Creditworthiness (UXL)

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Constance Bishop
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Creditworthiness (UXL) Since so much debt is unsecured, it is important for companies to have information on how well their potential borrowers handle money in order to assess their creditworthiness,

1 Creditworthiness (UXL) Since so much debt is unsecured, it is important for companies to have information on how well their potential borrowers handle money in order to assess their creditworthiness, or the likelihood that they will pay back the loan. Credit reporting agencies (CRAs; also known as credit bureaus) keep track of how much credit has been given to each borrower, how much they have used, and how responsible they have been in paying it back. The CRAs assign each person a credit score a statistical measurement of a borrower's credit-worthiness that indicates the person's ability to repay a loan. Information gathered by the CRAs is used for more than just credit. Employers look at job applicants' credit history to find out whether they are responsible and trustworthy. Landlords do a credit check to see whether potential tenants are likely to be able to pay their rent. Insurance companies review credit history to find out whether an applicant is a good risk. Having a good credit credit score can save thousands of dollars in interest over the life of a loan. Over the life of a $10,000 thirty-six-month auto loan, for example, a person with a low credit score might pay over $2,000 more in interest than a person with a high credit score. Consumers can use online services to learn their scores from any or all of the three credit bureaus, TransUnion, Experian, or Equifax. NETPHOTOS/ALAMY Credit reports There are three CRAs in the United States: Equifax, Experian, and TransUnion. Each agency collects slightly different data, but, in general, credit reports contain: Identifying information such as the borrower's name(s), Social Security number(s), current and previous addresses, telephone numbers, birth date, and employers. This information helps ensure that a credit report contains accurate information about the borrower and does not include information on other people who might have the same name.

2 Information from public records, such as bankruptcies, foreclosures, tax debt, child-support and alimony payments, and other judgments or court-ordered payments. Lists of the borrower's credit cards and loans, with information about how much credit was made available to the borrower and whether payments have been made on time. Information about which companies have requested copies of the report. Given the amount of data and the numbers of people with the same name, credit reports often contain errors everything from the spelling of the borrower's name to more substantial information about payments. Individuals are responsible for making sure their credit reports contain correct information. Negative information about credit can stay on a credit report for seven years, information about bankruptcies for ten years, and information about taxes for fifteen years. Because mistakes are so frequent and can have significant consequences, federal law requires the CRAs to provide individuals a free copy of their credit report once every twelve months. Although there are many agencies and companies that offer free credit reports, credit score reports, and/or credit monitoring, these are usually only free for a limited time and then a monthly fee is charged thereafter when the person has likely forgotten about signing up for the service. The best way to get free credit reports is by writing the government-authorized Annual Credit Report Request Service at PO Box , Atlanta, GA , or going online at Also, if a borrower is denied credit on the basis of a credit report, the lender must inform the borrower which credit reporting agency provided the report. The borrower can then request a free report within sixty days of the denial. If mistakes are found, the Fair Credit Reporting Act gives the borrower the right to dispute inaccuracies and omissions, and it requires credit bureaus to investigate the complaint and send a prompt response. A borrower who finds mistakes should notify the credit reporting company about the mistake in writing and include copies (not originals) of any documents that substantiate the claim. The letter should clearly identify each item in the report that the borrower disputes, state the facts, explain why the report is incorrect, and request that the error be removed or corrected. Credit scores Since credit reports are long and complex, many lenders prefer to use a simple numerical representation of a borrower's creditworthiness: a credit score. There are several credit scores on the market, but most lenders use the one compiled by the Fair Isaac Corporation (FICO). FICO scores range from 300 to 850, with a higher score indicating higher creditworthiness. Although the exact algorithm, or formula, used to calculate the FICO credit score is a trade secret, it is generally agreed that the score is affected by the following categories, listed in descending order of importance, as indicated by a percentage. (See the chart Components of a FICO Credit Score.) Payment history (35 percent): Do borrowers pay their bills on time? Records of delinquent payments, bankruptcies, judgments, tax liens, accounts that have been referred to collection agencies, repossessions, and foreclosures all count against borrowers in this section, especially if they have occurred within the last two years. Amounts owed and available credit (30 percent): How much credit does a borrower have available, and how much is he currently using? Here the company looks both at the amount of credit a borrower has been given and how much she is currently using. Borrowers who have used less than 10 percent of the credit available to them usually score well in this category. Length of credit history (15 percent): Lenders are looking for a long history of consistently made payments. The longer an account has been open, the better. Younger borrowers generally do not score well on this section because their credit history is relatively short. New credit-number of credit inquiries (10 percent): This section measures how often a borrower has applied for credit. A borrower who has tried to open a lot of accounts or apply for a lot of loans gets fewer points. The agency does make an allowance for borrowers who are simply

3 shopping for competitive rates on car loans or mortgages, so similar inquiries made within a fourteen-day period only count as one inquiry. Requests made by the person himself or herself of course do not count either. Types of credit used (10 percent): Lenders look for borrowers who have a number of different kinds of credit; for example, a mortgage, a car loan, installment debt (such as department store purchases), and credit card debt. A borrower with only one kind of credit will not get as good a score. Components of a FICO Credit Score What's in My FICO Score. Fair Isaac Corporation, (accessed December ). CENGAGE LEARNING Unlike credit reports, credit scores are not free. The three credit reporting agencies make them available through the website In early 2015, the cost was $19.95 for one agency's score and $59.85 for all three. Borrowers should not need to check their credit scores very often. Unlike credit reports, there is no way borrowers can dispute or change their scores. The only time it is necessary to know the score is before applying for credit. That way borrowers can adjust their expectations for credit availability and interest rates. They can also take steps to improve their score before seeking credit so that they are eligible for a better rate. Credit repair services Borrowers should be wary of businesses that claim to be able to fix their credit. If the items on the credit report are accurate, there is no way a credit repair business can change the borrower's score. If they are not accurate, borrowers can improve their own credit for free simply by requesting their credit reports and challenging any items that are not accurate. A credit card is an open-ended loan. The bank or credit card company agrees to lend the borrower any amount up to a specified maximum amount, called the credit limit. The bank then issues the borrower a plastic card that the borrower can use to buy goods and services. When the borrower charges something on the credit card, the bank lends that amount to the borrower. The borrower can pay that money back at the end of the billing period (usually one month), or she can keep the loan open, in which case the bank charges her interest until she pays the money back.

Every credit card transaction involves four parties: the buyer, the bank that issues the card to the buyer (called the issuing bank), the seller, and the bank or service that processes the payments

4 Every credit card transaction involves four parties: the buyer, the bank that issues the card to the buyer (called the issuing bank), the seller, and the bank or service that processes the payments for the seller. The issuing bank contracts with Visa, MasterCard, or Discover to handle their cards; American Express acts as its own issuing bank. The seller pays a fee to both the issuing bank and the bank or service that processes the payments, so the amount that the seller gets for the purchase is less than what the buyer pays. The seller accepts this lower amount because credit cards, unlike checks, can guarantee that the seller gets the payment. Also, buyers like the convenience of using credit cards and may spend more at stores that offer them. Credit cards are convenient to use and allow consumers to pay for purchases over time, but they can lead to overspending and increased costs because of interest rates. ABLEIMAGES/ALAMY Cards that look like credit cards but are not Since so many people carry payment cards, it is important to realize that not all of them are credit cards. The most common type of noncredit card is the debit card. Debit cards are issued by banks and let the user access the money in her checking or savings account. Debit cards charge the user's account immediately. If there is not enough money in the account, the debit card will be declined. There is no credit involved. Debit cards have the advantage of convenience. Like credit cards, they are fast and are accepted nearly everywhere because they are usually part of the Visa or MasterCard systems. Like credit cards, they also allow users to track their purchases. For young people, they are also easier to get than credit cards. On the other hand, debit cards do not have the same protections as credit cards in the event that a card is lost or stolen or if someone fraudulently charges purchases to the account. Buying with debit cards does not help build a credit history, and the fees for with-drawing too much on a debit card are the same as what banks charge for writing checks with insufficient funds. Another type of card often confused with credit cards are prepaid cards. These are often marketed to teens and young adults, especially since credit cards are less available to them. Cards like Visa Buxx, the BillMyParents card from MasterCard, and American Express's Bluebird card are specifically aimed at young people; young people might also get gift cards from stores like Macy's or or food service establishments like Starbucks. Prepaid cards and gift cards work the same way. The buyer of the card loads the card by paying cash. The cardholder can spend only as much as the buyer has put in. Afterward, the card must be reloaded, or it is useless. Again, there is no borrowing involved.

5 Like debit cards, prepaid cards offer many of the conveniences of credit cards. For younger spenders and for buyers on a budget, they provide the convenience of a credit card without incurring debt. But they also have some substantial disadvantages. Some prepaid cards have fees for loading the card, checking the balance, calling customer service, etc. Some have monthly maintenance fees. And if the card is not used, some have inactivity fees. The sales documents for these cards do not always reveal all the fees. Although some prepaid cards have reasonable terms, buyers should read the fine print. "Credit and Debt." UXL Money: Making Sense of Economics and Personal Finance. Julia Garbus. Ed. Shawn Corridor. Vol. 3: Personal Finance. Farmington Hills, MI: UXL, Web. 19 Aug URL w=w&asid=ffc04e1d5a01a0bba14bff6543d22fb7

Reviewing C YouR CRedit RepoRt

ChapteR 2 Reviewing C YouR CRedit RepoRt What do your creditors have to say about the way you handle money? Having a good credit score can help you turn your home-buying dream into a reality. There s much