Credit Scores-The Basics
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Slides for Part 1 of eXtension webinar about credit scores
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Credit Scores-The Basics
- 1. Credit Scores: What’s New? https://learn.extension.org/events/2488 This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587. Barbara O’Neill, Extension Specialist, Rutgers Cooperative Extension Rod Griffin, Director of Public Education, Experian
- 3. Question #1: How Often Do You Check Your Credit Report and How?
- 4. Credit Reports are Like a “Financial Report Card” • It’s just like you are back in school • You are still being evaluated with written comments • The results are still critical for your future
- 5. What is a Credit Report? • A summary of someone’s history of paying debts and other bills • Prepared by credit reporting agencies (a.k.a., CRAs or credit bureaus) • Used by those who have a legitimate need for the information – Lenders – Insurance companies – Potential employers – Potential landlords
- 6. The Better Your Credit History, The Better Your Chances of... • Obtaining a loan or credit card • Obtaining lower-cost credit terms and saving hundreds/thousands of dollars of interest • Obtaining a low-cost insurance policy • Renting an apartment • Being hired for a job
- 7. Three Major Credit Bureaus Equifax: www.equifax.com Experian: www.experian.com TransUnion: www.transunion.com • Different pieces of data about borrowers in their databases • Social Security number acts as a “magnet” to assemble data and create a credit report
- 8. Four Key Credit Report Sections • Identifying Information: Name, SS Number, current/previous addresses, birthdate, employer • Public Record Information from Local Courthouse: Liens, foreclosures, bankruptcy, etc. • Other Credit History Information: List of loans and credit cards, timeliness of payments, highest and current balance, negative information (7 years) • Inquiries: Self-initiated, promotional (for marketing purposes), and periodic creditor reviews
- 9. Free Credit Reports by Federal Law
- 10. Credit Scores Are Like a “Financial GPA” • Three-digit number calculated by statistical analysis • An important barometer of financial health • Based on credit report data at a point in time
- 11. More About Credit Scores • Predictive tool that measures the risk of a borrower’s delinquency or default • Determines who qualifies for credit, at what interest rate, and at what credit limits • Generally, higher credit scores indicate lower risk
- 12. How to Get a Credit Score • Request score from a prospective lender, landlord, or insurance company • Use a credit card that provides a free credit score (online or on billing statement) • Via the FICO web site: http://www.myfico.com/
- 13. Free Credit Report and Credit Score Providers • Credit.com • Credit Karma • Credit Sesame • QL Credit • Quizzle • Wise Piggy • Beware: solicitations for products, services, upgrades • Beware: free scores will likely vary from FICO scores
- 14. About Credit Scoring • Classic FICO score range: 300 (worst) to 850 (best) • Speeds up loan approvals • Objective focus on credit risk factors • 1989: Fair, Isaac Corp. introduced FICO score • 2002: FICO scores became available to consumers at www.myfico.com • 2016: Not required for free upon request by federal law (like credit reports are) BUT many creditors are providing for free (marketing and retention tool)
- 15. Sample Credit Score Data for Consumers by a Creditor
- 16. What a Credit Score Means Source: http://www.myfico.com/fico-score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 17. Question #2: How Often Do You Check Your Credit Score and How?
- 18. Credit Scoring Factors • Bill payment history, weighted for recent months (35%) • Proportion of outstanding debt to available credit limits (30%) • Length of credit history (15%) • Number of recent credit inquiries (10%) • Mix of types of credit used (10%)
- 19. Credit Scores Can Vary • Information in your credit report may vary across the “Big Three” credit reporting agencies (CRAs) – Reporting to CRAs by creditors is voluntary – Data that each CRA compiles about you may be different • Implication: To get a complete picture of what lenders see, check credit reports from all 3 bureaus – If credit report information is very similar, so, too, will be credit scores
- 20. Credit Scores Can Vary • Some large lenders still build their own scoring models – Custom models based on data from a lender’s own account holders – These scores are generally not disclosed to consumers • Each of the “Big Three” CRAs sells their own generic score built internally on their own data – Example: Experian’s score is called the Plus Score
- 21. Credit Scores Can Vary VantageScore (introduced in 2006) is a FICO score competitor: http://your.vantagescore.com/interpret_scores
- 22. Information That is NOT Included in a Credit Score • Your age • Your income • Your employment status – Caveat: Lenders will consider employment status • Your marital status • Interest rates (APRs) paid on existing debts • Child support and alimony • “Soft” and “promotional” inquiries • Credit counseling participation https://www.experian.com/ask-experian/20080625-the-impact-of-credit-counseling-on- credit-scores.html
- 23. Good Credit Scores Save Money Source: http://www.myfico.com/crediteduc ation/calculators/loanrates.aspx
- 24. Damage Points: How Mistakes Affect FICO Credit Scores Action Decline from 680 Score Decline from 780 Score Maxed-Out Credit Card 10-30 points 25-45 points 30 day-late payment 60-80 points 90-110 points Debt Settlement 45-65 points 105-125 points (Less than full balance) Foreclosure 85-105 points 140-160 points Bankruptcy 130-150 points 220-240 points Source: http://www.creditcards.com/credit-card-news/fico-credit-score- points-mistakes-1270.php
- 25. Ways To Improve Your Credit Score • Pay your bills on time (#1 weighted factor) • Keep debt-to-available credit ratio routinely low (< 30%) • Keep accounts open: – Older accounts establish length of history • Get points for variety (mix of types of credit) – Revolving and installment • Avoid “hard” inquiries: supply own report to lenders
- 26. Other Credit Score Tips • Only apply for new credit when needed • Pay or settle old collection accounts – Accounts with a “0” balance no longer hurt FICO score • Check credit report for errors that affect score • Correct errors and dispute evidence of fraud – Focus on negative factors provided with FICO score • Reduce balances on credit cards • Pay off debt rather than moving it around
- 27. FICO High Achievers • 96% have no late payments • Use, on average, only 7% of credit limit • Owe < $3,500 on credit cards • Have average credit history length of 25 years http://www.myfico.com/fico- score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 28. Question #3: Any Other Credit Score Tips?
- 29. Credit Score Resource: • The Credit Score Quiz: http://www.creditscorequiz.org/ • Print copy of the quiz with answer key: http://www.creditscorequiz.org/CreditScoreQuiz_AnswerKey _Eng.pdf
- 30. Credit Score Resource: Credit Score Game (University of Idaho) • Description: http://www.extension.uidaho.edu/impacts/Pdf_13/18- 13lerickson-creditscore.pdf • Game: http://www.uidaho.edu/extension/4h/programs/nw-youth-financial- ed/credit-score-millionaire
- 31. FICO Credit Score Estimator Resource: http://whatsmyscore.org/estimator/
- 32. Rutgers Cooperative Extension Wise Credit Management Quiz http://njaes.rutgers.edu/money/wise-credit/
- 33. Question #4: Any Other Good Credit Score Resources?
- 34. Key Take-Aways • A credit score is a “snapshot” of your credit performance at a point in time. • It changes over time as your credit behavior changes • Helpful credit score factors: – Timely payments (“current” or “paid as agreed”) – Old credit accounts (show lengthy history) – Low balances (<30% of credit card limit) – Variety (bankcards, car loans, mortgages)
- 35. Key Take-Applications • Review your credit report from each “Big Three” CRA annually • Obtain your FICO credit score; for free, if possible • Take steps to raise your credit score, if needed • Check out alternative credit scores, if interested • Check out suggested online resources
- 36. Part 2 Credit Scores: Beyond the Basics
- 37. Find all upcoming and recorded webinars covering: Personal Finance Military Caregiving Family Development Family Transitions Network Literacy Nutrition & Wellness Community Capacity Building This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587. www.extension.org/62581