CREDIT FICO Scores from: Understanding Your FICO Score by Fair Isaac Corporation

1
CREDIT(FICO Scores)from Understanding
Your FICO Score by Fair Isaac Corporation
2
Whats a FICO Score?

• FICO Score is a credit score
• Credit Score - a number that summarizes your
  credit risk, based on a snapshot of your credit
  report at a particular time
• FICO Score is a lending tool invented by Fair
  Isaac Corporation in 1956

3
Whats a FICO Score?

• Lenders buy FICO scores from 3 major credit
  reporting agencies
• Equifax
• Experion
• TransUnion
• These companies maintain records about you and
  your credit.
• These companies produce credit reports on you.
• Lenders buy these credit reports and use the
  scores to help decide whether to give you a loan,
  and at what rate.

4
Whats a FICO Score?

• In other words..
• FICO scores give lenders a fast, objective
  estimate of your credit risk

5
Whats in my Credit Report?
Personal Information Name John Smith Date of
Birth May 1, 1970 Social Security
No 123-45-6789 Current Address 6100 Fifth
Avenue Dayton, OH 45439 Accounts Summary
Acct. Type Company Account No.
Balance Neg. Items Installment Ford Mot.
BFM915X 23,000 No
Revolving Citicorp 427188888
325 No Negative Items Acct.
Type Company Status Delinquency
Neg. Descrip. Installment Ford
Pays as 30 days No
agreed
past due Inquiries Date Company
requesting your credit record 1/4/2005 Main
Street Bank 9/21/2004 XKK Cellular Phone
Service
6
How is my FICO score calculated?

• 1) Your FICO score is a mathematical
  calculation, using several pieces of information
  from your credit report
• You must have one account thats been open for at
  least 6 months, and has been reported to the
  credit agency

7
How is my FICO score calculated?

• FICO Scores range from 300 to 850.
• The higher the score the lower the risk.

8
(No Transcript)
9
How is my FICO score calculated?
10
How is my FICO score calculated?

• 1) Payment History - 35
• Late Payments are a score-killer
• Takes into account
• All types of accounts
• Bankruptcy, liens, attachments
• How many accounts show no late payments

11
How is my FICO score calculated?

• Amounts Owed - 30
• The amount owed on all accounts, and
  different types of accounts
• How many accounts have balances
• How much of total credit line is being used.
• How much is still owed.

12
How is my FICO score calculated?

• 3) Length of Credit History
• How long you have used credit
• How long specific accounts have been
  established
• How long it has been since youve used
  certain accounts

13
How is my FICO score calculated?

• New Credit - 10
• How many new accounts you have
• How many recent requests for credit you have
  made
• Length of time since credit report request
  was made by lender
• Whether you have good credit history
  following past problems

14
How is my FICO score calculated?

• Types of credit in use
• Is it a healthy mix?
• What kinds of credit you have, and how many of
  each

15
How Can I Improve my Score?

• Pay bills on time
• Keep balances low on credit cards
• Pay off debt rather than moving it between credit
  cards
• Apply for and open credit cards only when you
  need them
• Check your credit report
• If youve missed payments, get current and stay
  current.

16
Credit Laws
17
Consumer Credit Protection Act

• Federal garnishment law that protects employees
  with wage garnishments
• 1) employee cannot be discharged/fired for
  having a wage garnishment
• 2) Amount of garnishment is limited to 25 of
  net pay

18
Consumer Credit Protection Act

• Examples
• Ex 1 - John Doe did not pay his 2006 Federal
  Income Taxes. As a result, he has 40 deducted
  from his paycheck every week to pay back the
  taxes. John is fired from his employment as a
  result of this deduction.
• Ex 2 - John Doe is in debt to his bank for an
  outstanding loan. He has not made any payments
  on the loan for one year. The court orders that
  money be deducted from Johns paycheck in order
  to pay back the loan. Johns employer deducts
  90 of his net pay for repayment of the loan.

19
Fair Credit Reporting Act

• Regulates collection and distribution of consumer
  credit information
• CRA Consumer Reporting Agency
• ie. Experion, TransUnion, Equifax
• CRA must provide accurate credit reports to those
  who request the report

20
Fair Credit Reporting Act

• Examples
• Jane Smith requests a copy of her credit report
  from the credit agency. The credit agency
  informs Jane that she is not allowed to receive a
  copy of her report.
• Jane Smith goes to the bank for a car loan. She
  is rejected for the loan because her credit
  report reflects several missed payments on her
  home mortgage. However, Jane has in fact made
  all her mortgage payments on time, and for the
  full amount due.

21
Fair Credit Billing Act

• Protects consumer from unfair billing
• Consumer can write letter to credit card company
  regarding unfair billing, and it should be
  resolved within 60 days.
• For over-billing, damaged goods, wrong charges to
  account, etc.

22
Fair Credit Billing Act

• Examples
• John Doe purchases ski equipment from an internet
  sporting goods site. Upon receipt of the
  merchandise, John discovers that the ski poles
  are broken. However, the seller will not refund
  John for the purchase of the ski poles.
• Jane Smith receives her monthly billing from her
  credit card. On her statement, she finds that
  she has been charged 1,200 for car repairs on a
  car she does not own.

23
Equal Credit Opportunity Act

• Credit company cannot discriminate against race,
  sex, religion, marital status, age, etc.
• Income, expenses, credit history can be
  considered when determining credit
• Everyone has a chance to obtain credit.

24
Equal Credit Opportunity Act

• Examples
• Jane Smith applies for a credit card from Lowes.
  Upon review of her application, Lowes informs
  Jane Smith that she is ineligible for a credit
  card because she is female.
• Jane Smith applies for a credit card at Macys.
  On the credit card application, two separate
  questions state Please list your national
  origin and Please list your religion.

25
Fair Debt Collection Practices Act

• Intended to eliminate abusive practices in the
  collection of debt
• Debt Collector - tries to collect debt from
  consumer who has not paid
• Debt Collector is not allowed to use false
  statements, accuse consumer of a crime, contact
  you at any hour, etc.

26
Fair Debt Collection Practices Act

• Examples
• John Doe does not pay his bills, and is
  consequently contacted by a debt collector. The
  debt collector over-states the amount of debt
  owed by John Doe.
• John Doe receives a phone call from a debt
  collector at 10 p.m.

27
Solving Credit Problems

• The 20/10 rule - Your total borrowing should not
  exceed 20 of your yearly take-home pay
• You should not take on monthly payments that
  total more than 10 of your monthly take-home pay

28
Solving Credit Problems

• Credit Counseling
• Gives good advice, help setting up budget,
  voluntary
• Consumer Credit Counseling Service (CCCS)

29
Solving Credit Problems

• Debt Adjustment
• Debt Adjustment companies charge a fee
  require you to sign a contract.
• A credit advisor will contact your
  creditors to work out a payment plan.
• A credit advisor will supervise your
  budget, sometimes take away your credit cards,
  etc.

30
Types of Bankruptcy

• Involuntary bankruptcy
• Creditors file a petition with the court, asking
  that you be declared bankrupt. Court takes over
  your property and pays debt off as possible
• Voluntary bankruptcy
• Most common kind of bankruptcy
• You ask to be declared bankrupt.
• Court notifies creditors of your potential
  bankruptcy, and they file claims against you.
• Court sells your assets and gives creditors a
  proportional share.
• Balance of debt is discharged

31
Types of Bankruptcy (cont.)

• Chapter 11 bankruptcy
• A form of voluntary bankruptcy where assets are
  re-organized. That is, debtor can keep his
  property, but must submit a plan to the court for
  repaying most of the debt, under court
  supervision. A type of business bankruptcy.
• Chapter 7 bankruptcy
• Called straight bankruptcy
• A form of voluntary bankruptcy where assets are
  liquidated. Wipes out most of the debt in
  exchange for giving up most of debtors assets.

32
Types of Bankruptcy (cont.)

• Chapter 13 bankruptcy
• Called Wage-Earners Plan
• Reorganization form of bankruptcy that allows
  debtors to keep their property and use their
  income to pay a portion of their debts over 3 to
  5 years
• Debtors work out a court-enforced repayment plan

33
Major Causes of Bankruptcy

• Business failure
• Emotional spending
• Failure to budget and plan
• Catastrophic injury or illness

34
Advantages and Disadvantages of Bankruptcy

• Advantages
• Debts are erased.
• Exempted assets are retained.
• Certain incomes are unaffected.
• The cost is small.

• Disadvantages
• Credit is damaged.
• Property is lost.
• Some obligations remain.
• Some debts can be reaffirmed.
• Co-signers must pay.