Chapter 17
Credit Records and Law
Section 17.1
Establishing Good Credit
Goals / “I can…”
Describe what’s in a credit score
 Describe where you can find your credit
score
 Describe ways to protect your credit
identity in our digital world
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Pay bills
on time?
Pay debts according
to loan agreement?
credit history – complete record
of your borrowing and repayment
performance
How much do
you owe?
How large are the
payments you owe?
credit bureau – company that gathers,
stores, and sells credit information to
business subscribers
How Credit Bureau
Processes Information
Open a new credit
account
Credit bureau
enters info in
credit file – info is
available to view
Details about
credit transactions
are gathered
Once a month,
business transmits
data about your
activity to credit
bureaus
Customer uses
credit and makes
payments
Business records
the transactions
Can be ordered
online
Can be by
writing to a
credit bureau
credit report – written
statement of a consumer’s
credit history issued by a credit
bureau to its business
subscribers
annualcreditreport.com
**One free credit report per credit bureau per year**
Checkpoint Question!!
Getting Credit Information
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Credit bureaus get info from subscribers
◦ Subscribers pay a monthly fee
◦ Subscribers supply information about
customers to the credit bureaus
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Credit bureaus get info from:
◦ Newspaper articles
◦ Public records
Who has an Interest in
Credit Information?
Retail businesses
 Banks
 Employers
 Landlords
 Insurance Companies
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Creditworthiness
Five Qualifications -5 C’s
1. Character
2. Capacity
3. Capital
4. Conditions
5. Collateral
1st Qualification of Credit-Character
Will you Repay?
 Responsible attitude to go what you say
you’ll do
 Pay on time
 Stability – may be used as a measure
◦ How often have you moved?
◦ More stable you are—better the credit risk
2nd Qualification of Credit-Capacity
Can you Repay?
 Financial ability with present income
 Want to be sure your income is enough
to cover the loan amount
3rd Qualification of Credit-Capital
Is there protection if you don’t pay?
 Do you already owe a lot of debt?
 Is what you own greater than what you
owe?
 Would your assets cover the payment of
the debt?
4th Qualification of Credit-Conditions
What might impact your ability to repay?
 Current economy
 How secure is your job?
 How’s the company you work for doing?
 Is there a demand for people in your field
or occupation?
5th Qualification of Credit-Collateral
What assets do you have?
 Do you have any thing of value?
Possessions?
 Can possessions be sold easily? Quickly?
Ways to Get Started with Credit
Be sure you have a savings account
 Open a checking account when you obtain a
job—record transactions/check
balances/reconcile
 Establish credit by:
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◦ Opening store credit account/card—Gap, Macy’s
◦ Obtaining a small loan from a bank or credit
union
◦ Obtain one credit card—Visa or MasterCard
**Be sure you pay on time and
make all payments!!**
credit rating – a measure of
creditworthiness based on an
analysis of the consumer’s financial
history
Credit Rating Systems
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Point System
◦ Credit bureau assigns points
◦ Points are based on certain factors
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Amount of debt
Number of late payments
Number of accounts
Current employment
Amount of Income
Ratings—Excellent/Good/Fair/Poor
◦ Rates based on how reliably they pay back
money borrowed
◦ Subscribers make own rating decisions
FICO Score
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FICO stands for Fair Isaac and Company. Their scores are
the credit scores most lenders use to determine credit
risk.
Each person has three FICO score, one for each of the
three credit bureaus. As information changes, so does
your score.
FICO scores affect the loan terms, such as interest rate,
that you will be offered.
To calculate a FICO score, you must have at least one
account open for at least six months.
Your scores may be different at each of the credit
bureaus because of varying information collected and
slight differences in the way the rating system is applied.
FICO Score Breakdown
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Payment History (35%) is rated based on how you pay
your debts; the presence of bankruptcy, liens, or collections,
and whether accounts are past due or paid as agreed.
Amounts Owed (30%) is rated based on the amounts
owed on accounts, amounts on specific types of accounts,
lack of balances, and proportion of credit line used.
Length of Credit History (15%) is rated based on the
oldest account opened and the average age of all accounts.
New Credit (10%) is rated based on the number of
recently opened accounts and the number of recent credit
inquiries.
Types of Credit Used (10%) is rated based on the mix
of credit accounts, such as credit cards, retail accounts,
installment loans, mortgages, etc.
Excellent Credit Rating
730+
 Also called an A Rating
 Customers must pay bills
before the due date
 Customer is well established
 Customer has used credit for many years
 Customer has paid off debts/loans early
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Good Credit Rating
670 - 730
 Also called an B Rating
 Customers must pay bills
on
the due date or within
the grace period (usually 10 days)
 Customer doesn’t miss any payments
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Fair Credit Rating
585 - 670
 Earned by customer who
usually pays with grace
period
 Customer may occasionally take longer to
pay
 Late charges are sometimes applied
 Usually don’t need a reminder
 Slow to pay—but pretty dependable
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Poor Credit Rating
Below 585
 Usually have payments that aren’t paid on
a regular basis
 Miss monthly payments
 Need reminders about making payments
 May have not paid back a debt
 May have filed for bankruptcy
 May have been denied credit previously
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Credit Reports
 May
be requested for lots of reasons
 Investigating credit applications
 Employment applications
 Insurance matters
credit report video
What’s in a Credit Report?
1.
Summary Information
◦What to look for in report
◦Outlines +’s and –’s
◦Shows favorable items
2.
Public Record Information
◦ Lawsuits, legal issues
◦ Marriage, divorce, adoption
3.
Credit Information
◦List credit accounts
◦Gives details of the accounts payment status
What’s in a Credit Report?
4.
Account detail
◦Monthly balances
◦Lists credit limits
5.
Request for credit history
◦ Lists businesses requests credit information
from the file
◦ Examples are employers, creditors,
insurance companies
6.
Personal information
◦Name/previous names
◦Contact information/birthdate/SS#
Reading a Credit Report
Sample Credit Report
Consumer Credit Protection Act
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Passed in 1968
Also called the Truth-inLending Law
Requires lenders to
fully inform consumers
about all costs of a
credit purchase
Needs to be disclosed
before the agreement is
signed
Lenders need to disclose:
◦ Finance charge
◦ APR – consumer can
compare costs from other
lenders
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Allows for a grace
period of 3 business
days to change your
mind about an
agreement
Limits consumer’s
liability to $50 after a
credit card is reported
lost or stolen
No liability if card is
reported lost or stolen
and then someone else
uses it
Fair Credit Reporting Act
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Passed in 1970
 A small fee may be
Consumers have the right charged at other times
to know what’s in their
 Have the right to have
credit file
inaccurate info
Consumers have the right investigated, corrected or
deleted
to know who has seen
their credit file
 You can comment on
your credit file—give
A listing of requests to see
your side
your credit in the last six
months or two years –
 Your comments about
depending on the information your credit file can be
must be available for you
added to your file
Allowed to see your credit
file at no charge within 30
days if you are denied credit
Fair Credit Billing Act
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Passed in 1975
Creditors must resolve
billing errors within a
specified period of time
Creditors need to have
policies to correct
errors in billing
Consumers need to
take responsibility to
correct errors on credit
card bills
◦ Letter explaining the problem
◦ Letter should include account
number and information
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Complaints need to
be in writing
Complaints should
be mailed within 60
days from receiving
the statement
Creditor must
acknowledge your
complaint within 30
days
Creditor must
correct or explain
why bill is correct
within 60 days
Equal Credit Opportunity Act
Passed in 1975
 Designed to prevent discrimination
 Can’t be denied credit for the following
reasons:
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◦ Gender, martial status
◦ Religion, national origin, race, color, age—
(minors may be exception)
◦ Receive unemployment, social security or
retirement benefits
Equal Credit Opportunity Act
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Creditors can’t ask certain questions – plans
for having children, etc.
Creditor can’t discourage you from applying for
credit
Creditors have to notify you of actions taken on
credit application within 30 days of applying
Denial of credit must be in writing
Creditor needs to keep information about the
denial
You have the right to appeal a denial
Requires that both husband and wife are
responsible for debt
Fair Debt Collection Practices Act
Passed in 1978
Designed to eliminate abusive collection
practices
 Regulated techniques used by debt collectors
 Debt collectors aren’t allowed to:
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◦ Use threats, obscenities, false and misleading
statements
◦ Intimidate consumers into paying
Debt collectors can’t call at place of employment
or in the middle of the night
 Debt collectors have to verify of the bill is
accurate
 Consumers need to have a chance to clarify or
dispute the bill
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Credit Cardholder’s Bill of Rights
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Passed in 2010
Protects consumers
against unfair
lending practices:
◦ Arbitrary rate hikes
◦ Double-cycle billing
Consumers have right
to review their rates
and have them
reduced
Fair allocation
of payments
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Payments must be made
toward higher interest rates
first
No fees for paying bill early
Consumers have to have
enough time to pay their bill
No tricks/gimmicks dealing
with paying the bill by a
certain time on a due date
Protection for cardholders
under age 21
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Now it’s time to play a quick review game
to see if you guys understood what we
went over…………….
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Go to
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