1. Credit for You and Your Project © 2001, Dr. B. C. Paul

2. Your Personal Credit Each person (or couple) is tracked by 3 credit reporting agencies (CRAs) –Most businesses or organizations extending credit are members of one or more –These businesses send in information about your account or payment history The information on your report is mathematically rated by Fairchild and Issacs Company (FICO) –Your credit rating or score

3. Personal Credit Many Lenders also have you fill out applications with information not on your credit report –Your current income –Your savings and other assets Information is used to determine credit worthiness –Can determine if you will get credit –Is used to fix your interest rate/ security deposit

4. Use of Credit Ratings Mortgage Lenders (buying a home) Auto Lenders (buying a car) Credit Cards (used to set limits and interest rates) Some Rental Organizations Some Utility and Service Providers Potential Employers Insurance Companies Failure to maintain a good credit rating can not only raise your interest or force you to make big security deposits but may determine your ability to obtain even critical services

5. What's in a Credit Report Your Name, Address, Age, Social Security Number, former addresses, your employer Every Credit Card you have ever had, Every installment loan you have had, Every mortgage you have ever had –Your credit limits –Your initial loan or credit amounts –Your current account balances and payments –The number of times you have been late on a payment and how much for the last 7 years –A month by month status statement on each account for the last 2 years

6. They Know That About Me? Any account that is delinquent, or has been delinquent and when it was delinquent (up to 7 years) and how much you owed. Any account that has been turned over to collection or written off - when and how much (up to 7 years) Any public record items such as liens filed against you, court judgments ordering you to pay (how much and when), any bankruptcies for up to 10 years

7. The Fair Credit Reporting Act You have the right to a free copy of your credit report when you are preparing to seek a job or when your report is inaccurate due to fraud You may obtain a copy at any time for a fee of $8/CRA or less Anyone who uses information from your report to deny you credit must indicate the name and address and phone number that was a source for the information.

8. FCRA You have the right to challenge any inaccurate or incomplete information and the CRA has 30 days to investigate –The CRA must remove or correct any inaccurate information –The CRA must remove any information that cannot be verified –The CRA must provide you with a report of findings and a free copy of your report if there is a change –You may rechallenge with additional information –You may add a statement of your dispute to information not changed

9. FCRA Access to your file is limited Many report accesses require your written consent Some access to summary information is provided to insurers and credit card companies –Used for the unsolicited offers you get in the mail –You can ask your name be taken off these lists (CRA must comply for 2 years)

10. The CRAs Equifax - 1-888-202-4025 Experian - 1-800-831-5614 Trans Union - 1-800-899-7132

11. Your FICO Credit Rating Fairchild and Issacs has developed a system of 10 score cards for each credit bureau –These score cards are compared against a data base –The score cards are used as a basis for assigning you a risk score Current Area of Consumer Group Challenge –You have no right to know your score consumer group challenge - how can you negotiate on equal ground with others if they have critical information that you dont have? –The algorithms and procedures are a secret

12. FICO Credit Ratings Not all organizations use FICO –local banks may still look at the CRA reports and determine for themselves –Use of FICO scores in national banks and organizations is becoming almost universal FICO Credit Ratings do not provide all the information that mortgage or other lenders commonly use in credit decisions

13. What Is Known about FICO Each individual has a score between 350 and 900 –Big numbers are good - low numbers are bad Numbers above 650 or 680 (some 730) will usually put you in A+ rating range –You will be able to get faster hassle free closings –You will be able to get the best interest rates –(This is the issue with witholding info - how can you know when to negotiate hard or shop around)

14. FICO Scores If above 620, but below A+ line –You may be cut out of some of more cautious lenders –Others will probably take a hard look - ask a lot of questions - require explanation letters It could at least slow you up with the hassle factor –You may still be able to get good the best interest rates (but the pool will be more limited and harder to fish)

15. Sub-Prime If less than 620 your sub-prime Your interest rate will be higher Your choices more limited Sub-Prime lenders are more likely to play tricks and games

16. Statistical Reasons for Caution Can see why many break at around 650 to 680. - Get 70% pop. With < 5% risk of disruption. Disruption means account falling 90 days behind in a 2 year period

17. Guessing Your FICO Score Five Basic Areas are used in your rating Previous Credit History - 35% Your Debt Level - 30% Your Time in Use - 15% Your Types of Credit - 15% Your Pursuit of Credit - 5%

18. Previous Payment History (35%) CRAs dont consider payments late till the bill is 30 days past due –Dont use that as an invitation to push the limit (checks really do get lost in the mail) –Any past due payment will be on your record for 7 years CRAs will track –30 days past due, 60 days, 90 days, to collection or bad debt

19. Payment History Manipulation Your best choice is pay all bills on time (dont have any dings) Avoid being real late –a couple 30 days late probably wont kill you –more than two will start hurting (especially in the last 2 years) –60 days late is much worse than 30 –90 days - many lenders will question whether it will be repaid at all –Dont default / thats real bad

20. Late Payments Timing of late payments –Current status is important - if you have accounts 90 days overdue now you'll be clubbed –Last 6 months is very bad –Last 12 months is bad –Last 24 months is not good –The will know for next 7 years –Screw-Ups will haunt you a long time / if you have to rebuild youll be suffering for at least a year or two Picking Late Payments –late on large transactions is worse than late on small transactions –All your accounts going to heck at the same time is worse than scattered incidents If you get in trouble keep bailing what you can

21. Kisses of Death Bankruptcies - the CRAs will toast you for 10 years (and so will everyone else) –There are a lot of credit services and even lenders that will try to help you rather than let it go here Take them up on it Mortgage Foreclosures Vehicle Repossessions / other Repos

22. Debt Level (30%) What FICO Looks at –Report shows credit limit on Revolving Accounts (Credit Cards - Department Store Cards) - also shows balance and payments –FICO looks at the ratio of current debt to the limit on a collective basis what % of your credit line is tapped –over 50% tapped is bad –for highest ratings even over 20% will impact looks for number of cards that are maxed out or nearly so - the more the worse

23. Debt Level Other FICO factors –Number of credit lines –Age of credit lines –To many credit lines reduces rating –Large numbers of recently opened credit lines raises questions about your intentions your CRA report tells when every account was opened

24. Debt Level - The Other Shoe FICO doesnt know your income - your credit application will –Your credit report will tell all your monthly payments (and your credit application is likely to ask as well) –Most home loans want your monthly payment to be less than 27-33% of your gross income –Most want less than 38% of your income going to fixed obligations Major purchases Cars/Furniture just prior to going for a home loan will likely reduce your buying power High installment and credit card debt will limit your mortgage options.

25. Too Many Accounts FICO will cut you some Lenders may check your credit limits on unsecured lines and calculate how much potential debt you have –especially a problem with a lot of recently opened accounts –They may ratio your potential debt level against your income - even if the credit cards have no balances Warning - make sure credit cards are officially canceled or they may stay on your credit report even though you dont have the card any more

26. Time in Use (15%) Length of Credit History is important –To even be rated two basic conditions to meet Your file must not indicate that you are dead You must have at least one account with undisputed reported activity in last 6 months –More extensive loans probably want at least 3 years of credit history –Seven years is short –30 year is optimal

27. Need to Build Credit While handling credit badly will sink you, refusing to play with them will too. Need to begin to build early with a plan –Credit cards often target College students They want to trap you in the debt wagon Can make to your advantage by building a good credit history along with a good college transcript Remember - your credit report lists opening date for every account

28. History Beyond FICO Banks usually inquire about former addresses –Some of this info can be checked on your credit report –Moving around too much could indicate you are unstable or could get hard to find if your debt started going bad Also inquire about employment history –Too many job changes hurt you may be unstable or have low enough standing in your company to be first to go in a slowdown –Changes from one line of work to another hurt more than changes within a line of work

29. Types of Credit (15%) Lenders like to see good performance with more than one type of credit –Just getting bunch of credit cards is not complete These are termed revolving credit Also want to see performance on installment loans –These are regular payment loans car and furniture loans

30. Mortgage Herby and Hanna Housing may have been building more than equity by buying a house –There are some first time home buyer advantages - one risk of buying a house for temporary use is it may use your first time buyers position.

31. Bad Credit Types Taking sub-prime loans tends to lower your score –Puts you in the statistical category with people in some degree of distress Classic example is the debt consolidation loan –Occurrence of debt consolidation loans is usually interpreted as you got yourself strung- out.

32. Pursuit of Credit (5%) Every time you pursue credit it goes on your record –Lenders get nervous if they see too many inquires (could mean your in trouble) –Often ask if you have ever been turned down Trick for lenders is to tell the difference between a conscientious shopper in search of best deal and the distressed desporado –First 30 day inquires are ignored (you can go out and shop without sinking yourself) –Next 14 days multiple inquires are counted as 1

33. Figuring Your Score Information tells you what to avoid and some of the touch stones that earn you Brownie Points Obvious way to handle is do no bad and do all the good and youll have a good score By with-holding algorithms it becomes impossible to know quantitatively how bad the little? blemishes may be

34. FICO did Disclose Part of Algorithm Where do you live –Own your own home - give yourself 25 –Rent - give yourself 15 –Other arrangement - give yourself 10 How many years have you been at your current address –Less than 1/2 year - give yourself 12 points –.5 to 2.49 years – give yourself 10 points –2.5 to 6.49 years – give yourself 15 points –6.5 to 10.49 years – give yourself 19 points –10.5 or more – give yourself 23 points

35. Partial FICO Score What is Your Occupation –If youre a Doctor, Lawyer etc. (Professional) then 50 points –Semi-Professional – 44 points –Manager – 31 points –Office Worker – 28 points –Blue Collar – 25 points –Retired – 31 points –Other – 22 points

36. FICO Continued Years on your present job –< 6 months - 2 points –6 months to 1.49 years – 8 points –1.5 to 2.49 years – 19 points –2.5 to 5.49 years – 25 points –5.5 to 12.49 years – 30 points –12.5 and greater – 39 points –Retired – 43 points

37. FICO Cont. Do you have reports on active credit cards (do you have a credit card – not debit card) –No - Give yourself 0 (you refused to play with us) –Department Store Card – 11 points –A Visa MC or American Express – 16 points –Both – 27 points

38. What Bank Records Show Do you have a checking account – 5 points Do you have a savings account – 10 points Do you have both a checking and savings account – 20 points No checking or savings- but other bank types of accounts (CD etc) – 11 points

39. Debt to Income Considerations How much of your monthly gross income is tied up in credit card, mortgage, or installment debt obligations –< 15% - 22 points –15 to 25% - 15 points –26 to 35% - 12 points –36 to 49% - 5 points –50% + - no points for you you notty boy

40. Number of Inquires into your Credit last 12 months Number inquires from banks, department stores (lenders) Special rules – last 30 days dont count –Any number of inquires inside 14 days is 1 No inquires – 3 points 1 inquire – 11 points (it pays to play) 2 inquire – 3 points 3 or 4 - subtract 7 points 5 to 9 - subtract 20 points

41. How Long Have You Been on File? < 6 months 0 points (in fact they prob wont rate you period) 1 to 2 years – 5 points 3 to 4 years – 15 points 5 to 7 years – 30 points 8 plus years – 40 points

42. How Many Revolving Accounts do you have open? These are credit cards or revolving lines of credit at stores –0 open - 5 points –1 to 2 - 12 points (it pays to play) –3 to 5 - 8 points –6 + minus 4 (what you planning to do with all those cards?)

43. % of Credit Lines Used Take take the total of the credit limits on your cards Add up all your outstanding balances Divide your outstanding balances by your credit limits to find out % your using <15% - 15 points 15-30% - 5 points 31-40% minus 3 points 41-50% minus 10 points >50% minus 18 points

44. Worst Negative Remark No record – 0 in fact they probably wont rate you because you didnt play on their tread mill. Any default or collection turn over minus 29 (if its bankrupcy theyll get you elsewhere) Any late payments minus 14 1 satisfactory line – a creditor with all good history – 17 points 2 satisfactory lines – 24 points 3 satisfactory lines – 29 points

45. Dirty Credit Rating Est. Weighting is wrong Add up your number multiply by 2.8 900 would be perfect 700 would be average 650 or 680 is a cut-off on sub-prime lending

46. On-Line Service Options Some banks offer web site features where you input information and they will use their own quick and dirty algorithms to rate you –Often just get A rating or sub-prime etc. programs may make suggestions on things that could hurt you There are fee services that will get you a copy of your report and will then review the report and rate you –Wont give you FICO and often rate on a 100 scale –May include rating your relative ranking –Will include much more detailed specific suggestions –Services can be almost instant and on-line