 Samantha Davis  State Farm Financial Literacy Lab  Credit Basics  April 21, 2011

The financial downturn of the United States is linked to the careless lending practices of the financial institutions.

A credit report contains detailed information on a person’s credit, including identifying information, credit and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her credit worthiness.

Personal Identifying Information name, current and previous address, social security number, telephone number, birth date, your current and previous employers, and your spouse's name may be included as well Credit History Bill-paying history with companies that have granted you credit. Account information such as: date opened, type of account, credit amount extended, monthly payment amount, etc. Information about late payments, closed, charged off, or paid off account. Public Records Information that might indicate your credit worthiness, such as tax liens, court judgments and bankruptcies. Report Inquiries All credit granters who have received a copy of your credit report and others who were authorized to view it. Lists of companies that have received your name and address in order to offer you credit. Dispute Statements The report may also include any statements you've made disputing information on the report. Most credit bureaus allow both the consumer and the creditor to make statements to report what happened if there is a dispute about something on the report.

A credit report does not include:  information about your income  checking or savings accounts  bankruptcies that are more than 10 years old  charged-off or debts placed for collection that are more than seven years old,  gender  ethnicity  religion  political affiliation  medical history  driving record  criminal records Your credit score is generated by information on your credit report, but is not part of the report itself.

 Fair Isaac Corp. developed the first credit score as well as the Classic FICO score.  There are currently three major credit bureaus in the United Sates. They provide different credit scores as the data they collect are different and their method of FICO scoring is also different. EquifaxExperianTransunion Beacon Score/ Pinnacle Score Experian/Fair Isaac Risk Model Empirica Score Classic FICO Score Plus ScoreTransunion score 300 to to to 934

35%How you pay your bills. 30% Amount of money you owe and the amount of available credit. 15%Length of credit history 10%Mix of credit 10%New credit applications or inquires. 100%TOTAL

ScorePercentage of Population Delinquency Rate % % % % % % % 800 and higher111%

FICO ScoreGradeTypical Mortgage Rates * ExcellentA (e.g., 6.2%) Very GoodA % GoodA % FairA % BadA % Very BadA %

The three major credit reporting bureaus are currently involved developing and allowing for restricted use of an alternative credit rating system called Vantage score. It ranges from 501 to 900. Your personal score is transformed into a letter grade. ScoreGrade 901 – 990A 801 – 900B 701 – 800C 601 – 700D 501 – 600F

About 90% of auto lenders do not actually use classic FICO credit scores. Instead they use auto credit score. Due to this, there are individuals with car loans that are not necessarily eligible for credit cards. The theory behind this is that, people are more inclined to maintain good payment history in regards to auto loans. Studies have shown that individuals with low credit scores will continue payments while deteriorating their classic FICO score by defaulting on other payments.

Great or Excellent Good or Very Good Normal or Average Below Normal or Poor Bad or Very Bad Factors affecting auto score An auto loan or lease sent to collections Any late payments on an auto loan or lease An auto loan or lease settled for less than owed A repossession by the lender Previous two year overall credit

 An insurance credit score is not a measure of credit worthiness but instead a assessment of risk. Some information from your credit report such as (age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) are included in the calculation of the insurance credit score. The remainder of insurance score is calculated by insurance claims and profitability data.  Insurance credit scores are unique to the insurance company and each line of business (example auto or home).  It is very possible for someone with a high classic FICO score to have a low insurance credit score.

 Everyone is entitled to a free annual credit report or a free credit report after being denied credit.  You can retrieve your credit report and credit score at Myficoscore.com or at the major credit bureaus  Before shopping for credit, pull your own free credit report (it does not affect your score negatively) and show lenders to see if you are credit worthy according to their lending standards.  If your shopping around for lenders through different companies in the same industry over a span of 14 days then the inquiries will only affect your credit score as if it was only one inquiry.  Closing unused accounts lowers your credit score so its best just to leave it open.

 Diversifying your types of credit will improve your score.  The fastest way to increase your credit score is by staying within the 10% margin of utilization. Balance (divided) by Credit Limit = percentage.  To establish credit it is a good idea to become an authorized user on a responsible person’s account. The authorized user has no legal responsibility for the debt as oppose to a Joint or Co- Signer accounts. If this account starts to report negatively it is also easier to remove these types of credit from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs. Be certain that the lender reports this information to the credit bureaus.

 Do not apply for credit you do not need or apply for credit if you know you will be denied.  If your credit life is relatively new do not open numerous accounts in order to build credit. This looks risky to lenders. It will also lower your average account age which has an effect on your total credit score.  If you find yourself unable to pay back your debt be careful of debt consolidation or debt settlement companies. If you decide to settle your debt the negative report will take seven years to be removed from your credit report and your credit score will be substantially lowered. You may also have to pay income taxes at the end of the year for the discounted portion (balance – settlement = discounted portion) if the amount is $600 or greater. If you decide to declare bankruptcy it will take 10 years for the negative information to be removed from your credit.

For your free credit report go to:  For more information on credit go to:   You can access your credit score at either website with the conditions of a 7 day free trial of credit monitoring. They will ask for your credit card information in the event you do not call to cancel during the free trial period.

 Checking Accounts  Savings Account  Money Market Accounts  CD’s, Certificate Deposit, Time Deposits  Basic or no frill accounts - Many institutions offer a type of bank account that provides you with a limited set of services for a low price  Totally Free Accounts  Interest Bearing Accounts

 Availability of funds disclosures.  Extended Hold  Cut over time/ Turnover  Posted Balance and Available Balance  Maintenance Fees  Minimum balance accounts  Interest Bearing accounts  NSF, O/D, and Unavailable Overdraft fees.  Return item fees  Debit and Credit charges posted to debit cards.  ATM charges  International charges.  Fraud or Identity theft.