Credit Scores & Reports © 2006 Consumer Jungle

Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time - the higher your score, the less risk you represent © 2006 Consumer Jungle

Why Credit is Important FICO or credit score: Credit Card Issuers & Lenders Determine APR Auto Insurers Determine Premium Employers Are you a worthy hire? Landlords Are you a reliable tenant? But these days auto insurers are using credit-based scores to calculate premiums. Employers are using credit checks to determine whether you’re a worthy hire. And landlords are using them to figure out whether you’ll be a reliable tenant. Some utility companies are linking credit scores to the size of the deposit you must pay to have your power turned on. Source: Consumer Reports, “Credit scores: What you don’t know can be held against you ,” August 2005. _________________________________________________________________________________________________________________________ Insurers to set rates. Auto and home insurers often use credit-scoring formulas to help determine premiums. Insurers and independent researchers have found a strong, although still unexplained, correlation between how well people handle their credit and how likely they are to cost the insurer money. Folks with the highest credit scores tend to file the fewest claims; as credit scores deteriorate, the propensity to file claims rises. The practice is controversial (for details, read "Is your insurer discriminating against you?") but widespread; only a few states, including California and Massachusetts, prohibit insurers from using credit information. Source: Pulliam-Weston, Liz, “Demand Your FICO Score Now!,” MSN Money, October 9, 2006. © 2006 Consumer Jungle

The Cost of Borrowing Your Credit score: Your interest rate: Your monthly payment: 760 - 850 6.13% $1,313 700 - 759 6.35% $1,344 680 - 699 6.53% $1,369 660 - 679 6.74% $1,400 640 - 659 7.17% $1,462 620 - 639 7.72% $1,543 The example is for a $216,000 30-year, fixed rate mortgage. These ranges show how the interest rate and monthly payment increases as your credit score decreases © 2006 Consumer Jungle

© 2006 Consumer Jungle

35% Payment History Late payments have the greatest negative impact. Recency & frequency are important too. Payment history (35%) -Aside from extreme events, like bankruptcy or tax liens, late payments have the greatest negative impact on your score. Recency and frequency of late payments count too. In other words, even though a 60-day late payment is not as risky as a 90-day late payment in and of itself, a 60-day late payment made just a month ago will count more than a 90-day late payment from five years ago. © 2006 Consumer Jungle

30% Outstanding Balances Total balance vs. total available credit. Are you overextended? Outstanding balances (30%) - Evaluation of your total balances in relation to your total available credit on revolving accounts is one of the most important factors in the FICO score. Owing a great deal of money on many accounts or "maxing out" on various credit cards can indicate that a person is overextended, and is more likely to make some payments late or not at all. © 2006 Consumer Jungle

What Makes Up The Score 30% of your score is based on capacity. Capacity available on revolving debt (charge cards, credit cards, lines of credit, and home equity lines of credit) Available credit limit / total credit limit $9,000 available / $10,000 = 90% capacity (Good) $1,000 available / $10,000 = 10% capacity (Not so Good) © 2006 Consumer Jungle

15% Length of Credit History Number of years you’ve used credit. How long since you’ve used certain accounts. Length of credit history (15%) -Your score takes into account how long your credit accounts have been established in general, how long specific credit accounts have been established, and how long it has been since you used certain accounts. © 2006 Consumer Jungle

10% New Credit Number of new accounts. Multiple requests reduce your score. New Credit (10%) -Research shows that opening several credit accounts in a short period of time does represent greater risk-especially for people who do not have a long-established credit history. Multiple requests will reduce your score because it looks like you are either trying to get a high amount of credit (possibly because of a cash flow problem) or that you are being rejected by lenders and having to apply elsewhere. © 2006 Consumer Jungle

10% Types of Credit Mix of: Revolving Credit Installment Credit Credit cards Installment Credit Car loan Home loan Types of credit (10%)-The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your score takes into account what kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have. Revolving Credit: Creditor places a credit limit for a given period, and the consumer can add charges as long as the credit limit is not exceeded and the account remains in good standing. Another name for open credit. Installment Credit: A loan that is paid in equal monthly installments with a fixed interest rate. Loan payments include principal and finance charges and are a form of closed credit. © 2006 Consumer Jungle

How to Improve Your Score Pay all bills on time. Pay any delinquent bills. Lower your total credit card debt. © 2006 Consumer Jungle

How to Improve Your Score Don’t close unused credit cards. Don’t open up new credit cards to increase available credit. No matter how many cards you carry, it's a good idea to keep the ratio of outstanding balance to total available credit as low as possible. Credit scores look at how much of your available credit you've used. When you're close to the limit, you look out of control. From a score-lowering perspective, debt reduction should start with the cards on which you're closest to your credit limit (though from the point of view of shrinking the overall amount of your debt, it's best to pay off your highest-interest-rate cards first; see ASK SUZE on DEBT, pages 78-85, or THE ROAD TO WEALTH, Pages 27-32.) Be aware, however, that paying off a collection account or a judgment will not remove it from your credit report. It will stay on your report for seven years. Clean, active charge accounts, opened many years ago, will boost your score. Research shows that consumers with longer credit histories have a lower risk of default than those with shorter credit histories. However, even people who have not been using credit for a long time may get high scores, depending on how the rest of the credit report looks. Don't close unused credit cards as a short-term strategy to raise your score. In fact, owing a fixed amount but having fewer open accounts may lower your score. Conversely, don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your score. Every time someone requests your credit report from a credit bureau, an "inquiry" notation is made in your file. Too many inquiries on your credit report can signal looking for new credit and may lower your score. You should apply for credit only when you need it and wait before applying for more. FICO scores can usually identify "rate shopping" in the mortgage- and auto-lending environment, so that you are not penalized with multiple inquiries related to one credit transaction. To be safe, it is a good idea to do your rate shopping for a given loan within a short period of time. (Note that if you order your credit report from a credit reporting agency to check it for accuracy, it will not affect your score, as it is not an indication that you are seeking new credit.) In general, having a variety of credit products (such as credit cards and installment loans) will raise your score. Someone with no credit cards tends to be a higher risk than someone who has managed credit cards responsibly. Still, it is not necessary to have one of every type of account, and it is not a good idea to open credit accounts you don't intend to use. You don't improve your score by carrying balances forward from month to month (as opposed to paying each bill in full), but lenders may be more likely to offer credit to people who carry balances because they have a history of paying interest on their accounts. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time. (To find a credit counselor near you, call the National Foundation for Credit Counseling at 800-388-2227 or look for them on the Web at www.nfcc.org.) © 2006 Consumer Jungle

Duration of Info on Report Trade: Sears, Macy’s 7 years from last activity Judgments or liens 7 years from filing. Chapter 7 Bankruptcy 10 years Medical: case by case The following shows how long information stays on your credit report: Trade (Sears, Nordstrom’s, Macy's, etc.) credit card companies or collections agencies stay on credit report for 7 years from date of last activity. Judgments or liens stay on credit report for 7 years from date it is filed. Chapter 7 bankruptcy stays on for 10 years. Medical is difficult and has to be handled case by case. © 2006 Consumer Jungle

© 2006 Consumer Jungle