©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 III 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 III Credit Scores <ul><li>In this session, participants will learn: </li></ul><ul><li>What a credit score tells a lender </li></ul><ul><li>How credit scoring benefits consumers </li></ul><ul><li>How a credit score is calculated </li></ul><ul><li>Ways to maximize a credit score </li></ul><ul><li>Benchmarks for credit scoring </li></ul><ul><li>Steps to take to improve a credit score </li></ul>
  4. 4. Index (Click on the underlined item to go directly to that section.) <ul><li>What is credit scoring </li></ul><ul><li>How credit scoring benefits consumers </li></ul><ul><li>Credit by the numbers </li></ul><ul><li>Credit scoring at a glance </li></ul><ul><li>Payment History </li></ul><ul><li>Amounts Owed </li></ul><ul><li>Length of credit record </li></ul><ul><li>Credit Mix </li></ul><ul><li>Inquiries </li></ul><ul><li>Credit Scoring Benchmarks </li></ul><ul><li>Steps to take to Improve your Credit Score </li></ul><ul><li>For more information </li></ul>
  5. 5. What is credit scoring? <ul><li>Credit scoring is the system used by creditors to help determine </li></ul><ul><ul><li>whether or not to grant credit, and </li></ul></ul><ul><ul><li>at what terms (cost) to the applicant. </li></ul></ul><ul><li>A credit score tells a lender the applicant’s relative risk of defaulting on a loan. </li></ul><ul><ul><li>Lower scores indicate a higher likelihood of default, which means more risk to the lender. </li></ul></ul><ul><ul><li>Higher credit scores indicate a lesser likelihood that the borrower will default, which means less risk that the lender will lose its investment. </li></ul></ul><ul><li>An applicant’s data is compared to data from other consumers with similar credit profiles. An applicant’s score is based on factors that predict likeliness of debt repayment. </li></ul>
  6. 6. How credit scoring benefits consumers <ul><li>Credit scoring is based on real data and documented statistics. </li></ul><ul><li>Credit scoring provides lenders with a reliable standard for deciding when to grant credit, and at what amount. </li></ul><ul><li>Credit scoring models treat all applicants objectively and according to established criteria. </li></ul>
  7. 7. Credit by the Numbers <ul><li>Few lenders actually look at a full credit report. </li></ul><ul><li>Credit scores have become the benchmark for determining creditworthiness. </li></ul><ul><li>Credit scores generally range from 350-850. </li></ul><ul><li>Credit scores are not included automatically with credit reports. They can be purchased for a small additional fee. </li></ul>
  8. 8. Credit Scoring at a Glance <ul><li>The most commonly used credit scoring models were developed by Fair Isaac Co. and are known as FICO scores. </li></ul><ul><li>Credit scoring models analyze five factors to determine a credit score. </li></ul><ul><li>Factors are chosen on the basis of predictive value. </li></ul><ul><ul><li>These factors have shown themselves to be excellent predictors of how consumers manage credit. </li></ul></ul>
  9. 9. Credit Scoring Factors
  10. 10. Payment History <ul><li>Payment History is the single most important factor for determining a credit score. </li></ul><ul><li>It contributes up to 175 points of the total score. </li></ul><ul><li>A single late payment can drop an individual’s credit score by 100 points. </li></ul><ul><li>Credit reports shows payment habits over time. </li></ul>
  11. 11. Amounts Owed <ul><li>Amounts owed is the second most important factor in determining a credit score. </li></ul><ul><li>It considers the ratio of total credit used to total available credit for each revolving charge account on a credit report. </li></ul><ul><li>To maximize a credit score, consumers should use no more than 50% of available revolving credit lines. </li></ul><ul><li>If consumers are above the 50% threshold, they can improve their score by paying down debt. </li></ul>
  12. 12. Length of Credit Record <ul><li>Length of credit record counts for up to 75 points of the total credit score. </li></ul><ul><li>It considers the total length of a credit report and the average length in years of credit accounts. </li></ul><ul><li>To maximize this component of the score, open new accounts only when necessary. </li></ul><ul><ul><li>Avoid opening more than a few new accounts each year. </li></ul></ul>
  13. 13. Credit Mix <ul><li>Credit mix refers to the various types of credit a consumer can use: </li></ul><ul><ul><li>installment or revolving </li></ul></ul><ul><ul><li>secured or unsecured </li></ul></ul><ul><li>Installment debt is a fixed amount of credit, financed at a fixed rate, for a pre-determined number of payments </li></ul><ul><ul><li>for instance: student loans, auto loans, and mortgages. </li></ul></ul><ul><li>Installment and secured debt is usually considered superior to revolving and unsecured debt. </li></ul><ul><li>Most installment loans are secured , or backed up by collateral which is an asset equal in value to the cost of the loan. For example, an auto loan is secured by the car being financed. Student loans are secured by the borrower’s future income. </li></ul><ul><li>Revolving debt is a pre-determined line of credit available to the borrower. The borrower can use some, all, or none of the credit available, up to the pre-determined limit. As the borrower pays down credit used previously, that credit becomes available once more. This is how credit can “revolve.” </li></ul>
  14. 14. Credit Mix (continued) <ul><li>Credit cards and home equity lines of credit are examples of revolving credit. </li></ul><ul><li>Consumers may use some, none, or all of their revolving credit. </li></ul><ul><ul><li>As revolving debt is paid, the credit becomes available for re-use. </li></ul></ul><ul><li>Credit cards are usually unsecured because the consumer is not generally required to put money down in order to receive a card. </li></ul><ul><li>Home equity lines of credit are secured by the value of the home. </li></ul><ul><ul><li>Consumers who default on a home equity line of credit could lose their home since it secures the loan. </li></ul></ul>
  15. 15. Credit Inquiries <ul><li>Credit inquiries account for up to 50 points of total credit score. </li></ul><ul><li>They affect credit scores because new lines of credit usually mean new potential debt. </li></ul><ul><li>Credit bureaus have documented a correlation between credit inquiries and debt distress. </li></ul><ul><li>Consumers who open more than 6 new lines of credit in a single year are 8 times more likely to file for bankruptcy than those who open only a few new lines of credit each year. </li></ul>
  16. 16. Credit Scoring Benchmarks (According to Experian) <ul><li>The national average credit score is 678. </li></ul><ul><li>The average credit score in the southeastern states is 659. </li></ul><ul><li>The average Floridian’s credit score is 673. </li></ul>
  17. 17. Steps to take to improve your credit score <ul><li>Pay bills on time. </li></ul><ul><ul><li>If payments have been missed, get current and stay current. </li></ul></ul><ul><ul><li>If a person is unable to get his/her bills current, contact creditors or a credit counseling agency for assistance in managing bills. </li></ul></ul><ul><li>Dispute any errors on the credit report. </li></ul><ul><li>Keep balances low on credit cards and other &quot;revolving credit.&quot; </li></ul><ul><li>Pay off debt rather than moving it around. </li></ul>
  18. 18. Steps to take to improve your credit score (continued) <ul><li>Do not close unused credit cards as a short-term strategy to raise a credit score. </li></ul><ul><li>Do not close accounts with balances. </li></ul><ul><ul><li>Whenever a revolving account with a balance is closed, it signals to a lender that the consumer is over-extended and having trouble managing bills. </li></ul></ul><ul><li>Do not open a number of new credit cards that are not needed just to increase available credit. </li></ul>
  19. 19. Steps to take to improve your credit score (continued) <ul><li>If a consumer has been managing credit for a short time, avoid opening too many new accounts rapidly. </li></ul><ul><ul><li>New accounts will lower the average account age, which will have a larger effect on credit score. </li></ul></ul><ul><ul><li>Rapid account buildup can make a new credit user look risky. </li></ul></ul><ul><li>Do rate shopping for a given loan within a focused period of time. </li></ul><ul><ul><li>Multiple car loan or mortgage inquiries within 30 days of applying for credit will not be figured in to the credit score. </li></ul></ul><ul><ul><li>Car loan and mortgage inquiries grouped in a14-day period count as only one inquiry. </li></ul></ul>
  20. 20. Steps to take to improve your credit score (continued) <ul><li>Avoid borrowing from finance companies and other high-risk lenders. </li></ul><ul><li>Have credit cards but manage them responsibly. </li></ul><ul><ul><li>In general, having credit cards and installment loans will raise a credit score. </li></ul></ul><ul><ul><li>Someone with no credit cards tends to be a higher risk (in the eyes of lenders) than someone who has managed credit cards responsibly. This is because lenders can use a borrower’s past behavior as a gauge to estimate future creditworthiness. A person with little or no credit history offers lenders no way to determine whether or not they will be a responsible user of credit. </li></ul></ul>
  21. 21. 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>
  22. 22. 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>