Section 1.4 Credit and Debt (Borrowing)

How Credit is reported

*Creditors *Credit Reporting Agencies *Credit Bureaus

What type of additional information is on a credit report?

*Identifying information: Name (including suffixes), nicknames, current and previous addresses, Social Security Number, year of birth, and if applicable spouse's name *Credit: The accounts held with banks, retailers, credit card issuers, and other lenders. Accounts are listed by type of loan (mortgage, student loan, revolving credit), the date the account was opened, its credit limit or loan amount, any cosigners of the loan, and payment pattern over the past two years *Public Records: State and county court records on bankruptcy, tax liens, or monetary judgments (Some CRAs list non monetary judgments as well) *Inquiries: The name of those who have obtained copies of that credit report within the last six months

Credit Scores

A credit score is a number generated by a statistical model that objectively predicts the likelihood that the individual will repay their debt on time. *Banks, insurance companies, potential landlords, and other lenders use credit scores *Credit scores from each of the respective bureaus range from 500 to 800 and above and are determined by payment history, the amount of outstanding debt, length of credit history, recent inquiries on the credit report and the type of credit used. *A credit score of 750 or higher is considered very good, 620 to 749 is considered good, and 619 or below is considered poor *In order to have a credit score, a consumer must have at least one account reported for a minimum of six months.

Bankruptcy

Chapter 7 - Liquidation Chapter 13 - Reorganization Counseling and Education Requirements

Non-Traditional Credit

Clients with little-to-no credit history will need to build a non-traditional credit profile. This is developed from credit that is not reported to a credit bureau for rating, such as: *Credit union loans or bank loans that do not report to a credit bureau *Utility bills such as electric, gas, telephone, water, garbage removal and cable *Rental payment history *Monthly insurance payments *Payment to child care providers *School tuition *Stores such as department or furniture stores *Medical bills not covered by insurance *Internet or computer services *Auto leases *Personal loans

What makes up a credit score?

Credit scoring uses and algorithm to determine credit scores made of five primary components listed in order of impact *Payment History (35%) - your account payment information, including delinquencies, public records, late payments, judgment and liens. *Amount owed (30%) - how much you owe on your accounts. The amount of available credit you're using on revolving accounts is heavily weighted. Portion of score based on the ratio of total credit extended to the amount of credit owed. *Length of credit history (15%) - how long ago you opened accounts, time since account activity and average age of accounts. *Type of credit used (10%) - the mix of accounts you have, such as revolving and installment (e.g. credit cards, auto loans mortgages) *New credit (10%) - your pursuit of new credit, including credit inquiries and number of recently opened accounts

How long does information stay on a credit report?

Generally, the consumer report agency must automatically delete information on adverse credit instances more then seven years old *Includes collections, charge offs, judgments, paid tax liens and student loans. *Chapter 7 Bankruptcies that have been discharged remain for ten years from filing date *Chapter 13 bankruptcies that have been discharged remain for seven years from filing date

Credit and Debt (Borrowing)

Good credit and access to loans has become a major part of personal financial success. Establishing and maintaining a good credit history should be part of any individual financial plan *Credit can be used in times of emergency when cash on hand is simply not available or to make a strategic large purchase such as buying a car, obtaining a student loan, or purchasing a home. *Credit checks are more common by employers, property owners, insurance companies and service providers as a character reference.

The Fair and Accurate Credit Transaction Act (FACTA)

Guaranteed the right to a free annual credit report. Each of the CRAs, must at a consumers request provide a credit report for free once a year. *Established the right to place a fraud alert on your credit file *Required that credit card numbers be truncated on receipts so the full number is not visable

Counseling and Education Requirements

In general, the individual must file a certificate of completion of credit counseling courses when they file for bankruptcy.

Correcting Errors

It's important for clients to check their credit report, since 25% of all credit reports contain inaccurate information. Errors or outdated information can result in a low credit score. 1. Look in the credit report for instructions on correcting errors. Follow the instructions received with the credit report to tell the CRA about the mistake. Most CRAs will offer and online dispute form on their website 2. Call the CRA and alert them of the error. This may resolve the problem, but always follow up with written documentation 3. Write a letter explaining the problem.

The Fair Credit Reporting Act (FCRA)

Protects against inaccurate or misleading information in credit files maintained by credit reporting agencies. It requires that individuals be informed of what is on a credit file and there is the ability to correct any error *Issuing Credit Reports - Reports can be issued only to those with a legitimate business reason to receive them. Those include creditors, employers, insurers, and government agencies reviewing status for licensing or benefit purposes, or any third party for a report is requested. *Credit Report Error - Upon finding an error on the report, notify the credit bureau in writing immediately. The bureau is responsible for investigating and for changing or removing any incorrect data. The source of the error must notify all CRAs. If client is not satisfied they have the right to add a brief statement (100 words or less) about the issue on the report. *Denied Credit - If an application is turned down due to an error on the report, the lender is required to provide the name and address of the credit bureau that issued the report. The client has 30 days to request a free copy from the bureau. *Disclosure - Consumer reporting agencies must provide access to the information in the credit report, as well as identify those who have requested the information recently. Consumers are entitled to one free report per year if certifying in writing: (1) they are unemployed and plan to look for work for a job within 60 days (2) are on welfare (3) the report is inaccurate due to fraud. *Limiting Access - Clients may request that consumer-reporting agencies not distribute their name on list used by creditors or insurers to make unsolicited offers of credit and insurance. Request can by made by phone or in writing.

The Fair Credit Billing Act (FCBA)

Requires that s credit card company promptly credits payments and corrects mistakes on a bill without damage to the credit score. *Also permits billing errors on your credit card to be disputed and for your withhold payment for damaged goods *If a consumer is disputing a charge, creditors cannot report the consumer's account as delinquent *Consumers who question an item are responsible for notifying the creditor in writing within 60 days of receiving the bill *The creditor must acknowledge the notice within 30 days and may not do anything to damage the consumer's credit rating while the item is in dispute

Credit Laws

The Fair Credit Billing Act (FCBA) The Fair Credit Reporting Act (FCRA) The Fair and Accurate Credit Transaction Act (FACTA)

Chapter 7 - Liquidation

The individual's assets are sold and the money is divided among their creditors. *They may be able to keep somethings, such as car and certain personal property *Some debt will not go away such as child support, student loans, taxes and alimony. *A Chapter 7 bankruptcy filing stays on a credit report up to ten years.

The Credit Report

Those who have used credit will have a credit report that shows their payment history, including late payments. The information found on the credit report is used to create a credit score

Credit Bureaus (Credit Repositories)

are companies that gather the information from creditors on a monthly basis. *Information is aggregated into a consumer file, which creates a historical profile *Can include information on charge accounts, personal loans, employment information, public records and residence information. *The housing industry traditionally uses three credit reporting agencies: -Equifax, scoring model may be referred to as Beacon -Experian, scoring model may be referred to as Experian/Fair Isaac -TransUnion, scoring model may be referred to as Empirica

Chapter 13 - Reorganization

is a plan to pay back creditors. The individual makes installment payments to the court, usually spanning between 3-5 years, and trustees forward them to the *In general the creditors agree to accept less than full amount owed. *As long as the individual makes on-time payments, they get to keep the assets. *A Chapter 13 bankruptcy typically stays on a credit record for seven (7) years

Credit Reporting Agencies

is the entity that gathers information from the three main credit bureaus and provides it in an easily readable format to subscribers. *Report is provided for a transactional fee *If the CRA is informed of incorrect information on the report, it becomes their obligation to address the issue *A subscriber generally has one of two options when requesting a credit report: -Hard Inquiry - when a financial institution (lender, credit card issuer) checks your credit report when making a lending decision. You typically need to authorize a hard inquiry. Hard inquiries will lower your credit Score by a few points and remain on your credit report for 2 years. -Soft Inquiry occurs when a person or company checks your credit report as a background check, such as a potential employer, or when you're "pre-approved" for credit card offer, and when you check your own credit score. A soft inquiry can occur without your permission. This may appear on your credit report, but they will not affect your credit score.

Creditors

is the entity who offers a loan or credit to the consumer *Once the loan is accepted by the consumer, it becomes the responsibility of the creditor to report accurate periodic information, which is requested by the credit bureaus *As part of the loan or credit evaluation, the creditor also requests a report from a credit-reporting agency for a fee. *In this two-way transaction, a creditor may also be referred to as: -furnished, providing information -subscriber, requesting information