Understanding Your Credit Score

Report
UNDERSTANDING YOUR CREDIT SCORE
Ben Collier
Senior Healthcare Business Banker
PNC Bank
THE CREDIT REPORT DEFINED
The credit report is designed to give creditors a
history of how one has handled their debt
obligations
 The credit report contains a list of historic debt,
typically 7 years in the past
 The credit report is used as a score based model
for most financial institutions and creditors to
make a quick decision on smaller credit request
 The credit report is also used as a significant
factor to consider on all credit requests
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THE CREDIT REPORT DEFINED
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What makes up a credit report:
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List of all debt incurred including the following info:
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Original amount borrowed
The account number
The date the debt was originated
The financial institution that provided the debt
Whether the debt is revolving (line of credit, credit card, home
equity line of credit) or installment debt with a fixed monthly
payment
The type of debt like a car loan, mortgage, etc
The payment amount and frequency
The current balance
The highest balance if it is a revolving debt
How many times the individual has been 30 days or more late
on a payment
Whether the debt is in foreclosure, repo, short sale, etc
CREDIT REPORT DEFINED
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What makes up a credit report continued:
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Also includes the following:
Judgements
 Tax Liens
 Collections
 Inquiries
 Demographic info of the individual including:
 History of the individual’s past reported home address
 History of the individual’s past employement
 Individual’s Social Security number
 Individual’s date of birth
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CREDIT REPORT DEFINED
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What are judgements:
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A judgement is filed on your credit report as the
result of losing a case in court. Usually, a creditors
takes you to court in order to file a judgement so they
have a legal right to pursue you for collecting
payment. This is done in lieu of collection or a write
off of the debt so the creditor has a better chance of
collecting more of the amount owed
CREDIT REPORT DEFINED
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What are Tax Liens:
A tax lien is filed by the IRS or a State of unpaid
taxes owed.
 Tax liens could be in the form of unpaid income
taxes, payroll taxes, property taxes, etc
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CREDIT REPORT DEFINED
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What is a collection:
Collections are typically filed by utility companies,
healthcare practices, insurance companies, hospitals,
cell phone providers, etc.
 In fact, a collection can be filed for almost any kind of
debt, whether it be for a utility bill, medical bill, etc
 There are laws under the Fair Credit Reporting Act
(FCRA) that restrict false claims on credit reports
 Unpaid debts are typically reported to credit bureaus
by collection agency which buy the debt at a
discounted price from the creditor
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CREDIT REPORTS DEFINED
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What are inquiries:
Inquiries are a list of creditors that have pulled your
credit
 The inquiry lists the name of the creditor and the
date your credit was pulled
 Inquiries do affect your credit score, which we will
cover within the next few slides
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WHAT IS A CREDIT SCORE
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A credit score is a numerical expression based
on a statistical analysis of a person's credit files,
to represent the creditworthiness of that person.
A credit score is primarily based on credit report
information typically sourced from credit
bureaus.
CREDIT BUREAUS
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There are 3 credit bureaus for personal credit as
follows:
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Equifax
Experian
Transunion
These are US Based credit bureaus, other countries
may use different entities or different methods of
credit analysis
Some banks only pull from one credit report
Other banks, like Mortgage Companies, pull credit
reports from all 3 credit bureaus
HOW IS YOUR CREDIT SCORE DETERMINE
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Believe it or not, the exact formulas for determining a
credit score are secret, kept this way to avoid credit
fraud.
The following are the parts of the formulas that have
been made public:
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35% Payment history
30% Credit utilization
15% Length of credit history, also known as the in file date
10% Type of credit used
10% Number and Types of Inquiries
HOW IS YOUR CREDIT SCORE DETERMINED
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35% Payment History:
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30 day + late payments
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Avoid any late payments 30 days or more
Your score will drop dramitically with one 30 day late payment,
if payments continue to be late for 60 Days, 90 Days, or later
will further impact your score. This could create a 100 point +
decline
Having multiple trade lines with late payments at the same
time will crush your credit score
Late payments on a mortgage affect your credit more than any
other type of late payment
However, making payments on time will increase your credit
score
HOW IS YOUR CREDIT SCORE DETERMINED
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30% Credit Utilization:
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The ratio of current revolving debt, such as credit cards or
lines, of credit compared to the limit of the revolving debt is a
main factor. In other words, maintaining a balance on a credit
card or line of credit that is close to the limit will reduce your
score significantly. It is best to maintain balances at 50% or
less of the limit
The average age of the revolving debt tradelines is a factor. If
you close an old revolving debt and it drags down the average
age of the total revolving debt, this could reduce your credit
score. Therefore, closing open lines of credit or credit cards
may decrease your score
HOW IS YOUR CREDIT SCORE DETERMINED
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30% Credit Utilization Continues:
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Opening new revolving debt tradelines can also drag
down your score since they will decrease the average
age of the total open revolving debt tradelines
HOW IS YOUR CREDIT SCORE DETERMINED
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15% Length of Credit History
Better known as the In-file Date. This is the date of which
you first received credit. The longer your credit report has
been in existence, the better your score can absorb negative
actions without taking a big reduction in the score
 Someone who has had credit for only a few years and
experiences a 30 day late payment will see a huge reduction in
their score
 Likewise, someone who has had credit for 20 or 30 years may
seen a minor impact to their score if they experience a 30 day
late payment
 Don’t keep too many revolving lines open, but don’t close older
ones either. If you have more than 3-4 open revolving lines,
then pay off and close the younger lines
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HOW IS YOUR CREDIT SCORE DETERMINED
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10% Types of Credit Used:
Revolving lines such as credit cards or lines of credit – having
too many will hurt your score, especially with high balances –
but remember that the age of these lines is a factor to consider
before closing a revolving line
 Installment loans such as auto loans, student loans, etc. – the
number of trade lines can affect your score, but installment
loans have a minimal impact
 Consumer Finance – untraditional financial services such as
microfinance from untraditional lenders like payday loans,
rent to own contracts, leases, etc.
 Mortgages – Installment loans secured by residential real
estate
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HOW IS YOUR CREDIT SCORE DETERMINED
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10% Number and Types of Inquiries:
The number of hard inquiries can affect your credit score, especially if
there are numerous inquiries at one time. These typically reduce your
score by 3-5 points each, but the score will rebound in 6 months if the
number of inquiries is reduced over time
 Rate shopping for a mortgage or auto loan can create a large number
of inquiries, especially when an auto dealership sends your credit app
to multiple lenders. It is important to tell the dealership not to do
that to avoid a significant reduction in your score
 Soft inquiries are performed by your existing creditors to keep tabs on
your credit score to avoid potential repayment risk, these do not affect
your score, they are also known as sub-level credit pulls
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GOOD CREDIT SCORE DEFINED
A credit score can range from 300 to 850
 Good credit is considered to be anything above
700
 Excellent credit is considered to be anything
above 750
 Some banks set a minimum threshold of 650
 The average median for a credit score nationally
as of 2011 was 711
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MAINTAING YOUR CREDIT SCORE
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In summary, here are a few things to remember that will
keep your credit score high:
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No late payments over 30 days
Keep the balances on credit cards and lines of credit at 50% of
the limit
Avoid collections, judgements and tax liens whenever possible
Short sales are considered foreclosures, don’t let a lender or
attorney talk you into a short-sale without outside guidance
from someone unrelated to the transaction
Avoid having your credit pulled multiple times in the same
month
QUESTIONS

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