Credit Records and Credit Records and LawsLaws

Chapter 17Chapter 17

Credit RecordsCredit Records

Credit History is the complete record of Credit History is the complete record of your borrowing and repayment your borrowing and repayment performance.performance.

A credit bureau is a company that gathers, A credit bureau is a company that gathers, stores, and sells credit information to stores, and sells credit information to business subscribers.business subscribers.

When you open a new account with a When you open a new account with a business, they record your information and business, they record your information and every time you use credit to make a every time you use credit to make a payment, the business records the payment, the business records the transaction.transaction.

Once a month, the business electronically Once a month, the business electronically submits the accumulated data about your submits the accumulated data about your borrowing and repayments to the credit borrowing and repayments to the credit bureaus.bureaus.

The credit bureau enters the information The credit bureau enters the information into your file and stores it under your into your file and stores it under your social security number for ID.social security number for ID.

Local and regional credit bureaus can Local and regional credit bureaus can access those bureau networks to access access those bureau networks to access files.files.

Credit BureausCredit Bureaus

www.experian.com www.transunion.com www.equifax.com

Credit ReportCredit Report

A written statement of a consumer’s credit A written statement of a consumer’s credit history, issued by a credit bureau to its business history, issued by a credit bureau to its business subscribers.subscribers.

You can order a copy of your credit report for a You can order a copy of your credit report for a small fee.small fee.

If you are denied credit, you can get a free credit If you are denied credit, you can get a free credit report if you ask within 30 days of being denied.report if you ask within 30 days of being denied.

Types of Information StoredTypes of Information Stored

Any public informationAny public information Failure to pay taxes, marriage, bankruptcy, Failure to pay taxes, marriage, bankruptcy,

divorce divorce

The 5 C’s of CreditThe 5 C’s of Credit

Character- Will you repay the debt? Character- Will you repay the debt? Character is a responsible attitude toward living Character is a responsible attitude toward living up to agreements, often judged on evidence in up to agreements, often judged on evidence in the person’s credit history.the person’s credit history.

If you have character, you pay your bills on time, If you have character, you pay your bills on time, and your credit history will show it.and your credit history will show it.

Creditors also use stability as a measure of Creditors also use stability as a measure of character as well- if you have moved six times character as well- if you have moved six times during the past year, they may see you as a during the past year, they may see you as a credit risk.credit risk.

The 5 C’s of CreditThe 5 C’s of Credit

Capacity- Can you repay the debt? Capacity- Can you repay the debt? Capacity is the financial ability to repay a Capacity is the financial ability to repay a loan with present income.loan with present income.

Before lending you money, creditors want Before lending you money, creditors want to make sure that your income is sufficient to make sure that your income is sufficient to cover your current expenses each to cover your current expenses each month plus the payment of the new loan.month plus the payment of the new loan.

The 5 C’s of CreditThe 5 C’s of Credit

Capital- Is the creditor fully protected if Capital- Is the creditor fully protected if you fail to repay? you fail to repay?

Capital is the property you possess that is Capital is the property you possess that is worth more than your debts. (When you worth more than your debts. (When you add up all that you own, (assets) and add up all that you own, (assets) and subtract all that you owe (liabilities), the subtract all that you owe (liabilities), the difference (net worth or capital) should be difference (net worth or capital) should be sufficient to ensure repayment of the loan.sufficient to ensure repayment of the loan.

The 5 C’s of CreditThe 5 C’s of Credit

Conditions- What general economic Conditions- What general economic conditions can affect your repayment conditions can affect your repayment of debt? of debt?

The state of the economy can affect your The state of the economy can affect your ability to repay. If economy is slow and ability to repay. If economy is slow and there is a chance you can lose your job, there is a chance you can lose your job, they may not want to loan money to you. they may not want to loan money to you. They ask: How secure is your job? How They ask: How secure is your job? How secure is the company you work for?secure is the company you work for?

The 5 C’s of CreditThe 5 C’s of Credit

Collateral- What assets back up you Collateral- What assets back up you promise to pay? promise to pay?

Collateral is property pledged to assure Collateral is property pledged to assure repayment of a loan. Collateral protects repayment of a loan. Collateral protects creditors, making them more willing to lend creditors, making them more willing to lend to you.to you.

Getting Started With CreditGetting Started With Credit

Begin With a Savings AccountBegin With a Savings AccountOpen a savings account where they do not charge you a Open a savings account where they do not charge you a monthly fee or require a minimum balance. monthly fee or require a minimum balance.

Open a Checking AccountOpen a Checking AccountWhen you have enough money in your savings account When you have enough money in your savings account to allow you a little “cushion” you can open a checking to allow you a little “cushion” you can open a checking account. This will give you a convenient way to pay your account. This will give you a convenient way to pay your bills when you have credit accounts and will serve as a bills when you have credit accounts and will serve as a record-keeping system for your budget. record-keeping system for your budget.

Open a Store Credit AccountOpen a Store Credit AccountYour parent or guardian may need to Your parent or guardian may need to serve as a co-signer to help you open your serve as a co-signer to help you open your first credit account- they are promising to first credit account- they are promising to pay if you fail to do so. When you make pay if you fail to do so. When you make purchases, you can pay your bill using purchases, you can pay your bill using your checking account. Make small your checking account. Make small payments that you can afford to pay, and payments that you can afford to pay, and pay on time!pay on time!

Get a Small LoanGet a Small Loan

Take out a small loan from the bank that you use Take out a small loan from the bank that you use and use the money to buy something you really and use the money to buy something you really need. Pay back the loan as agreed. Make early need. Pay back the loan as agreed. Make early payments if possible. payments if possible.

Apply for a Credit CardApply for a Credit Card

With credit established for a few years, a part-With credit established for a few years, a part-time job, and a few credit references, you may time job, and a few credit references, you may now be eligible for a credit card.now be eligible for a credit card.

Credit RatingsCredit Ratings Credit bureaus give each consumer a credit Credit bureaus give each consumer a credit

rating- a measure of creditworthiness based on rating- a measure of creditworthiness based on an analysis of the consumer’s financial history. an analysis of the consumer’s financial history.

A point system is common. The bureau assigns A point system is common. The bureau assigns points based on factors such as amount of points based on factors such as amount of current debt, number of late payments, number current debt, number of late payments, number and types of open accounts, current and types of open accounts, current employment, amount of income, and so on.employment, amount of income, and so on.

Business subscribers use these scores as part Business subscribers use these scores as part of their decision to grant or not grant credit.of their decision to grant or not grant credit.

Credit RatingsCredit Ratings

Another rating system rates consumers Another rating system rates consumers according to how reliably they pay back according to how reliably they pay back money borrowed or charged. Credit money borrowed or charged. Credit bureaus supply credit files (account bureaus supply credit files (account balances, payment records) to their balances, payment records) to their subscribers, and they make their own subscribers, and they make their own rating decisions.rating decisions.

Credit RatingsCredit Ratings

To earn an To earn an excellent credit rating, or A-rating, excellent credit rating, or A-rating, the customer pays bills before the due date, and the customer pays bills before the due date, and is well established (has successfully used credit is well established (has successfully used credit for several years), has not missed any for several years), has not missed any payments, and has made larger payments than payments, and has made larger payments than the minimum amount required.the minimum amount required.

To earn a To earn a good credit rating, or B-rating, good credit rating, or B-rating, the the customer must pay bills on the due date or customer must pay bills on the due date or within the grace period, and does not miss any within the grace period, and does not miss any payments.payments.

Credit RatingsCredit Ratings

A A fair credit rating fair credit rating is earned by a customer who is earned by a customer who usually pays all bills within the grace period, but usually pays all bills within the grace period, but occasionally takes longer. Late charges are occasionally takes longer. Late charges are sometimes applied. They are described as slow sometimes applied. They are described as slow in paying but fairly dependable.in paying but fairly dependable.

People with a People with a poor credit rating poor credit rating are usually are usually denied credit because their payments are not denied credit because their payments are not regular. They miss some monthly payments, and regular. They miss some monthly payments, and have failed to entirely pay back a debt.have failed to entirely pay back a debt.

Credit ScoreCredit Score

Point system—Point system—the credit bureau assigns the credit bureau assigns points based on factors such as amount of points based on factors such as amount of current debt, number of late payments, current debt, number of late payments, number and types of open accounts, number and types of open accounts, current employment, amount of income.current employment, amount of income.

  Credit scoreCredit score—your points added up, —your points added up, which tells potential creditors the likelihood which tells potential creditors the likelihood that you will repay debt as agreed.that you will repay debt as agreed.

FICO ScoreFICO Score FICO stands for Fair Isaac and Company. Their scores are FICO stands for Fair Isaac and Company. Their scores are

the credit scores most lenders use to determine credit risk.the credit scores most lenders use to determine credit risk.   Each person has three FICO score, one for each of the Each person has three FICO score, one for each of the

three credit bureaus. As information changes, so does your three credit bureaus. As information changes, so does your score.score.

  FICO scores affect the loan terms, such as interest rate, FICO scores affect the loan terms, such as interest rate, that you will be offered.that you will be offered.

  To calculate a FICO score, you must have at least one To calculate a FICO score, you must have at least one account open for at least six months.account open for at least six months.

  Your scores may be different at each of the credit bureaus Your scores may be different at each of the credit bureaus because of varying information collected and slight because of varying information collected and slight differences in the way the rating system is applied.differences in the way the rating system is applied.

FICO Score BreakdownFICO Score Breakdown Payment HistoryPayment History (35%) is rated based on how you pay your debts; (35%) is rated based on how you pay your debts;

the presence of bankruptcy, liens, or collections, and whether the presence of bankruptcy, liens, or collections, and whether accounts are past due or paid as agreed.accounts are past due or paid as agreed.

Amounts Owed Amounts Owed (30%) is rated based on the amounts owed on (30%) is rated based on the amounts owed on accounts, amounts on specific types of accounts, lack of balances, accounts, amounts on specific types of accounts, lack of balances, and proportion of credit line used.and proportion of credit line used.

Length of Credit HistoryLength of Credit History (15%) is rated based on the oldest (15%) is rated based on the oldest account opened and the average age of all accounts. account opened and the average age of all accounts.

New CreditNew Credit (10%) is rated based on the number of recently opened (10%) is rated based on the number of recently opened accounts and the number of recent credit inquiries.accounts and the number of recent credit inquiries.

Types of Credit UsedTypes of Credit Used (10%) is rated based on the mix of credit (10%) is rated based on the mix of credit accounts, such as credit cards, retail accounts, installment loans, accounts, such as credit cards, retail accounts, installment loans, mortgages, etc.mortgages, etc.

How Errors Are MadeHow Errors Are Made

When a credit report contains errors, it is When a credit report contains errors, it is often because it is incomplete or contains often because it is incomplete or contains information about someone else.information about someone else.

Credit Inquiries Credit Inquiries

An item that indicates a business with a “permissible An item that indicates a business with a “permissible purpose” has requested a credit check.purpose” has requested a credit check.

  Business can make an inquiry without your permission Business can make an inquiry without your permission or knowledge, but usually these don’t count toward your or knowledge, but usually these don’t count toward your score.score.

  When you apply for a loan, mortgage, or other credit, When you apply for a loan, mortgage, or other credit, you authorize the lender to check your credit. These you authorize the lender to check your credit. These inquiries, which are prompted by your own actions, will inquiries, which are prompted by your own actions, will affect your FICO score.affect your FICO score.

Improving Your FICO ScoreImproving Your FICO Score

To raise your FICO score takes time and To raise your FICO score takes time and patience. patience. Pay your bills on time. Pay your bills on time. If you have missed payments, get and stay If you have missed payments, get and stay

current. current. Keep balances low on credit cards and Keep balances low on credit cards and

revolving credit. revolving credit. Open accounts slowly.Open accounts slowly.

Credit ReportsCredit Reports

Credit reports will contain these sections:Credit reports will contain these sections: Summary of Information-Summary of Information- A summary of the A summary of the

negative and positive items. It tells the negative and positive items. It tells the subscriber what to look for as they go through subscriber what to look for as they go through the information that follows. Negative items are the information that follows. Negative items are those that could harm your ability to get credit. those that could harm your ability to get credit. Accounts in good standing are those that are Accounts in good standing are those that are favorable to your credit.favorable to your credit.

Public Record Information- Public Record Information- this section lists this section lists information found in public records. information found in public records.

Credit ReportsCredit Reports

Credit Information- Credit Information- lists the credit lists the credit accounts, including department stores, accounts, including department stores, credit cards, and other loans, that have credit cards, and other loans, that have been reported to credit bureaus. It reports been reported to credit bureaus. It reports details such as each account’s high and details such as each account’s high and payment status.payment status.

Account Detail- Account Detail- shows the monthly shows the monthly balances of accounts and lists the credit balances of accounts and lists the credit limits.limits.

Credit ReportsCredit Reports

Requests for Credit History- Requests for Credit History- lists every lists every business that has sought information from your business that has sought information from your credit file- requests from potential employers, credit file- requests from potential employers, creditors, insurance companies, and others, creditors, insurance companies, and others, along with requests that you have made.along with requests that you have made.

Personal Information- Personal Information- lists the personal lists the personal information you have given when applying for information you have given when applying for credit or that is available through public records. credit or that is available through public records.

Credit LawsCredit Laws

The government has passed laws to The government has passed laws to protect consumers from unfair credit protect consumers from unfair credit practices.practices.

Consumer Credit Protection Act Consumer Credit Protection Act (1968)(1968)

Known as the Truth-in-Lending Law, requires Known as the Truth-in-Lending Law, requires lenders to fully inform consumers about all costs lenders to fully inform consumers about all costs of a credit purchase before an agreement is of a credit purchase before an agreement is signed. signed.

Lenders must disclose the finance charge and Lenders must disclose the finance charge and the annual percentage rate (APR). The law also the annual percentage rate (APR). The law also requires a grace period of three business days requires a grace period of three business days in which purchasers can change their mind in which purchasers can change their mind about a credit agreement, and limits the about a credit agreement, and limits the consumer’s liability to $50 after the consumer consumer’s liability to $50 after the consumer reports a credit card lost or stolen and it has reports a credit card lost or stolen and it has been used.been used.

Fair Credit Reporting ActFair Credit Reporting Act

If you are denied credit based on a credit If you are denied credit based on a credit report, inaccurate information in your file report, inaccurate information in your file may be the cause. You have a right to may be the cause. You have a right to know what is in your file and who has seen know what is in your file and who has seen your file. A listing of requests made for your file. A listing of requests made for your file for credit purposes in the last six your file for credit purposes in the last six months, and for employment purposes in months, and for employment purposes in the last two years, must be available to the last two years, must be available to you. You may see your credit report for you. You may see your credit report for free within 30 days of credit denial.free within 30 days of credit denial.

Fair Credit Billing ActFair Credit Billing Act

Creditors must resolve billing errors within a Creditors must resolve billing errors within a specified period of time. A statement is an itemized specified period of time. A statement is an itemized bill showing charges, credits and payments posted bill showing charges, credits and payments posted to your account during the billing period. Creditors to your account during the billing period. Creditors need to have a written policy that would outline what need to have a written policy that would outline what would happen if there were charges on your would happen if there were charges on your statement that you did not make. statement that you did not make.

If you believe there is an error, you should write to If you believe there is an error, you should write to the creditor and include the account number and the creditor and include the account number and detailed information. They must acknowledge your detailed information. They must acknowledge your complaint within 30 days and correct it or show why complaint within 30 days and correct it or show why it is correct within 90 days. it is correct within 90 days.

Equal Credit Opportunity Act (1975)Equal Credit Opportunity Act (1975)

Prevents discrimination in the judgment of Prevents discrimination in the judgment of creditworthiness. Discrimination is treating creditworthiness. Discrimination is treating people differently based on prejudice rather than people differently based on prejudice rather than individual merit.individual merit.

Credit cannot be denied solely because you are Credit cannot be denied solely because you are a woman, single, married, divorced, etc.a woman, single, married, divorced, etc.

Credit cannot be denied specifically because of Credit cannot be denied specifically because of religion, national origin, race, color, or agereligion, national origin, race, color, or age

Credit cannot be denied because you receive Credit cannot be denied because you receive public assistance, unemployment, social public assistance, unemployment, social security, or retirement benefits.security, or retirement benefits.

Credit applications can be oral or written. Credit applications can be oral or written. Creditors are prohibited from asking you certain Creditors are prohibited from asking you certain questions, like Do you plan on having children? questions, like Do you plan on having children? What is your ethnic origin?What is your ethnic origin?

A creditor may not discourage you from applying A creditor may not discourage you from applying for credit for any reason prohibited by the act.for credit for any reason prohibited by the act.

The act also states that creditors must notify you The act also states that creditors must notify you of any action taken on your credit application of any action taken on your credit application within 30 days of submission. within 30 days of submission.

If you are denied, it must be in writing and you If you are denied, it must be in writing and you have the right to appeal.have the right to appeal.

Fair Debt Collection Practice ActFair Debt Collection Practice Act

Eliminates abusive collection practices by debt Eliminates abusive collection practices by debt collectors- people or company hired by a collectors- people or company hired by a creditor to collect the overdue balance on an creditor to collect the overdue balance on an account.account.

The law prohibits the use of threats, obscenities, The law prohibits the use of threats, obscenities, and false and misleading statements to and false and misleading statements to intimidate the consumer into paying. intimidate the consumer into paying.

It also restricts the time and frequency of It also restricts the time and frequency of collection practices, like telephone calls.collection practices, like telephone calls.