evolved </li></ul><ul><li>How a lender determines credit worthiness </li></ul><ul><li>How consumer credit usage is tracked </li></ul><ul><li>What information is in a credit report </li></ul><ul><li>How to read a credit report </li></ul><ul><li>How to obtain a credit report </li></ul>
  4. 4. Index (Click on the underlined item to go directly to that section.) <ul><li>A History of Consumer Credit </li></ul><ul><li>The Lender’s Point of View </li></ul><ul><li>The Role of a Credit Reporting Agency (aka “Credit Bureau”) </li></ul><ul><li>How Credit Reporting Works </li></ul><ul><li>What is a Credit Report? </li></ul><ul><li>The Components of a Credit Report </li></ul><ul><li>How to read a credit report </li></ul><ul><li>Credit Reporting Guidelines </li></ul><ul><li>The FACT Act </li></ul><ul><li>How to obtain a free credit report </li></ul><ul><li>Consumer credit protection laws </li></ul><ul><li>Credit Reporting Agencies – contact information </li></ul><ul><li>For more information </li></ul>
  5. 5. A History of Consumer Credit <ul><li>First came prosperity… </li></ul><ul><li>Credit was not always part of the American consumer landscape; Americans lived on a cash basis for everything. </li></ul><ul><li>In the mid-1950s, America’s consumer culture blossomed. </li></ul><ul><li>In post-WW2 America when the economy was strong, people were not only able to satisfy their needs, but their wants too. </li></ul>
  6. 6. … Followed by Debt <ul><li>Average households began carrying home mortgages, car notes, and revolving credit. </li></ul><ul><li>Many became over-extended, that is, were carrying too much debt. </li></ul><ul><li>Credit Reporting Agencies began to track payment data to document credit worthiness. </li></ul><ul><li>Free credit counseling agencies opened to assist consumers experiencing debt distress. </li></ul>
  7. 7. People forgot . . . <ul><li>Credit is </li></ul><ul><li>a privilege granted by a lender, </li></ul><ul><li>not a source of income. </li></ul>
  8. 8. The Lender’s Point of View <ul><li>A lender’s business decision: </li></ul><ul><ul><li>whether or not to extend credit, and </li></ul></ul><ul><ul><li>how much credit to extend </li></ul></ul><ul><li>Lenders weigh risk against profit </li></ul><ul><ul><li>Lenders prefer to extend credit to consumers who will make timely repayment. </li></ul></ul><ul><ul><li>Timely repayment results in profit for the lender. </li></ul></ul><ul><li>Lenders use the “ Four Cs of Credit” to size up potential clients: </li></ul><ul><ul><li>Character </li></ul></ul><ul><ul><li>Capacity </li></ul></ul><ul><ul><li>Collateral </li></ul></ul><ul><ul><li>Capital </li></ul></ul>
  9. 9. The Four Cs of Credit <ul><li>Character refers to how well a consumer has managed his/her financial life in the past. </li></ul><ul><li>Capacity is the amount of debt a consumer can realistically manage on his/her income. </li></ul><ul><li>Collateral refers to assets owned outright that could be used to secure debt. </li></ul><ul><ul><li>Secure means that these assets could be sold to pay off the debt, if necessary. </li></ul></ul><ul><li>Capital is the total amount of cash a consumer has available. </li></ul>
  10. 10. The Fifth “C”: Credit Report <ul><li>Evaluating one’s individual credit report is the quickest and easiest way </li></ul><ul><ul><li>to evaluate one’s personal “Four Cs of Credit” </li></ul></ul><ul><ul><li>and thus, to determine creditworthiness. </li></ul></ul><ul><li>An individual credit report contains a person’s unique history of past debt management. </li></ul><ul><li>Credit reporting is based on the premise that past behavior is a good (maybe the best) predictor of future behavior. </li></ul>
  11. 11. The Role of a Credit Bureau <ul><li>Nearly all financial transactions are tracked at some level. This includes rent/mortgage, utilities, credit cards, secured and unsecured loans. </li></ul><ul><li>Credit Reporting Agencies (CRAs, also known as credit bureaus ) keep track of: </li></ul><ul><ul><li>spending and payment habits; </li></ul></ul><ul><ul><li>address, employment, new credit inquiries; and even </li></ul></ul><ul><ul><li>of legal matters that pertain to personal finances. </li></ul></ul>
  12. 12. The Role of a Credit Bureau (continued) <ul><li>Credit Reporting Agencies work with lenders, creditors, insurers and employers to update and distribute information. </li></ul><ul><li>The three largest national credit bureaus are </li></ul><ul><ul><li>Experian, </li></ul></ul><ul><ul><li>Equifax, and </li></ul></ul><ul><ul><li>Trans Union. </li></ul></ul><ul><li>They are the credit repositories for American consumers. </li></ul>
  13. 13. How Credit Reporting Works <ul><li>A consumer applies for credit. </li></ul><ul><li>The creditor requests a copy of the individual’s credit history from a CRA. </li></ul><ul><li>Creditor/Lender uses history to determine credit offer. </li></ul><ul><li>Credit/Debt activity is reported to one or more of the CRAs every 30 days by creditors and lenders. </li></ul>
  14. 14. Credit Inquiries <ul><li>There are two types of credit inquiries: “soft” and “hard” </li></ul><ul><li>A “hard” inquiry is an application for a new line of credit. </li></ul><ul><li>A “hard” inquiry appears on the individual’s credit report. </li></ul><ul><li>A “hard” inquiry remains on the credit report for 2 years. </li></ul><ul><li>Lenders may consider too many “hard” inquiries a signal of high debt risk. Consumers should avoid applying for credit frequently. </li></ul><ul><li>A “soft” inquiry is an inquiry made for a reason other than credit. Examples include inquiries from prospective employers or from lenders for routine monitoring. </li></ul><ul><li>When a consumer gets his/her own credit report, it is considered a “soft” inquiry. By law, a consumer is never penalized for checking his/her own report. </li></ul>
  15. 15. What is a Credit Report? <ul><li>A credit report is a detailed record of how financial obligations are managed over time. </li></ul><ul><li>It is a file containing personal financial information that creditors use to determine whether or not to extend credit. </li></ul><ul><li>Each item in a credit report must, by law, be backed up by legitimate documentation. </li></ul><ul><li>A credit report is designed to show patterns of activity over time and includes both open and closed accounts. </li></ul>
  16. 16. Credit Report Components <ul><li>Borrower information </li></ul><ul><li>Credit score section (when purchased) </li></ul><ul><li>Credit summary </li></ul><ul><li>Public Records information </li></ul><ul><li>Account Information (also called Tradelines ) </li></ul><ul><li>Credit Inquiries </li></ul><ul><li>Credit reports do not contain information on </li></ul><ul><li>lifestyle, personal habits, social life, medical </li></ul><ul><li>history, political activities, religious beliefs, etc. </li></ul><ul><li>[ Click here to download a sample credit report ] </li></ul>
  17. 17. <ul><li>Reading a Credit Report </li></ul><ul><li>1) Borrower (consumer) information contains general identifying information and social security number. The information may not be current. Variations of spellings or dates does not affect a person’s score. </li></ul>
  18. 18. <ul><li>2) The Credit Score section contains the score and type or name of score. The score is generally a number between 300 and 850. The higher the score, the better your credit potential. Currently, each of the three main Credit Bureaus- Experian, Equifax, Trans Union - uses a different score. In the downloaded sample report, the bureau used is Equifax and the credit score is called “Beacon.” This section also summarizes the reason(s) for a score less than 850. </li></ul>Credit Score Type of Score Bureau providing the report Reasons affecting score
  19. 19. <ul><li>3) The Credit Summary section provides an overview of each type of account associated with a particular individual, the number of accounts, the number of accounts with balances, the total balance owed, the payment amount, payment history, number of accounts past due, and last date of payment as reported to the bureau providing the information. </li></ul><ul><li>The overview may also include public record information related to a consumer’s financial life as well as inquiries. </li></ul>
  20. 20. <ul><li>4) The next section is Public Records . It is ideal to have a blank public records section. This is where legal judgments, bankruptcies and other types of legal action - such as liens and child support judgments - are recorded. </li></ul>
  21. 21. <ul><li>5) Account Information , or Tradelines , is the next section. This section contains details of every account in the borrower’s credit summary. This section includes all the credit accounts, open and closed, reported in the borrower’s name. Also included are the names of creditors, the dates the account were opened, the dates they were reviewed, the types of accounts, credit limits balances, monthly payments, and payment patterns. </li></ul><ul><li>Consumers need to review this section very carefully to ensure that all the accounts are legitimate. </li></ul><ul><li>Tradelines is the area used to determine </li></ul><ul><li>if there has been identity theft. </li></ul>
  22. 22. <ul><li>6) The final section is Credit Inquiries which details all hard and soft inquiries made into the borrower’s file. The inquiries section includes the date the inquiry was made, the inquiring party, and what bureau the inquiry was made through. </li></ul><ul><li>The inquiries section is followed by additional borrower information and creditor or “subscriber” information listing the name, address and account number for each creditor. </li></ul>
  23. 23. Credit Reporting Guidelines <ul><li>All account information will be reported for 7 years. </li></ul><ul><li>Inquires for new lines of credit stay for 2 years. </li></ul><ul><li>Chapter 13 Bankruptcy filing stays 7 years from date of filing. </li></ul><ul><li>Chapter 7 Bankruptcy stays on credit record for 10 years. </li></ul><ul><li>Defaulted student loans, judgments on loans, and lawsuits can be listed for longer periods of time. </li></ul>
  24. 24. The FACT Act <ul><li>To help protect consumers against identity theft, Congress passed the F air and A ccurate C redit T ransaction Act of 2004. </li></ul><ul><ul><li>The Act went into effect nationwide in 2005. </li></ul></ul><ul><ul><li>It entitles consumers to one free credit report annually from each of the three main credit bureaus. </li></ul></ul><ul><li>Credit scores are not covered by the Act but can be purchased from the CRA. </li></ul>
  25. 25. How to Obtain a FACT-Mandated Free Credit Report <ul><li>Annual Credit Report Request Service </li></ul><ul><li>P.O. Box 105281 </li></ul><ul><li>Atlanta, GA 30348-5281 </li></ul><ul><li>www.annualcreditreport.com </li></ul><ul><li>1-877-322-8228 </li></ul>
  26. 26. Consumer Credit Protection Laws <ul><li>If a credit report is inaccurate due to fraudulent activity, the consumer is entitled to obtain a free credit report from each of the three main bureaus. </li></ul><ul><li>The bureaus will forward a complete credit report at the time the consumer makes a report of identity theft or fraud. </li></ul>
  27. 27. Consumer Credit Protection Laws (continued) <ul><li>If a consumer’s application for new credit is refused, the consumer is entitled to a free credit report from the bureau that supplied the report causing denial. </li></ul><ul><li>The consumer must ask which bureau provided the credit information. </li></ul><ul><li>The consumer must send a written request to that bureau within 60 days of the denial of credit. </li></ul>
  28. 28. Obtaining Credit Reports & Scores 1-877-322-8228 www.annualcreditreport.com Annual Credit Report Request Service PO Box 105281 Atlanta, GA 30348-5281 1-888-397-3742 www.experian.com Experian 475 Anton Blvd. Costa Mesa, CA 92626 1-800-888-4213 www.transunion.com Trans Union PO Box 2000 Chester, PA 19022 1-800-685-1111 www.equifax.com Equifax PO Box 740123 Atlanta, GA 30374-0123
  29. 29. For more information, contact CCCS <ul><li>Call toll-free 1-800-355-2227 </li></ul><ul><li>Online at www.cccservices.com </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Through UM’s EAP office </li></ul><ul><ul><li>305-284-6604 </li></ul></ul><ul><ul><li>1-800-341-8060 (outside the local calling area) </li></ul></ul><ul><ul><li>[email_address] </li></ul></ul><ul><li>[ Click here to download a CCCS information sheet ] </li></ul>
  30. 30. Evaluation <ul><li>If you are viewing only this module of the credit report education, please click here to complete an evaluation. Otherwise, please evaluate after all modules have been completed. </li></ul><ul><li>Thank you! </li></ul>