Take the Quiz.
Get credit towards the protect badge by taking this quiz on what you’ve learned through: go.uillinois.edu/CreditSecretsQuiz.
Slides for the recording can be found at go.uillinois.edu/creditsecretsslides.
By participating in 3 Protect Badge-eligible events, you could earn a digital badge to enhance your online professional portfolio. Learn more about the Financial Literacy Badges Program by visiting: badges.illinois.edu/usfsco.
This webinar was a Money Smart Week event, and we'd like to encourage you to complete the evaluation for today's webinar and look for more events occurring this week (April 24-29, 2017) at moneysmartweek.org/events.
There are a few basics of credit & debt management that are addressed more thoroughly in another webinar, Staying on Good Terms: Credit & Debt...
- Credit is an agreement to receive cash, goods, or services now and pay for them in the future.
- Debt is the amount you owe under such agreements.
- If you don't manage your credit, your debt can easily spiral out of control.
- Your credit and debt show up in your credit file and is used in determining your credit score.
Learn more about credit & debt management through the Staying On Good Terms: Credit & Debt webinar recording.
The CFPB is another great resource for getting your credit questions answered.
There are three major credit bureaus in the United States - Experian, TransUnion & Equifax - who collect financial information that reflects how you manage your money and credit.
These credit reporting agencies are competing businesses and do not share information. You could have different information on each report. The information collected is updated regularly and changes all the time.
Once the information is collected, companies can put together a credit score that represents your credit worthiness.
Be aware that credit REPORTS and credit SCORES are two different things, and the laws that protect you are different for reports versus scores.
Impacts of Your Credit Report
Lenders evaluate your credit report and/or your credit score to determine if they should give you credit.
Since paying debts is so closely related to paying bills, others besides creditors and lenders are now interested in these reports. Your report/score not only affects loans for purchasing a home or car, but also affects
- renting an apartment,
- purchasing insurance,
- acquiring a phone, or even
- seeking employment in some states.
It’s not legal in Illinois for employers to use credit reports when hiring, except in some circumstances. For example, jobs that require handling money are an exception.
Federal law does allow you to be turned down for a job because of something on your credit report.
By federal law, you have a right to one free credit report a year from each credit bureau. You can access your free reports through www.annualcreditreport.com.
There are companies that offer free credit reports with the use of their credit monitoring or management services. With all of them, your “free” credit report will eventually cost you money.
You have the legal right, and responsibility, to check your credit report annually. You do not have the legal right to do this with your credit score – this is one of the differences between legal protections for credit reports vs credit scores. The Fair Credit Reporting Act (FCRA) restricts who can access your credit report and for what reasons.
It’s more important for you to review the information in your credit reports than to worry about a single one of those scores, because the algorithms credit scoring companies sell all use information in your credit report to come up with those numbers. Make sure the data is correct so you get the most accurate scores for whatever you’re trying to accomplish with your credit.
The easiest way to do this is to check all of the 3 bureaus at one site: annualcreditreport.com
- Don’t contact the three bureaus individually for your reports.
- Check all three credit reports of the major credit bureaus.
- They are competing businesses and don’t share information. You may have a mistake on one report and not another.
- There can be differences between the three reports, so review them carefully!
You also can get your credit report for free if you’ve been denied credit or insurance because of your credit history. The business that turned you down should give you the information you need to get your free credit report. You need to contact the credit bureaus directly for these reports.
Content of a Credit Report
What's in a Credit Report?
Your credit report is a record or profile of your credit history. Lenders use your credit report to learn how you have handled your obligations in the past. It helps them to determine the risk of lending money to you.
Businesses report information about you to credit reporting agencies, or credit bureaus. The credit bureaus compile the information into a credit report and sell those to anyone with a “legitimate business purpose” to see it.
Your permission is not required in every instance. For example, your credit history may be accessed without your approval in order to make a preapproved credit offer. In fact, the only instance in which explicit, written permission is required is for employment purposes.
Your credit report has personal identification information, public record information, & collection agency information.
Personal identification information includes: your name, address, date of birth, social security number, and employment. These are used to identify you. Your race, color, religion, national origin, sex, and marital status aren’t in your credit report.
Public record information includes: bankruptcies, foreclosures, suits against you, wage attachments, and liens. Bankruptcies stay on your credit report for 10 years. All of these are things that can happen to you if you don’t repay your debts.
For each record, the following pieces are included: type of record, status, date filed/reported, how filed, closing/released date, court with jurisdiction, amount, and remarks by you or the court.
Collection agency account information identifies any accounts that credit grantors have placed for collection with a collection agency. Creditors can turn even small unpaid amounts – a library fine, for example, over to a collection agency. A collection action is VERY negative information on your credit report.
Also in your credit report is credit account information and the different companies that have requested your file. The credit account information includes the type of account, credit lines, outstanding balances, and payment history.
Your credit report will have a summary of all of your credit accounts broken down by account type followed by a more detailed credit account history section. Your credit account history section contains more detailed information such as the date you opened each account, the balance and limit on each account, and payment history for each account. Your credit report shows every time you made a payment late. That information can stay on your credit report for up to seven years. Good information about your credit use can stay on your credit report indefinitely. Defaults (not paying) on student loans that are government issued or guaranteed can stay on your credit report indefinitely. You will also see information regarding the close date for any accounts that have been closed and if the account was closed due to individual request. Your credit report will show every time you made a payment late.
There’s also information in your credit report about companies, landlords, employers, etc. who have asked to see your credit report. The report distinguishes between requests because of something you did (applied for a credit card) and information to market a product to you.
Many students have a credit report, even if they don’t have a credit card. Do you have a cell phone in your name? If you do, they checked your credit history and that inquiry is on your credit report. Do you have a student loan? If so, that is also on your credit report.
Your credit reports from the three different credit bureaus may vary slightly – or a lot. Lenders decide to which credit bureau they report lending activities; they may report to all three credit bureaus, only one, or none of them.
What's NOT in a Credit Report?
The following information is not in a credit report (by law):
Your race, color, religion, national origin, sex and marital status.
US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
A Summary of Your Rights Under the Fair Credit Reporting Act can be found on the CFPB website.
Errors on Credit Reports
Mistakes can happen, so it is important to check your credit report carefully to ensure that all information is correct. If you have mistakes on your credit report you should contact the credit bureau immediately. Document all interactions and conversations in writing. There’s even an option now to dispute errors right on your digital credit reports if you look them up online.
If the information isn’t wrong – i.e., you didn’t pay the debt and it WAS turned over to a collection agency or you DID make the payment late – no one can remove it from your record. If it’s a collection action and you pay the debt you owe, you CAN ask the creditor to contact the credit bureau to remove the action from your report. And, you can add good credit behaviors to your report – making payments on time, for example – to balance out the negative ones.
The CFPB provides resources for both finding mistakes & disputing errors on a credit report.
One of the most popular credit scoring companies is FICO, develops scores for different purposes. It’s a common belief that you have just one FICO score, but in reality, you have potentially many, many credit scores.
Because many businesses have tens of thousands of consumers apply for their services, they don’t have time to review everyone’s individual credit report. Instead, they view your credit SCORE – a single number that tells them how good a credit risk you are. It’s designed to predict the likelihood that you will pay 90 days or more late in the next 24 months.
Many lenders and insurers use information in your credit reports (and sometimes other information) to calculate your credit score. Fair Isaac Company is a company that creates a credit score known as your FICO score.. Other companies use a credit score that is calculated in a similar but slightly different way. FICO scores can range from 300 to 850. The higher your score, the better. You will probably have to pay to learn your FICO credit score. And it may not be worth it.
Remember, your credit score is affected by your report – you can work to improve your report, which will then improve your score.
What Goes Into a Score?
Payment history makes up the largest amount of your FICO score. Late payments and bankruptcies hurt your score, whereas a history of on-time payments will increase your score.
The total amount you owe on your accounts, the number of accounts you have, and how much of your available credit you are using influence your score. Your credit score will go down as you use more of your available credit.
Think of it this way: if you knew that your friend had already borrowed all the money they could from their parents, other friends, and credit cards, you might be hesitant to lend them more money because they already owe so many other people money and can’t borrow more. You might still loan your friend money, but you might not loan them as much. The same can be true of lenders and credit card companies. You want to use 25% or less of your available credit for a higher credit score.
Other small factors influencing your FICO score are the length of your credit history, any new credit, and the types of credit you use.
Cancelling a credit card you have had for a while will lower your credit score because it shortens the length of your credit history, and may change your credit utlilization ratio (how much debt you have in regards to how much you could borrow).
Inquiries by companies to compile marketing lists doesn’t have any effect on your credit score. And, inquiries by you about your own credit report NEVER has ANY effect on your credit score.
FICO vs VantageScore
Not all scores are used the same. Different companies produce different scores.
FICO scores are used most frequently by lenders
“Free” scores are typically VantageScores
One out of five consumers would likely receive a meaningfully different score than would a creditor.
Check how different credit scores can impact loan interest rates with this calculator from myfico.com.
Final Tips for Managing Credit
The most important thing when it comes to establishing & maintaining good credit is to manage it responsibly, pay bills on time & monitor your credit reports at least once per year to make sure the information being used to calculate your scores are accurate.
Don't get too hung up on a single number, since what you see is likely to be very different from what a lender sees.
Keep shopping around for a single credit type (like a new credit card) to a few weeks so it shows up as a single hard inquiry rather than several over the course of months, since that can negatively impact your credit scores.
And, avoid making major changes to your credit profile before seeking out credit (e.g., don't close too many accounts a few months before planning to get an auto loan or shop for mortgage rates).
Keep In Contact
Keep in contact with SMMC through social media by following us on Facebook,Twitter, YouTube or Instagram as well as University of Illinois Extension and Saluki Cents. Or, you can use the hashtag #UIMoney to continue sharing your thoughts about money with other members of the University of Illinois community or #SalukiCents if you're part of the Southern Illinois University community throughout the year.