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Understanding Credit Reports. Family Economics & Financial Education. Credit Reports. Credit report - a record of a consumer’s transactions involving credit No credit report if you have never used credit Affects your ability to acquire credit

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Understanding Credit Reports

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understanding credit reports

Understanding Credit Reports

Family Economics & Financial Education

credit reports
Credit Reports
  • Credit report - a record of a consumer’s transactions involving credit
  • No credit report if you have never used credit
  • Affects your ability to acquire credit
    • Bad credit history stays with your for 7-10 years
why is it important to building a credit history
Why is it important to Building a Credit History
  • To be able to
    • purchase items on credit
      • house, vehicles, appliances
    • Renting an apartment
    • Emergencies
general rule
General Rule
  • Keep the amount of debt currently held at 25% of the total amount of available credit
    • For example - if Sue’s total amount of credit available is $1,000, her current amount of debt should not exceed $250
how can you harm your credit
Debit/Credit cards over the limit

Routinely paying bills late

Having a criminal record

Holding a large amount of debt

Holding an unreasonable amount of unused credit

Defaulting on a loan

Obtaining a high number of credit inquiries

Carrying many credit/store cards

Having a public record of bankruptcy

How can you harm your credit?
  • When a person or company does not have the financial means to pay their debts as they come due
  • Secured debt- creditor has the legal right to something of yours if you fail to make proper payments
    • Example: mortgage- bank can reposes your home
  • Unsecured debt- loans made without the security of assets
    • Example: credit cards- not always possessions to take back
  • Secured debt gets paid first in bankruptcy cases
types of personal bankruptcy
Types of Personal Bankruptcy
  • Chapter 7- Liquidation Bankruptcy
    • Sell all assets to repay creditors
    • May reaffirm some debt- house, car
    • Some debt discharged- no repayment
    • Must have an average monthly income less than medium income of family of the same size
      • Example: family of 4 median income $64,427 or $5,368.92 per month
      • If salary is higher, must file Chapter 13
    • Must get budget management and debt counseling before debt discharged
types of personal bankruptcy1
Types of Personal Bankruptcy
  • Chapter 13
    • Restructuring of debt
    • Debtor retains assets
    • Plan of repayment created with a trustee of the court
      • 3-5 years
      • Pays only $.30 to $.50 on the dollar of debt value
  • Chapter 12
    • Same as 13 but for farmers
credit reporting agencies
Credit Reporting Agencies
  • Keep a record of a consumer’s credit transactions and compiles credit reports

The three main credit reporting agencies are:

  • Equifax
    • www.equifax.com
    • (800) 685-1111
  • Trans Union
    • www.transunion.com
    • (800) 888-4213
  • Experian
    • www.experian.com
requesting credit reports
Requesting Credit Reports
  • Consumers can request his/her credit report any time
    • Can obtain one free credit report annually from all three credit agencies www.annualcreditreport.com
    • Additional copies can be purchased for no more than $9.50
  • Consumers should check credit report once a year for accuracy
    • Mistakes are common
who can request your report
This may include:

Insurance agencies

Current and potential credit companies

State/local child support agencies

Government agencies

Financial institutions inquiring for lines of credit


Potential employers

Only with applicant’s written request

Who can Request your report?
  • Credit inquiry- and entry on a credit report that shows a business has requested a copy of your report
mistakes in credit reports
Mistakes in Credit Reports
  • More than 50% of the credit reports checked in a study contained errors
    • Source: Consumer Reports (July 2000)
  • The two main errors are:
    • Mistaken identity – occurs when a lender reports a credit transaction and information is recorded on the wrong person’s credit report, usually of a similar name
    • Fraud
fair credit reporting act 1971
Fair Credit Reporting Act 1971

Consumers have the right:

  • To know the information in their credit report
  • To have errors corrected in their credit report
correcting errors on credit reports
Correcting Errors on Credit Reports

Steps include:

  • Contact the credit bureau that has the error
  • CRA must report to the consumer within 30 days
  • If the CRA can’t verify the information,
    • must be removed from the file
    • Corrected in file
  • If a consumer disagrees with result
    • right to submit a 100 word explanation
    • stays in the consumer’s file
  • Negative information is usually removed from credit file after seven years,
    • except bankruptcy- removed after 10 years
credit scores
Credit Scores
  • A mathematical tool created to help lender evaluate the risk associated with lending a customer money
  • Not listed on a credit report
  • It takes 6 months of using credit to get a credit score
    • If you pay on time for 1st 6 months, score should me 650-700 range
fico score
FICO Score
  • 700 and above – Very good to excellent
  • 680 to 699 – This credit score puts you in the "Good" category.
  • 620 to 679 – If your credit score falls into this range, you fall into the "Okay" category.
  • 580 to 619 – plan on paying a higher interest rate
  • 500 to 580 – can still get credit, but expect to pay a very high interest rate
  • 499 and below – you can still be extended credit, but with very high interest rates
five standard categories of scores
Five Standard Categories of Scores
  • 35%-Payment history

- Timely manner in which a consumer pays debt

  • 30%-Outstanding debt

-Amount of debt currently held

  • 15%-Credit history

-How long the consumer has held credit accounts and how often they are used

  • 10%-Pursuit of new credit

-How much credit is acquired over the length of the consumer’s credit history

  • 10%-Types of credit in use

-May include credit cards, gas cards, store cards or accounts, loans, etc.

effect of credit scores on consumers
Effect of Credit Scores on Consumers
  • Interest rate of loans
    • High score – can insure a lower interest rate on credit
    • Low score– can cause a higher interest rate on credit
  • Ability to receive future loans/credit
    • Financial lending institutions have guidelines of what score will qualify for a loan
  • Reflection of risk of borrower to the lender
    • The lower the score, the higher the possibility the consumer pays bills late
  • Financial security for lifetime
    • Takes time to improve credit, which could take time from building financial security

Build and maintain positive credit!

Check credit reports annually for errors!

Act financially responsible!