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Credit Scoring

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Title: How to Give Your Credit A Makeover Author: willvandertoolen Last modified by: USOE Created Date: 6/19/2008 9:52:10 PM Document presentation format – PowerPoint PPT presentation

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Title: Credit Scoring


1
Credit Scoring
  • Presented by
  • Will VanderToolen
  • Director of Counseling Services
  • AAA Fair Credit Foundation
  • www.faircredit.org

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.

5
National Averages
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.

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 Experian
Trans Union Empirica
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
  • 901-990 equals "A" credit 801-900 equals "B"
    credit 701-800 equals "C" credit 601-700
    equals "D" credit 501-600 equals "F" credit

9
Fair and Accurate Credit Transactions Act (FACTA)
  • www.annualcreditreport.com (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
  • www.annualcreditreport.com
  • Mail
  • Annual Credit Report Request ServiceP.O. Box
    105281Atlanta, GA 30348-5281
  • Phone
  • 1-877-322-8228

11
How do I obtain my Score?
  • You can purchase your credit score from each
    bureau
  • www.equifax.com
  • www.experian.com
  • www.transunion.com
  • You can also purchase it at www.annualcreditreport
    .com
  • All three scores may be different (due to reports
    containing different information)

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

13
Whats In Your FICO Score?
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.

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.

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.

17
Types of Credit Used
  • Apply for and open new credit accounts only as
    needed.
  • Dont 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.

18
Credit Maintenance Overview
  • Dont 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 Didnt 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
  • This leads to
  • Qualify for College Qualify for Loan

25
Pop Quiz
  • Needing credit can be like a pop quiz
  • You dont 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 didnt know wanted to borrow
    from you?

27
Credit Score Estimator
  • MyFico.com (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 1199.10 a month
  • Total Cost of payments
  • (1199.10)x(360 months) 419,796
  • Bad Credit
  • Same loan at 8, Payment 1467.53

  • 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 dont 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 isnt unlimited credit
  • Could they restrict themselves, Try

37
Rate Shopping
  • Have students shop around for the best rates on
    bank accounts
  • Dont 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
  • One for each account
  • Having checks doesnt 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
  • 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 semesters 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
  • www.utjumpstart.org
  • www.fdic.gov (Money Smart Curriculum)
  • www.myfico.com
  • www.handsonbanking.com
  • www.nafcu.org (Financial Education Curriculum)
  • www.consumercents.com (Financial Literacy)
  • News Sites
  • Bank and C.U. Sites

45
Questions Answers
  • Will VanderToolen
  • AAA Fair Credit Foundation
  • Director of Counseling Education
  • 800-351-4195
  • will_at_faircredit.org
  • www.faircredit.org
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