UNDERSTANDING CREDIT KASFAA Conference Manhattan, KS April 21, 2016 Robb Cummings Director of Business Development
FICO Score 2 A FICO Score is a three-digit number calculated from the credit information on your credit report at a particular point in time. It summarizes information in your credit report into a single number than lenders can use to assess your credit risk quickly. Components of Your FICO Score FICO Scores fall within the 300-850 score range. Learning your FICO Score can help you better understand your credit risk. A good FICO Score means better financial options for you
Why FICO Score Matters According to TowerGroup, the FICO Score makes up 90% of the credit scores purchased by lenders. US News and World Report states, The FICO Score is the No.1 piece of data to determine how much you ll pay on a loan and whether you get credit. Regulators widely accept the FICO Score as a trusted, reliable credit risk model standard, which FICO has helped shape over the last 20 years.
FICO Score Ranges With a FICO Score, the higher the score the better it is. The below chart shows a breakdown of FICO Score ranges found across the U.S. consumer populations. You can estimate your FICO Score at SallieMae.com/EstimateScore
FICO Score Factors When you receive your FICO Score, you ll often receive several reasons why your score was not higher. These factors are important because they ll give you an idea of how you can better manage your financial health. Score factors include: The amount you owe is too high You owe too much on past-due accounts You owe too much on revolving accounts (e.g. credit cards) You owe too much on your installment accounts relative to the original amount You have a recent public record or collection on your credit report You don t have enough revolving accounts to be evaluated Get ideas on how to manage your credit score at: SallieMae.com/Score
Tips for Improving FICO Pay all your bills on time If you have missed payments, get current and stay current. Keep balances low on credit cards and other types of revolving credit Apply for and open new credit accounts only as needed. Don t open accounts for the purpose of providing a better credit picture it probably won t raise your FICO Score and, in some instances, may even lower your score Monitor your credit report. You can get a free report annually from each of the three major credit bureaus at annualcreditreport.com. Check for errors periodically to ensure you have not become the victim of identity theft Pay off debt rather than moving it from one credit card to another. The most effective way to increase your FICO Score in this area is by paying down your total credit card debt Manage credit cards responsibly. Keep any balances low and always pay your bills on time. Closing credit cards will not increase your score and may actually lower it slightly. If you have been using credit for only a short time, don t open many new accounts quickly, as rapid account build-up can lower your score While having student loans to pay may limit your discretionary spending for a time, it can also help you build a solid credit history if you are making regular, on-time payments. And that can pay off in the future when you borrower for a car, a home, or other items on credit.
Credit Report: Overview When you apply for credit, the company from whom you re requesting it will check your credit report from one or more of the major consumer reporting agencies: TransUnion Equifax Experian Credit reports differ from credit scores A credit report is a detailed view of your outstanding credit, payment history, and public records Credit reports are provided by one of the three major consumer reporting agencies A credit score is a number calculated using the information in your credit reports, how many times lenders requested information, and any collections, among other items FICO is a leading provider of credit scores There are other credit scores available; they may vary because the companies calculate credit factors differently Your credit score does not appear on your credit report
Credit Report: Reviewing your credit Why you should review your credit report Credit reporting companies sell the information to lenders and other businesses that use it to evaluate your applications for credit The information in the report can impact whether you ll qualify for a loan (student, home, auto) and how much interest you ll have to pay Potential employers may be able to view your credit which could affect whether you get a job When you should review your credit report Annually, to make sure there are no mistakes Before an activity that requires a loan, like applying for a student loan, purchasing or leasing a car, or buying a house How you can review your credit report The Fair Credit Reporting Act (FCRA) requires each nationwide credit reporting company to provide you access to free copy of your credit report every 12 months Request a free copy each year at AnnualCreditReport.com or call 1-877-322-8228
Credit Report: What it includes Each credit reporting agency s report may look different, but they all contain: Your identifying information The amount of credit available to you The amount of credit you re using A record of whether you make payments on time or are delinquent Collection activities
Credit Report: Personal information Personal information: Information that distinguishes you from others with similar names: Name Current and previous addresses Social Security number Telephone number Date of birth, etc. Employment information: Past and present employers, your position, and when you were hired
Credit Report: Account and Public Record Information Account Information: Your entire credit history, including student loans, auto loans, mortgages, and credit cards Opened and closed credit accounts Credit limits Public Record Information: Publicly available reports on: Delinquent accounts Liens Bankruptcies Lawsuits, etc. A public record can remain on your credit report for a number of years, depending on the type of account.
Credit Report: Inquiries, Messages, Contact Information Credit Inquiries: People or companies who have requested your credit report, the date they requested it, and the reason for the request, over the past two years. Businesses must have a legitimate reason to access your report. Special Messages: Notes about your credit report; these can include discrepancies within your personal information or reported fraud or theft. Bureau Contact Information: Who to contact if you see mistakes or have questions about anything in your credit report.
Credit Report: Correcting errors Check your credit report once a year to make sure there are no errors or fraud; if you do find something: Write to the credit reporting company about the error and include supporting documents (and keep a copy of your letter!) The company generally has 30 days to investigate the issue If they find there is an error, they have to notify all three major credit reporting companies Guard against identity theft: Thieves can use your name or Social Security number to open new credit cards in your name; when the account is delinquent, it can affect your credit If you suspect identity theft, contact the credit reporting company immediately and file a police report
Knowing Your Credit & Student Loans When you apply for your loan, make sure that you know the terms and payment dates. Consider enrolling in automatic debit so you don t have to remember to mail in your payment each month. 14 Is my FICO Score different because I m a college student; do you take my future earning potential into account? No, income and income potential are not considered in FICO Scores. Does taking out a student loan have a negative impact on my FICO Score? Student loans are considered in FICO Scores, along with your other credit obligations on your credit report. When you apply for and open a student loan, the FICO Scores see this as a new request for credit and an increase in the amount you owe on your outstanding loans. A student loan will increase your amount of debt but, as you establish a history of paying your bills on time, lenders tend to view you as being a relatively lower credit risk. I don t start paying my student loan until I graduate; will this harm my payment history? Deferred loans do not harm FICO Scores. In fact, the existence of your loan can help establish the length of credit history and mix of credit. I have the option of starting to pay my student loan while I m in college. Will this impact my FICO Score? When you pay installment loans (loans where you make regular payments, such as a student loan) on time, it shows responsible behavior and lowers total outstanding debt, which does contribute to your FICO Score. Missing or late payments have a negative impact on your FICO Score.
15 Knowing Your Credit & Student Loans Does moving my loan into forbearance impact my FICO Score? Forbearance is a period of time during repayment in which a borrower is allowed to temporarily postpone making regular monthly payments. The debt is not forgiven, but regular payments are suspended until a later time. For example, forbearance may be granted if a borrower is experiencing temporary financial difficulty. The borrower may make reduced payments, interest-only payments or no payments. Your FICO Scores do not consider the fact that a loan is in forbearance, so moving a loan into forbearance would not affect your score. However, your loan is still considered part of your personal credit. Even in forbearance, the amount of your loan will be taken into account and could impact your scores. Does it impact FICO Scores when a loan balance increases due to interest capitalization? Interest capitalization is unpaid, accrued interest that is added to the outstanding principal balance of your loan. Capitalized interest can increase your total outstanding principal balance. Depending on how information is reported to each of the consumer reporting agencies by your lender, capitalized interest could have an impact on a FICO Score.
Knowing Your Credit Credit Cards A credit card can be a good way to build credit. When selecting a card, you should compare different cards Annual Percentage Rates (APR). 16 An APR is the actual yearly cost of borrowing money, including interest and fees, given as a percentage. You should also be aware of hidden fees. If you miss a payment, make a late payment, or exceed your credit limit, you may be charged fees. Here are additional fees to factor into your choice:
17 Knowing Your Credit Credit Cards I ve been an approved user on my parents credit card for the past few years; will that impact FICO Scores? Being an authorized user on your parents account will help establish your credit history and create a profile of your behavior for lenders to consider. Keep in mind that if those payments are late or missed on that account may have a negative impact your FICO Score. Should I open a secured credit card in order to establish a credit history needed for a FICO Score? A secured credit card is like a savings account that you can charge against. Your credit limit is based on the amount that you can deposit. For instance, you put $400 into the account and you can charge up to $400. It may be reported on your credit report as a credit card. A secured credit card can be a great option for people without credit or with poor credit. Before you open a secured card, make sure that the issuer reports to the consumer reporting agencies (Equifax, TransUnion and Experian). Not all secured cards are reported. How many credit cards should I have? There is no one answer for everyone. However, having a single credit card can be risky if you have a large unplanned expense. You may want to consider having more than one card. On the other end of the spectrum, maintaining a large number of credit card can complicate your financial health management. The more cards you have, the more likely it is that you may miss seeing a bill and making a payment.
Financial Wellness Create a budget There are a number of websites that offer models for budgeting. Sallie Mae has a downloadable monthly budget worksheet that can help you stay in control of your finances during college. Create yours at https://www.salliemae.com/collegeplanningtoolbox 18 Pay on time Always pay your bills on time late payments and collections can have a big impact on your FICO Score. Paying off a collection account or closing an account on which you previously missed a payment will not remove it from your credit report. It will stay on your report for 7 years. If you have missed payments, get current and stay current. If you ve had a hard time paying your bills on time, consider signing up for an automated bill pay service. If you re having trouble paying your bills, contact your creditors or seek help from a non-profit credit counseling agency. Don t wait and hope it gets better Manage your accounts Keep your balances low. High balances on your credit cards and other revolving credit can lower your FICO Score. Consider increasing your monthly payments until all balances are manageable. Manage credit cards responsibly. In general, having credit cards doesn t hurt your FICO Score if you make payments on time. People without credit cards, for example, tend to be at slightly higher risk than people who have shown they can manage credit cards responsibly.
Financial Wellness Monitor your score It s a good idea to check and monitor your FICO Score 6-12 months before applying for a big loan. That lets you know where you stand. 19 Correct mistakes If you find mistakes on your credit history, contact the following credit bureaus directly: Equifax Experian TransUnion Equifax.com Experian.com TransUnion.com 800-685-1111 888-397-3742 800-916-8800 For more information on understanding credit, FICO Scores, and your student loans, visit SallieMae.com/FICO
Questions?
The information contained in this presentation is not comprehensive, is subject to constant change, and therefore should serve only as general, background information for further investigation and study related to the subject matter and the specific factual circumstances being considered or evaluated. Nothing in this presentation constitutes or is designed to constitute legal advice. For school use only. Not to be distributed to students.