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Financial Empowerment Center
Counselor Training Curriculum
Topic 3: Understanding a Credit Report
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Questions to Think About
• What are the different types of credit and why is
credit important?
• What is a credit report?
• How does credit impact future financial goals?
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What is Credit?
• Credit is a trust relationship.
• A party such as a lender, a bank, merchant or
credit card company, known as a creditor, gives
you, the debtor, funds or makes payment on your
behalf so that you can make a purchase or
payment, with expectation that you will pay the
creditor back in accordance with your agreement.
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Why is Credit Important?
Credit is used to judge character and level of risk
• Potential employers and mangers
• Housing and rental decisions
• Lenders (home, car or business)
Lack of credit
• Inconvenience
• No emergency options
Bad credit
• Everything costs you more
• Fewer loan options
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What Does Credit Actually Cost You?
AMOUNT OF
PURCHASE
MINIMUM
MONTHLY
PAYMENT
4%
INTEREST
FINAL
TIME TO
YOU WILL
COST OF PAY OFF
PAY
PURCHASE
$500
$20
$131.36
$631.36
31 Mos.
$2,000
$80
$525.24
$2,525.24
31 Mos.
Assume an 18% interest rate
Assume an 18% interest rate
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Real Cost of Credit Terminology
• Interest: The amount a borrower pays to use
someone else’s money
• Annual Percentage Rate (APR): The annual cost of
using the credit for the year; the figure includes
interest, transaction fees and service charges if any.
This is the charge when a borrower carries a balance
• Annual Fee: The cost of having the use of a credit
card, or having access to the use of the credit per
year
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Terminology
• Finance Charge: This is the actual amount the
borrower pays for using the credit for the year
• Origination Fee: The cost of setting up a loan; this
usually applies in the case of a mortgage or real
estate loan
• Loan Term: The period of time over which the
borrower has to repay the loan
• Late Fees: The penalty that a borrower must pay if a
payment is made late. This is in addition to the
interest that is calculated.
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Terminology
• Minimum Payment: Usually at least 2% of the
outstanding balance. Most creditors will set a
minimum of $15 or $20/ month. Minimum payments
have been rising recently.
• Grace Period: The number of days that a borrower
will not have to pay interest. A good strategy is to pay
off the balance within the grace period whenever
possible.
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Benefits of Credit
• Emergencies
• Safety and Convenience
• Extras – bonus points/miles
• Tool for Managing Your Money
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Types of Credit
•
Credit Cards/Revolving Credit: Credit limit decreases
as account is used, and increases as balance is
repaid.
•
Installment Loan: Usually for larger purchases such as
car loan or appliances. Payments are set at a fixed
amount payable monthly until the full amount and
interest are paid in full.
•
Mortgages: A loan made in which the borrower’s
collateral securing the loan is real estate.
•
Student Loans (covered in separate module)
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Establishing Credit
• How to Build Credit History
 Establish savings and checking accounts
 Obtain credit cards and installment loans
• Establish a Banking Relationship for the Long-Term
 Will products and services offered fit my future
plans?
 Handle your accounts responsibly
 Get to know your branch manager
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Potential Lenders & Creditors
Triple C’s
• Character
• Capacity
• Capital
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• CHARACTER – Does the Borrower Appear Fiscally
Responsible?
 A good credit report and score
 A good past history of paying on time
 A set of good financial and personal references
• CAPACITY – Does the Borrower Have the Ability to Repay?
 Is the applicant employed?
 Are there other sources of income?
 What are the applicant’s expenses (is there net income
after expenses – refer to budget form from Session I, i.e.
cash flow)?
• CAPITAL – Does the Borrower Have Capital?
 Does the applicant have any savings, or investments?
 Does the applicant have any collateral such as real estate?
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Your Free Credit Report
• Mail
 Write letters to the three credit bureaus: Experian,
Equifax, and TransUnion requesting a free copy of your
credit report.
 Your letter should include your:
Full name including middle initial and suffix (Jr., Sr., II, etc.)
Date of birth
Social Security number
Current mailing address
A prior address if your current address is less than 2 years
If you are married, separate requests should be made for husband
and wife.
 Proof of mailing address by copy of 2 utility bills.






• Telephone
• Online: www.annualcreditreport.com
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To Obtain Free Credit Report
CREDIT
REPORTIN
G AGENCY
ADDRESS
TELEPHONE
NUMBER
WEBSITE ADDRESS
EXPERIAN
EXPERIAN
P.O. Box 2104
Allen, TX 75013
To obtain a report
1-888-397-3742
WWW.EXPERIAN.COM
EQUIFAX
EQUIFAX
INFORMATION
SERVICES LLC
P.O. Box 740241
Atlanta, GA 30374
To request a report
1-800-997-2493
Customer Service
1-800-685-5000
WWW.EQUIFAX.COM
TRANSUNION
TRANSUNION
CONSUMER
SOLUTIONS
P.O. Box 2000
Chester, PA 19022
To request a report
1-800-888-4213
Customer Service
1-800-916-8800
WWW.TRANSUNION.COM
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Credit Score
• Score is not free
• FICO Score – Fair Isaacs
Company Score
• Three Credit Bureaus’
Scores
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Score Determines Interest Rates
• FICO scores range 300-850
• Each credit bureau uses slightly different system,
but are generally based on FICO
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Calculating Your Score
35%: Punctuality of payment in the past (only includes
payments later than 30 days past due)
30%: The amount of debt, expressed as the ratio of
current revolving debt (credit card balances, etc.)
to total available revolving credit (credit limits)
15%: Length of credit history
10%: Types of credit used (installment, revolving, real
estate)
10%: Recent search for credit and/or amount of credit
obtained recently
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Reviewing a Sample Credit Report
• Merged report – shows
information from all 3
bureaus
• Summary page
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• Check to make sure
addresses are yours
• Check employer
information
• Aliases – maiden name,
nicknames, adopting
name upon citizenship,
name changes
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Sample Credit Report
Scores given by each
company may vary
based on scale and
information available
to them
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Sample Credit Report
Merged credit score was
615 when information
from all 3 reports
aggregated
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Sample Credit Report
Factors impacting score
• Balance on revolving
loans too high
• Short credit history
• Too many active accounts
with balance
• Not enough Installment
Debt Experience
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Strategies for Credit Repair
•
•
•
•
Immediately report any errors
Start paying on time
Severely delinquent payments – talk to creditors
Obtain secured credit card
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Correcting Errors
• To dispute or correct credit reports, make sure you utilize
your 100-word statement
• Write to the Credit Bureau that supplied the information
In your letter be sure to include:
 Full name including middle initial and suffix (Jr., Sr., II, etc.)
 Date of birth
 Social Security number
 Current mailing address
 If applicable, the name and account number of the creditor and item
in question
 The specific reason for your disagreement with the disputed item
 Your signature
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How to Repair Credit
Passage of Time:
• Negative information reported for 7 years
• Chapter 7 Bankruptcies reported for 10 years
• Chapter 13 Bankruptcies reported for 7 years
• Criminal records – no time limit
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How Do Credit Decisions Affect Financial Goals?
• Credit cards / Revolving credit; Installment loans;
Mortgages; Student loans
• Creditors look for triple C’s – Character, Capacity &
Capital
• Lack of credit allow for fewer loan options and no
emergency outlet
• Credit provides safety and convenience and tools for
managing your money
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How Do Credit Decisions Affect Financial Goals?
Case Study (handout) # 2
How would counsel Marta and Bobby about their rights
as consumers, and advise them on how to handle their
credit card debt and why, applying the principles
presented in class and in your reading.
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