Understanding Your Credit Score Ben Collier Senior Healthcare Business Banker PNC Bank

The Credit Report Defined The credit report is designed to give creditors a history of how one has handled their debt obligations The credit report contains a list of historic debt, typically 7 years in the past The credit report is used as a score based model for most financial institutions and creditors to make a quick decision on smaller credit request The credit report is also used as a significant factor to consider on all credit requests

The Credit Report Defined What makes up a credit report: List of all debt incurred including the following info: Original amount borrowed The account number The date the debt was originated The financial institution that provided the debt Whether the debt is revolving (line of credit, credit card, home equity line of credit) or installment debt with a fixed monthly payment The type of debt like a car loan, mortgage, etc The payment amount and frequency The current balance The highest balance if it is a revolving debt How many times the individual has been 30 days or more late on a payment Whether the debt is in foreclosure, repo, short sale, etc

Credit Report Defined What makes up a credit report continued: Also includes the following: Judgements Tax Liens Collections Inquiries Demographic info of the individual including: History of the individual’s past reported home address History of the individual’s past employement Individual’s Social Security number Individual’s date of birth

Credit Report Defined What are judgements: A judgement is filed on your credit report as the result of losing a case in court. Usually, a creditors takes you to court in order to file a judgement so they have a legal right to pursue you for collecting payment. This is done in lieu of collection or a write off of the debt so the creditor has a better chance of collecting more of the amount owed

Credit Report Defined What are Tax Liens: A tax lien is filed by the IRS or a State of unpaid taxes owed. Tax liens could be in the form of unpaid income taxes, payroll taxes, property taxes, etc

Credit Report Defined What is a collection: Collections are typically filed by utility companies, healthcare practices, insurance companies, hospitals, cell phone providers, etc. In fact, a collection can be filed for almost any kind of debt, whether it be for a utility bill, medical bill, etc There are laws under the Fair Credit Reporting Act (FCRA) that restrict false claims on credit reports Unpaid debts are typically reported to credit bureaus by collection agency which buy the debt at a discounted price from the creditor

Credit Reports Defined What are inquiries: Inquiries are a list of creditors that have pulled your credit The inquiry lists the name of the creditor and the date your credit was pulled Inquiries do affect your credit score, which we will cover within the next few slides

What is a Credit Score A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Credit Bureaus There are 3 credit bureaus for personal credit as follows: Equifax Experian Transunion These are US Based credit bureaus, other countries may use different entities or different methods of credit analysis Some banks only pull from one credit report Other banks, like Mortgage Companies, pull credit reports from all 3 credit bureaus

How is your Credit Score Determine Believe it or not, the exact formulas for determining a credit score are secret, kept this way to avoid credit fraud. The following are the parts of the formulas that have been made public: 35% Payment history 30% Credit utilization 15% Length of credit history, also known as the in file date 10% Type of credit used 10% Number and Types of Inquiries

How is your Credit Score Determined 35% Payment History: 30 day + late payments Avoid any late payments 30 days or more Your score will drop dramitically with one 30 day late payment, if payments continue to be late for 60 Days, 90 Days, or later will further impact your score. This could create a 100 point + decline Having multiple trade lines with late payments at the same time will crush your credit score Late payments on a mortgage affect your credit more than any other type of late payment However, making payments on time will increase your credit score

How is your Credit Score Determined 30% Credit Utilization: The ratio of current revolving debt, such as credit cards or lines, of credit compared to the limit of the revolving debt is a main factor. In other words, maintaining a balance on a credit card or line of credit that is close to the limit will reduce your score significantly. It is best to maintain balances at 50% or less of the limit The average age of the revolving debt tradelines is a factor. If you close an old revolving debt and it drags down the average age of the total revolving debt, this could reduce your credit score. Therefore, closing open lines of credit or credit cards may decrease your score

How is your Credit Score Determined 30% Credit Utilization Continues: Opening new revolving debt tradelines can also drag down your score since they will decrease the average age of the total open revolving debt tradelines

How is your Credit Score Determined 15% Length of Credit History Better known as the In-file Date. This is the date of which you first received credit. The longer your credit report has been in existence, the better your score can absorb negative actions without taking a big reduction in the score Someone who has had credit for only a few years and experiences a 30 day late payment will see a huge reduction in their score Likewise, someone who has had credit for 20 or 30 years may seen a minor impact to their score if they experience a 30 day late payment Don’t keep too many revolving lines open, but don’t close older ones either. If you have more than 3-4 open revolving lines, then pay off and close the younger lines

How is your Credit Score Determined 10% Types of Credit Used: Revolving lines such as credit cards or lines of credit – having too many will hurt your score, especially with high balances – but remember that the age of these lines is a factor to consider before closing a revolving line Installment loans such as auto loans, student loans, etc. – the number of trade lines can affect your score, but installment loans have a minimal impact Consumer Finance – untraditional financial services such as microfinance from untraditional lenders like payday loans, rent to own contracts, leases, etc. Mortgages – Installment loans secured by residential real estate

How is your Credit Score Determined 10% Number and Types of Inquiries: The number of hard inquiries can affect your credit score, especially if there are numerous inquiries at one time. These typically reduce your score by 3-5 points each, but the score will rebound in 6 months if the number of inquiries is reduced over time Rate shopping for a mortgage or auto loan can create a large number of inquiries, especially when an auto dealership sends your credit app to multiple lenders. It is important to tell the dealership not to do that to avoid a significant reduction in your score Soft inquiries are performed by your existing creditors to keep tabs on your credit score to avoid potential repayment risk, these do not affect your score, they are also known as sub-level credit pulls

Good Credit Score Defined A credit score can range from 300 to 850 Good credit is considered to be anything above 700 Excellent credit is considered to be anything above 750 Some banks set a minimum threshold of 650 The average median for a credit score nationally as of 2011 was 711

Maintaing your Credit Score In summary, here are a few things to remember that will keep your credit score high: No late payments over 30 days Keep the balances on credit cards and lines of credit at 50% of the limit Avoid collections, judgements and tax liens whenever possible Short sales are considered foreclosures, don’t let a lender or attorney talk you into a short-sale without outside guidance from someone unrelated to the transaction Avoid having your credit pulled multiple times in the same month

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