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Credit Scoring Presented by Will VanderToolen

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1 Credit Scoring Presented by Will VanderToolen
Director of Counseling Services AAA Fair Credit Foundation

2 What do we want to Accomplish:
Understand Credit Scoring and Credit Reports Help students understand Credit through the use of classroom activities

3 A Little Credit History
Credit reporting was born more than 100 ago, when small retail merchants banded together to trade financial information about their customers. The merchant associations then turned into small credit bureaus, which later consolidated into larger ones with the advent of computerization. By the 1960s, CRAs back then reported only negative financial information as well as "lifestyle" information culled from newspapers and other sources -- information such as sexual orientation, drinking habits, and cleanliness. The controversy led to a congressional inquiry, and in 1971, Congress passed the Fair Credit Reporting Act (FCRA), which established a framework for fair information practices to protect privacy and promote accuracy in credit reporting. Consumers gained the right to view, dispute and correct their records, and CRAs began to supplement the often-bleak reports with information on consumers' positive financial history.

4 What is a Credit Score? Snapshot of a person's financial standing at a particular point in time The one most widely used is the "FICO" (Fair Isaac Corporation) score The FICO score, a three-digit number between 300 and 850 The scoring system awards points for each factor that can help predict the likelihood of a person repaying debts on time The higher a credit score, the more likely a person is to be approved for loans and receive favorable interest rates. Pay first, cont.

5 National Averages We’ve talked about cutting expenses, paying with Power Payments and ways to raise money. If you can incorporate cutting expenses to use a power payment and raise some additional cash and apply as a power payment, you can reach your goal of eliminating debt much faster.

6 How Are Credit Scores Calculated?
Scores are computed using a patented mathematical algorithm, designed and sold to credit bureaus by FICO. (VantageScore™ recently released) There are theories as to what affects or does not affect your score but no one, especially FICO, will give you the formula, so in reality it is any ones best guess. Your score considers both positive and negative information in your credit report. It is important to check out all options before make the choice to file bankruptcy. Evaluate – Are you frequently late in paying bills? Do you only pay the minimum amount due on credit card balances? Do you have trouble making even the minimum payments to creditors? Do you lose sleep over how to meet monthly financial obligations? Have you experienced a significant decrease in wages? Have you experienced a life changing event, i.e. divorce, disability, loss of employment? Answering yes to some or all of these questions is a clear indication that you are in or on the brink of financial disaster. Do not wait to take action – evaluate your options and find a solution as quickly as possible. Professional advise- Contact a qualified consumer credit counseling agency and ask for a free financial consultation. They will assist you in creating an overview of your personal finances, a monthly budget, and other advise pertaining to those items. They will also help you determine if you will benefit more from filing bankruptcy or if an alternate solution is best. Review the qualifications of the agency before receiving any services. Are they approved to provide the required pre-bankruptcy counseling? Check the agency’s record with both the Better Business Bureau and a national trade organization such as American Assoc for Debt Management Organizations. Ask about policies and fee structures. Some may charge you for the pre-bankruptcy counseling certification. Consult a Licensed Bankruptcy Attorney – If, after your consultation with a credit counseling agency, it is determined that you should file bankruptcy, ALWAYS seek advice from a bankruptcy attorney. Considering interviewing 2 different attorneys; conduct a background check by verifying their license status with the State Bar Assoc; reviewing their history with BBB and check to see if they belong to any trade associations such as the National Assoc. of Consumer Bankruptcy Attorneys.

7 Other Names for Credit Scores
FICO scores have different names at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data. CRA Credit Score Equifax Beacon Experian Trans Union Empirica Once you’ve trimmed the fat from your budget and paid the necessities (mtg payment, car, utilities, etc.), use the extra money and apply it, along with the minimum payment, to one of your debts. This is called a Power Payment. For example, let’s say by trimming the fat on your spending habits you can save $50 each month to apply to a credit card. By adding a $50 Power Payment to your minimum monthly payment, you can retire your $1,000 debt in 16.6 months compared to 8 years by paying only the minimum monthly payment. Example 2: Let’s say you have 3 credit cards. Credit Card A has $1,000 balance; Credit Card B has $1,001 balance and Credit C has $1,002 balance. Take the $50 Power Payment and apply it, along with your minimum payment, let’s say $10, and pay the credit card with the smallest total balance, $1,000. So, you will pay $60 each month on Credit Card A. Once Credit Card A is paid off, take the $60 ($10 min. payment + $50 Power Payment) and apply this to Credit Card B along with min. payment of $10 on CC B. You will now pay $70 each month on CC B instead of the $10 min. payment. Once CC B is paid take the $70 and apply it, along with the min. payment on CC C.

8 Credit Scoring Methodology VantageScore
FICO and VantageScore use two different ranges. The classic FICO scale runs from 300 to 850, while the VantageScore starts at 501 and runs to 990. The credit bureaus are now saying the VantageScore range is more "intuitive," because it breaks down like the familiar academic scale: equals "A" credit equals "B" credit equals "C" credit equals "D" credit equals "F" credit Savings – If you have money in the bank earning 3 or 4% while you’re paying 18% + on your credit cards or other loans, you’re losing big money. Use some of your savings to pay down some of the debt. Selling Assets – Sell one of you cars; guns; jewelry

9 Fair and Accurate Credit Transactions Act (FACTA)
(ACR) enables consumers to request a free credit report once every 12 months from Equifax, Experian, and Trans Union ACR is the only source authorized by all three nationwide credit reporting repositories ACR provides consumers with a safe, secure, convenient way to request credit reports annually

10 Obtaining a Copy of Your Credit Report
Internet Mail Annual Credit Report Request Service P.O. Box Atlanta, GA Phone

11 How do I obtain my Score? You can purchase your credit score from each bureau You can also purchase it at All three scores may be different (due to reports containing different information) Should you decide you can’t climb out of debt alone, make sure you choose a reputable credit counseling agency. Make sure the agency is: Licensed to operate in your state Employs counselors who are certified and trained in consumer credit, money and debt management and budgeting. Are the counselors trained by an outside organization? Are they licensed or accredited? A non-profit organization has a legal obligation to provide free financial education. A reputable agency should offer a range of services, including budget counseling, savings, and debt management. You should be able to review a formal written agreement that identifies the services you will receive and identifies the fees you will pay prior to enrolling in a debt management program. An agency should not recommend that you dispute all information, even accurate information, on your credit report. Once you’ve identified a credit counseling organization that suits your needs, make sure you check them out with your state Attorney General, local consumer protection agency and the Better Business Bureau. These organizations can tell you if consumers have filed complaints about them. The absence of complaints doesn’t guarantee legitimacy, but complaints from other consumers may alert you to problems.

12 How Does A Credit Score Help Me?
Improves risk assessment Lenders, Insurance, Employers, Housing More equitable treatment among borrowers Able to qualify more quickly for credit Credit “mistakes” will not affect your ability to obtain lending as drastically Public record - In this age of heightened security, employers, financial institutions, and insurance companies routinely check the public records for fraud, convictions, garnishments, and bankruptcies. Financial recovery from Bankruptcy is slow. Bankrupts have to find creditors who will grant them credit. After several years with a spotless record, new creditors will begin to grant them limited credit. It’s a growth process where bankrupts are constantly trying to prove themselves.

13 What’s In Your FICO Score?
If you are committed to obtaining financial freedom, you will wake up one day and all your debts will be gone. When that day does come – celebrate! Then the fun begins because you can shift your goals from debt reduction to building wealth.

14 Payment History Pay your bills on time.
If you have missed payments, get current and stay current. Be aware that paying off a collection account will not remove it from your credit report. Bankruptcy is a serious financial matter that carries with it serious consequences. It should not be viewed as an easy way out of a bad financial situation. Bankruptcy remains on your credit record for 10 years. You might be able to get an auto lease – if you have a cash down payment of around 70% of the lease.

15 Amounts Owed Keep balances low on credit cards and other “revolving credit”. Pay off debt rather than moving it around. Negotiate with creditors for better terms. Bankruptcy is a serious financial matter that carries with it serious consequences. It should not be viewed as an easy way out of a bad financial situation. Bankruptcy remains on your credit record for 10 years. You might be able to get an auto lease – if you have a cash down payment of around 70% of the lease.

16 Length of Credit History
Rapid account buildup can look risky if you are a new credit user. Don't open a number of new credit cards that you don't need, just to increase your available credit. Don't close unused credit cards as a short-term strategy to raise your score. Bankruptcy is a serious financial matter that carries with it serious consequences. It should not be viewed as an easy way out of a bad financial situation. Bankruptcy remains on your credit record for 10 years. You might be able to get an auto lease – if you have a cash down payment of around 70% of the lease.

17 Types of Credit Used Apply for and open new credit accounts only as needed. Don’t use unnecessary credit just to try and build your score. Use and manage credit cards responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score. Bankruptcy is a serious financial matter that carries with it serious consequences. It should not be viewed as an easy way out of a bad financial situation. Bankruptcy remains on your credit record for 10 years. You might be able to get an auto lease – if you have a cash down payment of around 70% of the lease.

18 Credit Maintenance Overview
Don’t get into debt just to build credit. Avoid becoming overextended. This will lower your score. Avoid excessive accounts. Having too much available credit can create concern with lenders. There is no quick fix if your credit has been damaged. It will take time and planning.

19 Plan your Credit Makeover
Obtain your credit reports Review and understand your credit Dispute any discrepancies Review the types of credit you have Make all payments on time Pay down debt Maintain accounts long-term

20 Application for Students

21 What I Knew in HS I needed to save before purchasing
It is important to pay bills on time I should work hard for my paycheck

22 What I Didn’t Know How interest works Balancing Accounts
In depth understanding of credit Credit Reports Budgeting How investments/stocks work

23 National Endowment for Financial Education (NEFE)
19% almost always confident with financial decisions 18.5% set aside money as savings 42% say they knew the difference between needs and wants 9% set financial goals

24 Credit Score Homework for a class = Payment on an account
Good Grade = Positive Account This leads to: High GPA = High Credit Score Qualify for College = Qualify for Loan

25 Pop Quiz Needing credit can be like a pop quiz
You don’t always know when it will happen…(need new auto after accident) Think about what your grades look like right now, how are you doing? The same is applicable to credit

26 Credit Worthiness Which friends are you likely/not likely to lend money to? Why? What would you say if another person asked you if it were safe to lend to your friend? What if someone you didn’t know wanted to borrow from you?

27 Credit Score Estimator (credit score estimate) Create multiple scenarios Name, # of Accts, Payment History, etc. Have kids research scenarios Class - guess the estimated score Preferential treatment to high scores

28 Why work for a High Score?
Lower Credit means the bank considers you a higher risk, they require a higher return (Interest Rate) You have a higher rate, which means a higher payment for the same item. Different credit types offer different rates

29 The Cost of Credit - TV Television: Regularly $900, on Sale for $850
Savings- the cost is $850 ($900 if no longer on sale) Credit Card – at 21% interest over 12 months the cost is $79 per month or $950 Rent to Own – at 100% interest over 12 months the cost is $114 per month or $1377

30 Cost of Credit - Auto An Automobile Loan Pay $15000
Loan Terms 60 months at 7% Payment = $297 a month Total Cost of payments = ($297)x(60 months) = $17,821

31 Cost of Credit - Auto New Situation – Poor Credit History
An Automobile Loan Pay $15000 Loan Terms 60 months at 17% Payment = $372 a month Total Cost of payments = ($372)x(60 months) = $22,367

32 Cost of Credit - Mortgage
Mortgage Financing Pay $200,000 Loan Terms 360 months at 6% Payment = $ a month Total Cost of payments = ($ )x(360 months) = $419,796 Bad Credit Same loan at 8%, Payment = $ Cost = $528,310

33 Before you Buy Ask yourself these three questions:
Is this item worth going into debt for? What makes you think you will have the $ to pay it next month if you don’t have the $ this month? How much will the item cost with interest included if you re-pay over time?

34 Credit = Savings Account
Country is at a point where the Savings Rate has been negative We spend more than we make We transform wants to needs Credit has become the savings account How is this different from times after the depression?

35 Self Evaluation Is the Student responsible for any payments (How often are they paid on time/late?) Do they know the difference between Debit / Credit cards? Do they know how interest works (use amortization schedules) Know how to create/follow a budget Do they balance bank accounts?

36 Self Evaluation (cont.)
How well do they manage cell phone plans? Do they go over their minutes/texts? This could be an indicator of how they would use credit NOTE: If they have unlimited texts, know that there isn’t unlimited credit Could they restrict themselves, Try

37 Rate Shopping Have students shop around for the best rates on bank accounts Don’t forget to get the fine print Visit Credit Card sites in class, view the application and read the fine print They always shop for the best product, they should also shop for credit

38 Budgeting Help them develop a ledger Track ALL income and expenses
One for each account Having checks doesn’t mean you have $ Track ALL income and expenses This can be done on paper, computer, check book, etc. Track debt payments (possibly to parents) Compare to Business cash flow

39 Avoid the Credit Traps High Interest Predatory Loans
Free T-shirt / Blanket / Hat Buy now pay later (with huge interest cost) Music or other clubs with required purchases Co-signing Read the fine Print

40 Budget Homework Research the cost of living Develop a Budget
Average Family Costs: Housing & Utilities, Transportation, Food, Clothing, Medical, Etc. Call and get quotes, speak to others about costs Develop a Budget How much income is necessary? What if credit is bad, payments increase? Evaluate ways that families can save money

41 Payment Organization Homework
Create a list of bills Due dates, Minimum payments, Balance Organize the bills so that they are paid on time and according to income Show savings from previous month may be necessary due to the timing of due dates and pay dates

42 Class Investment Have each class member pick a stock
Create a pretend portfolio with a certain amount of $ invested in each stock At semester’s end, see how each stock and the portfolio have changed

43 Who wants to be a Millionaire?
The time value of Money at age 18: Save $91 a month until 65 ($91)*(47 Yrs)*(12 Mo/Yr) = $51,324 At 10% Investment Return, you will make $1 million from 51K! Wait until 40 to start saving: You will need to save $805 per month ($805)*(25 Yrs)*(12 Mo/Yr) = $241,500 You will still make $1 Million, but it will cost more

44 Resources (Money Smart Curriculum)
(Financial Education Curriculum) (Financial Literacy) News Sites Bank and C.U. Sites

45 Questions & Answers Will VanderToolen AAA Fair Credit Foundation
Director of Counseling & Education

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