Credit Score Basics-04-17
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Credit Score Basics-04-17
- 1. Credit Score Basics Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension
- 2. Question #1: How Often Do You Check Your Credit Report and How?
- 3. Credit Reports are Like a “Financial Report Card” • It’s just like you are back in school • You are still being evaluated with written comments • The results are still critical for your future
- 4. What is a Credit Report? • A summary of someone’s history of paying debts and other bills • Prepared by credit reporting agencies (a.k.a., CRAs or credit bureaus) • Used by those who have a legitimate need for the information – Lenders – Insurance companies – Potential employers – Potential landlords
- 5. The Better Your Credit History, The Better Your Chances of... • Obtaining a loan or credit card • Obtaining lower-cost credit terms and saving hundreds/thousands of dollars of interest • Obtaining a low-cost insurance policy • Renting an apartment • Being hired for a job
- 6. Three Major Credit Bureaus Equifax: www.equifax.com Experian: www.experian.com TransUnion: www.transunion.com • Different pieces of data about borrowers in their databases • Social Security number acts as a “magnet” to assemble data and create a credit report
- 7. Four Key Credit Report Sections • Identifying Information: Name, SS Number, current/previous addresses, birthdate, employer • Public Record Information from Local Courthouse: Liens, foreclosures, bankruptcy, etc. • Other Credit History Information: List of loans and credit cards, timeliness of payments, highest and current balance, negative information (7 years) • Inquiries: Self-initiated, promotional (for marketing purposes), and periodic creditor reviews
- 8. Free Credit Reports by Federal Law
- 9. Credit Scores Are Like a “Financial GPA” • Three-digit number calculated by statistical analysis • An important barometer of financial health • Based on credit report data at a point in time
- 10. More About Credit Scores • Predictive tool that measures the risk of a borrower’s delinquency or default • Determines who qualifies for credit, at what interest rate, and at what credit limits • Generally, higher credit scores indicate lower risk • Can be used for auto insurance and apartment rental decisions
- 11. How to Get a Credit Score • Request score from a prospective lender, landlord, or insurance company • Use a credit card that provides a free credit score (online or on billing statement) • Via the FICO web site: http://www.myfico.com/
- 12. Free Credit Report and Credit Score Providers • Credit.com • Credit Karma • Credit Sesame • QL Credit • Quizzle • Wise Piggy • Beware: solicitations for products, services, upgrades • Beware: free scores will likely vary from FICO scores
- 13. About Credit Scoring • Classic FICO score range: 300 (worst) to 850 (best) • Speeds up loan approvals • Objective focus on credit risk factors • 1989: Fair, Isaac Corp. introduced FICO score • 2002: FICO scores became available to consumers at www.myfico.com • 2016: Not required for free upon request by federal law (like credit reports are) BUT many creditors are providing for free (marketing and retention tool)
- 14. Sample Credit Score Data for Consumers by a Creditor
- 15. What a Credit Score Means Source: http://www.myfico.com/fico-score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 16. Question #2: How Often Do You Check Your Credit Score and How?
- 17. Credit Scoring Factors • Bill payment history, weighted for recent months (35%) • Proportion of outstanding debt to available credit limits (30%) • Length of credit history (15%) • Number of recent credit inquiries (10%) • Mix of types of credit used (10%)
- 18. Credit Scores Can Vary • Information in your credit report may vary across the “Big Three” credit reporting agencies (CRAs) – Reporting to CRAs by creditors is voluntary – Data that each CRA compiles about you may be different • Implication: To get a complete picture of what lenders see, check credit reports from all 3 bureaus – If credit report information is very similar, so, too, will be credit scores
- 19. Credit Scores Can Vary • Some large lenders still build their own scoring models – Custom models based on data from a lender’s own account holders – These scores are generally not disclosed to consumers • Each of the “Big Three” CRAs sells their own generic score built internally on their own data – Example: Experian’s score is called the Plus Score
- 20. Credit Scores Can Vary VantageScore (introduced in 2006) is a FICO score competitor: http://your.vantagescore.com/interpret_scores
- 21. Information That is NOT Included in a Credit Score • Your age • Your income • Your employment status – Caveat: Lenders will consider employment status • Your marital status • Interest rates (APRs) paid on existing debts • Child support and alimony • “Soft” and “promotional” inquiries • Credit counseling participation https://www.experian.com/ask-experian/20080625-the-impact-of-credit-counseling-on- credit-scores.html
- 22. Good Credit Scores Save Money Source: http://www.myfico.com/crediteduc ation/calculators/loanrates.aspx
- 23. Damage Points: How Mistakes Affect FICO Credit Scores Action Decline from 680 Score Decline from 780 Score Maxed-Out Credit Card 10-30 points 25-45 points 30 day-late payment 60-80 points 90-110 points Debt Settlement 45-65 points 105-125 points (Less than full balance) Foreclosure 85-105 points 140-160 points Bankruptcy 130-150 points 220-240 points Source: http://www.creditcards.com/credit-card-news/fico-credit-score- points-mistakes-1270.php
- 24. Ways To Improve Your Credit Score • Pay your bills on time (#1 weighted factor) • Keep debt-to-available credit ratio routinely low (< 30%) • Keep accounts open: – Older accounts establish length of history • Get points for variety (mix of types of credit) – Revolving and installment • Avoid “hard” inquiries: supply own report to lenders
- 25. Other Credit Score Tips • Only apply for new credit when needed • Pay or settle old collection accounts – Accounts with a “0” balance no longer hurt FICO score • Check credit report for errors that affect score • Correct errors and dispute evidence of fraud – Focus on negative factors provided with FICO score • Reduce balances on credit cards • Pay off debt rather than moving it around
- 26. FICO High Achievers • 96% have no late payments • Use, on average, only 7% of credit limit • Owe < $3,500 on credit cards • Have average credit history length of 25 years http://www.myfico.com/fico- score-high-achievers- infographic.aspx#.Vsyj8cv2aM8
- 27. Portrait of a Credit Rock Star What Do People with the Best Credit Scores Look like? • Experian surveyed five categories of consumers ranging from Super Prime (Highest) to Deep Subprime (Lowest) • Six key credit score components • Age of accounts • Number of accounts • Revolving account balances • Utilization • Inquiries • Delinquency
- 28. Age is a Virtue Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 Account Age Oldest acct. 27 19 15 12 9 Avg. acct. age 12 11 8 7 5 Oldest revolving 27 18 15 12 9 Avg. revolving 13 12 8 8 6 Newest acct. 3 6 3 3 2 Source: Experian, Inc.
- 29. What’s in Your Wallet? Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 # of Accounts Currently paid as agreed 6 4 4 1 1 Carrying a balance 3 3 4 1 2 Source: Experian, Inc.
- 30. What Comes Around Goes Around Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 Revolving Accounts # open credit cards 5 3 3 1 1 Balance (total in $) 2,648 4,838 6,074 1,221 588 Source: Experian, Inc.
- 31. Don’t Push the Limit Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 Utilization Revolving Util. (%) 8 30 59 73 99 Installment (%)* 39 30 24 19 6 *Installment non-mortgage paid-down Source: Experian, Inc.
- 32. Sometimes it Hurts to Ask Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 Inquiries No inquires (%) 69 62 50 62 43 Source: Experian, Inc.
- 33. It Never Pays to Be Late Super Prime 781-850 Prime 661-780 Nonprime 601-660 Subprime 500-600 Deep Subprime 300-499 Delinquency None (%) 100 97 85 62 18 60 days (%) 0 2 13 35 78 Most recent* 42 29 20 16 3 *in months Source: Experian, Inc.
- 34. Question #3: Any Other Credit Score Tips?
- 35. Credit Score Resource: • The Credit Score Quiz: http://www.creditscorequiz.org/ • Print copy of the quiz with answer key: http://www.creditscorequiz.org/CreditScoreQuiz_AnswerKey _Eng.pdf
- 36. Credit Score Resource: Credit Score Game (University of Idaho) • Description: http://www.extension.uidaho.edu/impacts/Pdf_13/18- 13lerickson-creditscore.pdf • Game: http://www.uidaho.edu/extension/4h/programs/nw-youth-financial- ed/credit-score-millionaire
- 37. FICO Credit Score Estimator Resource: http://whatsmyscore.org/estimator/
- 38. Rutgers Cooperative Extension Wise Credit Management Quiz http://njaes.rutgers.edu/money/wise-credit/
- 39. Question #4: Any Other Good Credit Score Resources?
- 40. Key Take-Aways • A credit score is a “snapshot” of your credit performance at a point in time. • It changes over time as your credit behavior changes • Helpful credit score factors: – Timely payments (“current” or “paid as agreed”) – Old credit accounts (show lengthy history) – Low balances (<30% of credit card limit) – Variety (bankcards, car loans, mortgages)
- 41. Key Take-Applications • Review your credit report from each “Big Three” CRA annually • Obtain your FICO credit score; for free, if possible • Take steps to raise your credit score, if needed • Check out alternative credit scores, if interested • Check out suggested online resources