Credit Scores &Financial ExclusionA Growing Cheatsheet for Kiva Zip fellows,by Kiva Zip fellows
A Credit Score• Numerical expression based on a statistical analysis of a persons credit files, torepresent the creditwort...
How to readFICO scoresFICO scores• FICO, previously known as Fair Isaac Corporation, is the most widely known credit score...
How FICO scores arecalculated• The FICO®Score is calculated from 5 categories of ofcredit data in your credit report (see ...
What doesn’t count towards yourcredit score (what FICO ignores)• Oddly enough, a person’s income/occupation/employment his...
Women have lower credit scores,but greater potential forimprovement.Source:survey conducted by Quizzle of more than 800,00...
How you can BuildYour Credit• Limit yourself to 2-3 credit cards, the more creditaccounts the lower the score• When you cl...
How Person X learnstheir credit scoretheir credit score• Under the Fair Credit Reporting Act, a consumer is entitled to a ...
Really good document on credit &impact on financial exclusion andfinancial access• Federal Reserve System’s Report to the ...
Really good document on credit &impact on financial exclusion andfinancial access• Federal Reserve System’s Report to the ...
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Kiva Zip Fellows Wiki: Credit scoring & financialexclusion cheatsheet

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Kiva Zip Fellows Wiki: Credit scoring & financialexclusion cheatsheet

  1. 1. Credit Scores &Financial ExclusionA Growing Cheatsheet for Kiva Zip fellows,by Kiva Zip fellows
  2. 2. A Credit Score• Numerical expression based on a statistical analysis of a persons credit files, torepresent the creditworthiness of that person.• in other words, the “likelihood that people will pay their bills”• PRIMARILY based on credit report information typically sourced from credit bureaus.• Used by lenders (banks, credit card cos) to evaluate potential risk of lending to a specificperson• In most cases, your credit score determines (a) whether you qualify for a loan at all, butalso (b) how much you can borrow (loan or credit limit), (c) at what cost (interest rate)• Credit scores are also used by mobile phone companies, insurance, gov departments,property companies. As such, beyond their original function of representing creditworthiness, credit scores have become a sort of numerical shorthand for “how risky /trustworthy is this person” to do business with
  3. 3. How to readFICO scoresFICO scores• FICO, previously known as Fair Isaac Corporation, is the most widely known credit score in the US,used by most credit bureaus and financial institutions• 90 of the top 100 largest U.S. financial institutions use FICO to make consumer credit decisions• Inputs and parameters are designed to “predict the likelihood that a consumer will go 90days past due or worse in the subsequent 24 months after the score has beencalculated”• FICO Scores range between 300 - 850• 623 being the median FICO score of Americans in 2010• historically, scores >620 are considered “prime”, with those below considered “sub-prime”• However in recent years, mortgage lenders and insurers have tightened it even more - many largeinstitutions will NOT insure mortages of those with scores <660, or will charge extra on loans tothose <740• Interesting: same person may a few slightly different FICO scores at a single time - depending ontype of lending they are applying for (mortgage, automobile, credit card) as these are calculatedwith slightly different parameters
  4. 4. How FICO scores arecalculated• The FICO®Score is calculated from 5 categories of ofcredit data in your credit report (see left)• The most important being Payment History behaviour(35% weightage) and Current Amounts Owed (30%weightage)• Late payments will lower your FICO Score, butestablishing or re-establishing a good track record ofmaking payments on time will raise your score.• NOTE the “New Credit” factor (10%) - You credit scoreis generally lowered when you open multiple new creditaccounts; the number of times a lender has requestedfor your credit report in past 12 months as both theseare interpreted as events that increase your risk ofdefaulting/deliquency• A score is a “snapshot” of your risk at a particular pointin time. It changes as new information is added to yourbank and credit bureau files• Learn more herehttp://www.myfico.com/CreditEducation/WhatsInYourScore.aspxand here:http://www.myfico.com/CreditEducation/WhatsNotInYourScore.aspx
  5. 5. What doesn’t count towards yourcredit score (what FICO ignores)• Oddly enough, a person’s income/occupation/employment history is notconsidered when calculating a credit score - banks usually request thisseparately• For small business, credit scores do not give a discount for age or length of timein the US. Recent immigrants and younger people simply have a shorter credithistory• Many married couples tend to share credit cards or loans in a joint account, often underthe husbands name. Credit history as a couple also doesn’t count. Women would needto get some bills and credit cards in their own name to establish a separate credit historyfrom your husband. Many married women don’t until they get separated, and it takestime to build your scoreRead more: http://www.bankrate.com/finance/credit-debt/10-ways-women-can-build-credit-1.aspx#ixzz2KukZXyB8
  6. 6. Women have lower credit scores,but greater potential forimprovement.Source:survey conducted by Quizzle of more than 800,000 Americans
  7. 7. How you can BuildYour Credit• Limit yourself to 2-3 credit cards, the more creditaccounts the lower the score• When you close accounts, close them gradually - evenwhen closing joint accounts in a divorce• Credit in your own name!• Pay every bill on time. Never late and never forget. Eachmissed payment erodes your creditworthiness
  8. 8. How Person X learnstheir credit scoretheir credit score• Under the Fair Credit Reporting Act, a consumer is entitled to a free creditreport (but not a free credit score) within 60 days of any adverse action (e.g.being denied credit, or receiving substandard credit terms from a lender) takenas a result of their credit score.• Under the Wall Street reform bill passed on July 22, 2010, a consumer isentitled to receive a free credit score if they are denied a loan or insurance dueto their credit score.[23]
  9. 9. Really good document on credit &impact on financial exclusion andfinancial access• Federal Reserve System’s Report to the Congresson Credit Scoring and Its Effects on the Availabilityand Affordability of Credit• http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf
  10. 10. Really good document on credit &impact on financial exclusion andfinancial access• Federal Reserve System’s Report to the Congresson Credit Scoring and Its Effects on the Availabilityand Affordability of Credit• http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf

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