Credit scores influence the credit that’s available and the terms i.e. interest rate, etc. that lenders may offer. It’s a vital part of credit health, and when a consumer applies for credit - whether for a credit card, an auto loan, or a mortgage, lenders want to know what risk they'd take by loaning money. When lenders order a credit report, they are seeking information, and a credit score helps lenders evaluate a credit report because it’s simply a number that summarizes credit risk.

1. Credit Scores Explained
Chloe Gray-Le Coz & Luigi Wewege
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Center for Business and Industrial Studies
University of Missouri-St. Louis

2. What is a Credit Score?
• A high credit score suggests
that a person is likely to pay
his/her debts on time
• Scores range from 300-850
• With a higher credit score, a
consumer is eligible for more
credit and under more
favorable terms
• i.e., interest rate or credit line
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

3. What a Credit Score Measures
• The score measures future risk by examining
historical information within a person’s credit
report.
• Future risk - The likelihood that a person will have
a default incidence (a late payment of 90 days +
and/ or charged off account) within the next 24
months.
• Equifax, TransUnion, and Experian are the three
nation wide consumer reporting agencies (CRAs)
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Center for Business and Industrial Studies
University of Missouri-St. Louis

4. Credit Reports vs. Credit Score
• A report is a comprehensive and detailed history of the
consumer’s credit
– Often 30+ pages from each bureau
• A score summarizes the information in the report to produce
a number that measures your level of risk to the creditors
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

5. A Few Definitions:
• Revolving credit limit:
– A line of credit open to the limit agreed upon
• i.e. credit cards and home equity loans
• Secured Debt:
– i.e. Mortgage, car loan, home equity loans
• Delinquencies:
– A debt or other financial obligation on which payment is overdue
• i.e. late payment, collection account or public record
• Collection Account:
– An account that was not paid on time or at all, and was closed by the
creditor and sold to a collection agency
• i.e. Credit cards, revolving accounts, or loan
• Derogatory Public Record:
– An account that has had a history of late payments
• i.e. Unpaid taxes, library fines
Center for Business and Industrial Studies
University of Missouri-St. Louis 5

6. What makes up a Credit Score
• There are five basic
predictive
characteristics
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

7. Payment History
• How many late payments
have there been?
• How recent was the late
payment?
• How severe were the
delinquencies?
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

8. Outstanding Debt
• How much debt is the
consumer carrying?
– What kind of debt
(secured or unsecured)
• What percentage of available
revolving credit limits are
being used?
• What percentage is
outstanding on installment
loans? Ratio of Total Balances to Total Limits of
Revolving Credit
(Credit Utilization Ratio)
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

9. Length of Credit History
• Total length of the credit
history
• Number of months since
most recent account was
opened
• Average number of months
accounts have been open
Number of Months Since Oldest
Revolving Trade Line Opening
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Center for Business and Industrial Studies
University of Missouri-St. Louis
(Source: Fair Isaac, Corp.)

10. New Credit
• Number of inquiries in the past 12 months
• Number of new trade lines opened in the past
12 months
• Hard Pulls vs. Soft Pulls
• Eliminations and duplications resulting from
“shopping around”
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Center for Business and Industrial Studies
University of Missouri-St. Louis

11. Credit Mix
• What is the mix of credit product types
• Number of revolving credit lines
• Percentage of trade lines that are installment
loans
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Center for Business and Industrial Studies
University of Missouri-St. Louis

12. FACT ACT of 2003
• The Fair Credit Reporting Act (FCRA) was amended
to include The Fair and Accurate Credit Transactions
Act (FACT Act)
• Some of the amendments in the FACT Act include:
– The right to obtain one free credit report per year from
each of the nation wide credit reporting agencies
– Identity theft prevention and credit history restoration
– Improvements in use of and consumer access to credit
information
– Enhancing the accuracy of consumer reporting
information
– Financial literacy and education improvements
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Center for Business and Industrial Studies
University of Missouri-St. Louis

13. Types of Errors
• Errors that will not affect your score:
– errors concerning age, address, gender, date of birth, or
employment history
• Errors that may affect your score:
– error in number of negative items such as late payments,
number of public derogatories, number of accounts sent to
collection
– error in number of inquiries for new credit
– error in outstanding balances
– accounts on the report not belonging to the client
– duplicate entries of the same negative information
• Other Issues
– Signals of identity theft
– Account matching problems
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Center for Business and Industrial Studies
University of Missouri-St. Louis

14. Process for Disputes
• The consumer files the dispute with the bureau(s) with alleged
error(s) in the credit report(s)
• The bureau forwards the dispute to the furnisher of the
information
• The furnisher investigates the dispute and reports the finding to
the bureau
• The bureau informs the consumer of the outcome
• The process should take no longer than 30 days
• Some accounts are directly corrected by the bureaus without
contacting the furnishers
– TransUnion states “if the documentation [provided by a
consumer] can be reasonably verified as being authentic, the
account is automatically updated based on the documentation”
• Parallel correspondence with creditors is advised
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Center for Business and Industrial Studies
University of Missouri-St. Louis

15. What the Consumer’s Dispute Must
Contain
• Name of the creditor that is reporting the disputed information
• Account number relating to the dispute
• Reason for the dispute
• Copies of any relevant documentation that support the consumer’s
dispute
– i.e. account applications, billing statements, and letters
• Consumer’s identifying information
– Date of birth
– Social Security number
– Current address
• Can be sent to the bureau
– Via mail
– Online
– In person
– Telephone
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Center for Business and Industrial Studies
University of Missouri-St. Louis

16. Improving Your Score
• Payment History
– Pay your bills on time
• Delinquent payments and collections can have a major negative impact on your score
– Get current and stay current
• Amounts Owed and Open Credit Lines
– Keep balances low on credit cards and revolving credit
– Pay off debt
• Pay down your revolving credit
– Do not close unused credit cards
– Do not open a number of new credit cards that you don't need to increase
your available credit
Notes:
• Paying off a collection account will not remove the collection from your
report.
• If you have a temporary financial squeeze, contact the creditors or see a
legitimate credit counselor
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Center for Business and Industrial Studies
University of Missouri-St. Louis

17. Improving Your Score
• Length of Credit History Tips
– Do not lower your average length of credit history by opening several
new accounts
• New Credit Tips
– Do your rate shopping within a focused period of time
• A search for a single loan and for many new credit lines is determined by the
length of time over which inquiries occur
– Avoid aggressive sales tactics that push credit offers and “hard” pulls
of your credit reports
• Requesting and checking your own credit report will not affect your score
– Responsibly pay off balances
• Types of Credit Use Tips
– Apply for and open new credit accounts only as needed.
– Have credit cards - but manage them responsibly.
– Closing an account doesn't make the debt disappear
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Center for Business and Industrial Studies
University of Missouri-St. Louis

18. TRIAGE
• Match Remedies to the Severity of the
Problem
– Help Through Self Repair
– Help Through Debt Relief
– Help Through Social Services
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Center for Business and Industrial Studies
University of Missouri-St. Louis

19. Remedial Strategies
Assessment
of Current
Situation
Self Repair
Containing
Expenses
Revenue
Enhancement
Debt Relief
Chapter 7 Chapter 13
Social
Services
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Center for Business and Industrial Studies
University of Missouri-St. Louis

20. Help through Self Repair
• Renegotiation
– Renegotiate credit terms with creditor if possible
– Reduce interest rates
• Consolidation
• Balance transfers
– See credit counselor if necessary
• Behavior
– Assessment of asset and liabilities
– Limit liabilities
• Eliminate unnecessary bills
– Cell phone
– Second, third car
– Cable
– Selling of assets
– Enhance income by taking on more hours or another job
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Center for Business and Industrial Studies
University of Missouri-St. Louis

21. Help through Debt Relief
• Chapter 7
– Liquidation bankruptcy
• Eliminates unsecured debt
• Nonexempt property is liquidated to repay creditors
• Takes 4-6 months
• Must complete credit counseling prior to filing
• Does not eliminate secured debts, child support, alimony, most tax debts, or student
loans
• Must pass means test
– the higher your disposable income the less likely you are to be eligible
• Chapter 13
– Reorganization bankruptcy
• Use your income to pay what you owe to your creditors over time
• 3-5 year plan
• Must complete credit counseling prior to filing
• Secured debts cannot exceed $1,010,650
• Unsecured debts cannot exceed $336,900
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Center for Business and Industrial Studies
University of Missouri-St. Louis

22. Fair Debt Collection Practices Act
(FDCPA)
• Protects consumers from abusive, harassing,
false, misleading, and unfair practices of third
party debt collectors
• A debt is considered delinquent after 90 days
of nonpayment and this is the start date for
the statute of limitations.
– This may differ depending on the state in which
you reside

23. Time Barred Debts
• Debts that are past the statute of limitations thus the creditor
can no longer sue you for payment
• This does not prevent the creditor from trying to collect
• Creditors and debt collectors have different access to court
and the rights of the consumer, creditor, and debt collectors
vary among states
• Statue of limitations in Missouri
– Open Accounts = 5 years
• i.e. credit cards, revolving accounts
– Written Contracts = 10 years
• i.e. mortgage, home loan
– Judgments = 10 years

24. Help through Social Services
• Section 8 Housing
• Food Stamps
• Child Support
• Free Clinics
• Charities
• Food Pantries
• Medicaid
• TANF
• SCHIP
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Center for Business and Industrial Studies
University of Missouri-St. Louis

25. Other Issues
• Managing Debt
• Budgeting
• Banking and Saving
• Tax Planning
• Investing
• Retirement Planning
• Estate Planning
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Center for Business and Industrial Studies
University of Missouri-St. Louis

26. For help and more information…
• http://www.catholiccharitiesusa.org or
http://www.ccstl.org
• http://www.beyondhousing.org
• http://ww.unitedway.org
• http://www.clearpointfinancialsolutions.org
Center for Business and Industrial Studies
University of Missouri-St. Louis 26

27. Sources
• http://www.myfico.com
• http://www.ftc.gov
• Acknowledgement:
– Dr. Jeffrey Feinstein, Fair Isaac, Corp.
• Gratitude expressed to:
– State Farm Insurance Group
– U.S. Bancorp
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Center for Business and Industrial Studies
University of Missouri-St. Louis