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Financial Literacy

Financial Literacy

Home Financial Literacy Credit and Debit Understanding Credit Reports and Scores

Understanding Credit Reports and Scores

Yes, there is such a thing as your “Permanent Record.” It’s called a credit score. The three major credit bureaus come up with a score for the likelihood that you’ll pay back any money you borrow. A lender (a company that loans money in some way, like a store, bank, mortgage banker or credit card company) uses your credit rating to decide

1) Whether or not to lend you money, and
2) How much interest to charge you if they do.

There are these two average guys. Each buys a house for $200,000. Both get 30-year home mortgages with a fixed (unchanging) interest rate. One pays $25,000 more in interest over the 30 years it takes to pay off the house simply because his credit rating is 100 points lower.

FICO ScoreAPRMonthly PaymentTotal Interest Paid
760-8503.22%868$112,000
700-7593.45%892$121,000
680-6993.62%912$128,000
660-6793.84%936$137,000
640-6594.27%986$155,000
620-6394.81%1051$178,00

http://www.myfico.com/myfico/creditcentral/loanrates.aspx

FICO is an abbreviation for the company that created the credit score software.

Reading a credit report is like reading Greek at first. They’re very detailed and list all your creditors (person or company that you owe money) and the amount due to each for the past seven years. Some of them run for pages and pages, depending on how many credit accounts you have. But the $25 grand above makes it worthwhile to decipher it all.

The standard format is

• Potentially negative items
• Accounts in good standing
• Requests for your credit history
• Personal information

http://www.experian.com/credit_report_basics/pdf/samplecreditreport.pdf

1. Report number: Helps keep track of your report if you ever need to talk to the credit bureau about a problem.

2. Potentially negative items: Shows all the credit items that could be a strike against you. Could be a past due account or more serious problems like loan default or bankruptcy. Also shows other public records info court ruling against you.

3. Status: the payment status of any given account.

4. Accounts in good standing: lists all your credit accounts, balances, terms, limits, payments, etc.

5. Type: whether your account is revolving or installment. Revolving accounts like credit cards let you keep borrowing money up to your credit limit as long as you’re making the minimum payment. Installment means a one-time loan for a specific purpose that is paid back over time in set payments, like a car loan.

6. Requests for your credit history: Lists anyone that has checked you out. Often it’s a lender, like if you filled out a credit card application, or applied for a home loan. Or it could be things like an employer doing a background check or when you request a credit report for yourself.

7. Personal information includes everything (and it’s a lot) they know about you, like name, aliases, social security number, how to reach you., who you work for, etc.

8. Address information shows your current digs and anywhere you’ve lived in the last seven years.

9. Personal statement: any comments you’ve made to explain things on your credit report.

Monica recently had mono. After a week of feeling really crappy and tired all the time, she finally made an appointment with Dr. Brown. He ordered what seemed like dozens of test to try and figure out what was wrong. He told her to go home and rest. After days and days of sleep, Monica finally started feeling better until she opened her mail one day and saw she owed $2,000 in lab fees that for some unknown reason her insurance wouldn’t pay. After spending another week in bed to recover from that, she started talking to her insurance company and the lab company. And we all know it can take weeks to resolve these kinds of issues. In the meantime the lab company reported to the credit bureaus that she was late paying her bills. Monica hit the roof when she saw it on her credit report and filed a comment on the report herself.

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