What is a credit report?
What is a credit report?
∗ A database that provides a summary of information
about a person and their use of different types of
credit. Credit reports are created by credit agencies or
bureaus and are used by lenders, insurance
companies, landlords to assess the credit history of
individuals and businesses.
What is on a credit report?
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Person’s name
Current and past residences
Phone number
Social Security Number
Date of Birth
Current and past jobs
Outstanding creditors by type included date account
opened, credit limit, loan amount, and payment history
What appears on a credit report?
∗ Any Federal Bankruptcy records
∗ Federal, State and County tax liens and monetary
judgements
∗ Recent requests for credit with the person or
business who made the inquiry
∗ Personal statements made by the individual
How are Credit Reports compiled?
∗ Thousands of credit grantors such as department
stores, Home Depot and many other retailers and
financial institutions, send monthly or quarterly
updates to each of the credit reporting agencies.
∗ Other information is supplied by court records.
What happens once the data is
received?
∗ It is entered into the database and used to create a
credit report and provide data to create statistical
credit scoring models.
Impact of your Credit Report
∗ Influences your ability to purchase, your chance to
obtain a job, rent or buy a house, or even buy car
insurance.
∗ Accurate negative information can stay on a credit
report for up to seven years.
∗ A bankruptcy under Chapter 7, 11, 12 can stay in a
report for 10 years and a Chapter 13 filing for 7 years.
∗ Unpaid federal tax liens can remain for 15 years.
The BIG THREE!
∗ There are three major Credit Bureaus
∗ Experian
∗ TransUnion
∗ Equifax
Free Annual credit report
∗ Consumers can request and obtain a free credit
report every 12 months from each of the “big three”
by visiting www.AnnualCreditReport.com
Credit scores
∗ A credit score is a computer generated number that
indicates a consumer’s ability and willingness to repay
a debt based on information that is contained in the
consumer’s credit report.
∗ The most common used credit score is known as FICO
SCORE. FICO scores range on a scale from 400 to 900.
Credit scores
∗ Credit scores are highly related to delinquency
∗ High scores are associated with low delinquency and
low scores with high delinquency
∗ Looks at trade lines on your credit report, a trade line
is an organization that has supplied credit to the
individual.
What a credit score drives?
∗ Can be used to determine the interest rate on a loan
∗ Can be used to determine the type of loan
you can obtain in many cases you may not be able
to obtain a personal loan with no collateral
Reason lenders use credit scores
∗ Use credit scores to make lending decisions because
credit scores are highly related to loan delinquency.
∗ High scores tend to be associated with low
delinquency and low score with high delinquency.
Improving Your Credit Score
∗ Pay your bills on time- a credit score emphasizes a person’s
most recent payment record
∗ Pay at least the minimum amount required- never pay less
than the minimum required
∗ Keep credit balances low- try to keep balances at 50% of
limit or lower
∗ Do not apply for too many loans or new accounts during a
short time span
∗ Establish credit a little bit at a time so that your score goes
up slowly and systematically
Credit Report Scoring Factors
∗ Borrower characteristic factors to include:
∗ Number of credit trade lines without delinquencies or
other derogatory comments
∗ More trade lines suggest lower risk as long as
balances are low
∗ Percent of trade lines that were ever delinquent or
worse. (more suggests higher risk)
∗ Worst ever derogatory and number of derogatories
Credit Report Scoring Factors
∗ Age of oldest trade lines (older lines suggest lower
risk)
∗ If no trade lines are more than 4 years old, has
borrower added lines or have high outstanding
balances. (recent activity suggests higher risk)
Develop a budget
∗ List your fixed expenses, those are the same bills that
you must pay each month like rent, mortgage, car
insurance.
∗ Then list your variable expenses such as
entertainment, clothing
∗ Then list your sources of income
∗ Once you have done this track your spending patterns
Budget
∗ After 3 months identify all the expenses that are
necessary and prioritize the rest of your expenses.
∗ The goal of a budget is to make sure you can make
ends meet on the basics: housing, food, health care,
insurance and education.
∗ Once a year analyze all your debts that appear on
your credit report to make sure that are valid.
Problems making payments
∗ If you find yourself having difficulty making your
payments you should contact your creditor.
∗ Explain the cause of the trouble and work with the
creditor for a solution that both you and the creditor
can live with.
∗ Many lenders have modification or extension
programs that they can set up to help you long term
or just temporarily