Your Name – Your Business Helping People Improve & Protect Their Credit Credit Concepts I

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Provide usable information to help you manage and protect your credit worthiness. Learning Objectives Understand the Principles of Credit Learn How Credit Affects Financing Workshop Goal

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Credit Concepts Quiz 1. What do lenders such as mortgage brokers and other creditors use your credit report and score for? 2. What are the three C s that a creditor considers when determining your approval for a loan? 3. Who has created the credit scoring formulas that lenders use for determining credit scores? 4. You are entitled to a free copy of your credit report every ? 5. How long will most items remain on your credit report? 6. Your credit affects your life in which of the following areas?

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert The 3 Cs of Financing Collateral CollateralCapacityCharacter Before 1980: Assets Securing a Loan Income and Years of Employment Relationship With Banker After 1980: Assets Securing a Loan Debt to Income Ratio Credit Score

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert The 3 Cs – What Changed? What Changed after 1980? What Changed after 1980? – Mortgage loans were grouped together into investment portfolios and sold on Wall Street. – Investors then required that the loans in the portfolio met STANDARDIZEDparameters. – Investors then required that the loans in the portfolio met STANDARDIZED parameters. –Credit scores became the method of standardizing a borrowers Character. –Today, most financing has become credit-score driven, making managing our credit worthiness a necessity.

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert The Cost of Bad Credit These figures are based on a mortgage loan of $100,000 for 30 years

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert The Role of the Credit Bureaus TransUnion, Equifax, & Experian TransUnion, Equifax, & Experian –Profit-making companies –Gather data about consumers from creditors and public records depts. –Sell consumer data to the financial industry in the form of credit reports. Their Affiliation with the Financial Industry Their Affiliation with the Financial Industry –The credit bureaus customers are financial institutions (banks, creditors). –Financial Institutions want to avoid lending to bad credit risks. –Credit bureaus protect financial institutions by reporting ANY potentially negative credit data about consumers – often resulting in credit reporting errors. What Does This Mean? What Does This Mean? –Credit bureaus have no incentive to correct errors (which hurt scores). Creditors prefer more errors than less to assure they are lending to good credit risks.

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Errors In Your Credit Report 30% of all credit reports contain serious errors that result in the denial of credit, such as: 30% of all credit reports contain serious errors that result in the denial of credit, such as: –Paid items still showing an unpaid balance –Medical items sent to collection prior to insurance payment –Someone elses items reporting; people with similar names or family members –Items reported in bankruptcy still showing balances owed

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Whats In Your Credit Report? Personal Information Personal Information – SSN, Drivers License, Birth Date, Employment Information, Previous Addresses, and Name Aliases Trade Lines Trade Lines – Open and Closed accounts Collections, Bankruptcies, Judgments, & Late Payments Collections, Bankruptcies, Judgments, & Late Payments Inquiries Inquiries All positive and negative accounts report for 7 years from the date of last activity, excluding bankruptcies (10 yrs) and unpaid tax liens (15 yrs)

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Credit Scores Scores range between Scores range between Excellent Credit: 700 and above, excellent interest rates Excellent Credit: 700 and above, excellent interest rates Mediocre Credit: ~600 to ~700, loan qualify cutoff Mediocre Credit: ~600 to ~700, loan qualify cutoff Bad Credit: ~600 and below, need restoration Bad Credit: ~600 and below, need restoration Score distribution among U.S. population

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Who Is FICO? Fair Isaac Corporation (FICO) Fair Isaac Corporation (FICO) – Established in 1956 – Creates risk models (formulas) used by the financial industry to generate credit scores – Risk model formulas are trade secrets of FICO and are not shared with financial institutions or credit bureaus – Different risk models (formulas) are used for different types of financing, generating different scores

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Key #1 - Payment History Payment History Payment History –How well we make payments on time in the past 24 months –35% of score –Considers positive accounts Such as: auto loans, credit cards, mortgage loans, etc.Such as: auto loans, credit cards, mortgage loans, etc. –Considers negative accounts Such as: collections, judgments, bankruptcies, late pays, etc.Such as: collections, judgments, bankruptcies, late pays, etc.

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Key #2 - Utilization Ratio Ratio of total credit card debt to credit limit should be no more than 30%. Ratio of total credit card debt to credit limit should be no more than 30%. Closing accounts with high credit limits will increase your utilization ratio and decrease your credit score Closing accounts with high credit limits will increase your utilization ratio and decrease your credit score Example: $3,000 of debt with a $10,000 credit limit = 30% utilization ratio Example: $3,000 of debt with a $10,000 credit limit = 30% utilization ratio

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Key #3 - Credit Inquiries Inquiries that DO affect credit score: HARD inquiries Inquiries that DO affect credit score: HARD inquiries –Reported when applying for credit –Auto and mortgage inquiries in any 14 day period count as one inquiry –Recent inquiries (prior 1-2 months) have the most impact on scores –Impact score less than 5%. (Rarely more than points) Inquiries that DONT affect credit score: SOFT inquiries Inquiries that DONT affect credit score: SOFT inquiries –Your own requests for your credit report –Promotional offers –Your current lenders and collection agencies –Prospective employers and insurance companies

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Credit Counseling Ruins Scores Credit Counseling Companies: Credit Counseling Companies: –Negotiate with creditors to make partial payments and lower interest rates –Stop credit harassment through the limited power of attorney The Problem: The Problem: –Part of each payment pays counseling fees, so less money is used to pay down the balance –Payments REPORT AS LATE on credit reports –Viewed as a chapter 13 bankruptcy by many lenders –IT IS NOT DEBT CONSOLIDATION

Helping people improve and protect their credit Credit Concepts Your Name – Credit Expert Thank You For Your Time! Opt-In Form Opt-In Form -Fill out top half of form to receive our newsletter -Fill out bottom half if youd like to meet about any of the related topics. QUIZ ANSWERS QUIZ ANSWERS 1.(B) & (C) Credit scores affect interest rates and down payments. Income is not reported. 2.(C) Character, Capacity, Collateral 3.(D) Fair Isaac Corporation 4.(C) 1 free credit report every 12 months 5.(C) Most items remain for seven years. 6.(A), (B), (D) Investing does not require credit. Next Workshop: –How to Improve Your Credit Score –How to Protect Your Credit and Identity