Credit Concepts
I
Helping People Improve & Protect Their Credit
Your Name – Your Business
Credit Concepts
Helping people improve and protect their credit
Workshop Goal
Provide usable information to help you manage
and protect your credit worthiness.
Learning Objectives
Understand the Principles of Credit
Learn How Credit Affects Financing
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Credit Concepts Quiz
1. What do lenders such as mortgage brokers and other creditors
use your credit report and score for?
2. What are the three “C s” that a creditor considers when
determining your approval for a loan?
3. Who has created the credit scoring formulas that lenders use
for determining credit scores?
4. You are entitled to a free copy of your credit report every ?
5. How long will most items remain on your credit report?
6. Your credit affects your life in which of the following areas?
Your Name – Credit Expert
The 3 C’s of Financing
Credit Concepts
Helping people improve and protect their credit
After 1980:
Before 1980:
Assets Securing a Loan
Collateral
Assets Securing a Loan
Income and Years of
Employment
Capacity
Debt to Income Ratio
Relationship With Banker
Character
Credit Score
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
The 3 C’s – What Changed?
 What Changed after 1980?
–
Mortgage loans were grouped together into investment
portfolios and sold on Wall Street.
–
Investors then required that the loans in the portfolio met
STANDARDIZED parameters.
–
Credit scores became the method of standardizing a
borrower’s Character.
–
Today, most financing has become credit-score driven,
making “managing our credit worthiness” a necessity.
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
The Cost of Bad Credit
These figures are based on a mortgage loan of $100,000 for 30 years
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
The Role of the Credit Bureaus
 TransUnion, Equifax, & Experian
– Profit-making companies
– Gather data about consumers from creditors and public records depts.
– Sell consumer data to the financial industry in the form of credit reports.
 Their Affiliation with the Financial Industry
– The credit bureaus’ customers are financial institutions (banks, creditors).
– Financial Institutions want to avoid lending to bad credit risks.
– Credit bureaus protect financial institutions by reporting ANY “potentially”
negative credit data about consumers – often resulting in credit reporting errors.
 What Does This Mean?
– Credit bureaus have no incentive to correct errors (which hurt scores). Creditors
prefer more errors than less to assure they are lending to good credit risks.
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Errors In Your Credit Report
 30% of all credit reports contain “serious” errors that
result in the denial of credit, such as:
– Paid items still showing an unpaid balance
– Medical items sent to collection prior to insurance payment
– Someone else’s items reporting; people with similar names or
family members
– Items reported in bankruptcy still showing balances owed
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
What’s In Your Credit Report?
 Personal Information
– SSN, Driver’s License, Birth Date, Employment
Information, Previous Addresses, and Name Aliases
 Trade Lines
– Open and Closed accounts
 Collections, Bankruptcies, Judgments, & Late Payments
 Inquiries
All positive and negative accounts report for 7 years
from the date of last activity, excluding bankruptcies
(10 yrs) and unpaid tax liens (15 yrs)
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Credit Scores
 Scores range between 300-850
 Excellent Credit: 700 and above, excellent interest rates
 Mediocre Credit: ~600 to ~700, loan qualify cutoff
 Bad Credit: ~600 and below, need restoration
Score distribution among U.S. population
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Who Is FICO?
 Fair Isaac Corporation (FICO)
– Established in 1956
– Creates risk models (formulas) used by the financial
industry to generate credit scores
– Risk model formulas are trade secrets of FICO and are
not shared with financial institutions or credit bureaus
– Different risk models (formulas) are used for different
types of financing, generating different scores
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Key #1 - Payment History
 Payment History
– How well we make payments on time in the past 24 months
– 35% of score
– Considers positive accounts
• Such as: auto loans, credit cards, mortgage loans, etc.
– Considers negative accounts
• Such as: collections, judgments, bankruptcies, late pays, etc.
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Key #2 - Utilization Ratio
 Ratio of total credit card debt to credit limit should
be no more than 30%.
 Closing accounts with high credit limits will increase
your utilization ratio and decrease your credit score
 Example: $3,000 of debt with a $10,000 credit limit
= 30% utilization ratio
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Key #3 - Credit Inquiries
 Inquiries that DO affect credit score: HARD inquiries”
– Reported when applying for credit
– Auto and mortgage inquiries in any 14 day period count as one inquiry
– Recent inquiries (prior 1-2 months) have the most impact on scores
– Impact score less than 5%. (Rarely more than 10-15 points)
 Inquiries that DON’T affect credit score: SOFT inquiries
– Your own requests for your credit report
– Promotional offers
– Your current lenders and collection agencies
– Prospective employers and insurance companies
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Credit Counseling Ruins Scores
 Credit Counseling Companies:
– Negotiate with creditors to make partial payments and lower
interest rates
– Stop credit harassment through the limited power of attorney
 The Problem:
– Part of each payment pays counseling fees, so less money is used
to pay down the balance
– Payments REPORT AS LATE on credit reports
– Viewed as a chapter 13 bankruptcy by many lenders
– IT IS NOT DEBT CONSOLIDATION
Your Name – Credit Expert
Credit Concepts
Helping people improve and protect their credit
Thank You For Your Time!
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 QUIZ ANSWERS
1. (B) & (C) Credit scores affect interest rates and down payments. Income is not reported.
2. (C) Character, Capacity, Collateral
3. (D) Fair Isaac Corporation
4. (C) 1 free credit report every 12 months
5. (C) Most items remain for seven years.
6. (A), (B), (D) Investing does not require credit.
Your Name – Credit Expert
Next Workshop:
–How to Improve Your Credit Score
–How to Protect Your Credit and
Identity