Consumer Credit - Quick Outline 1

What Is Consumer Credit?

Credit (from Latin verb credit, meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), but promises either to repay or return those resources (or other materials of equal value) at a later date.[1] The resources provided by the first party can be either property, fulfillment of promises, or performances.[2] In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.

The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment.[3] Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower (that's YOU!!)

https://en.wikipedia.org/wiki/Credit

Who Checks Your Credit Scores?

Credit Card Companies

Banks & Mortgage Companies

Auto Loan & Insurance Companies

Landlords and Employers

There Are Many Different Credit Score Models…

There are hundreds of different credit scoring models. Most of the commonly used models come from a company named Fair Isaac (FICO). This company does statistical calculations of risk and summarizes it in a numerical value known as your common consumer credit score, one score for each of the big three bureaus.

Their calculations are designed to gauge a consumer’s risk of going 90 days late on an account in the next 2 years.

Consumer Credit Bureaus That Use The Fair Isaac (FICO) Model Include

Trans Union

Equifax 

&

Experian 

There are also Mortgage Industry and Auto Industry Option scoring models, 

various credit card models, banking industry models, global models, and many more.

***Each industry specific model will be impacted more if accounts are paid late or defaulted on within that specific industry.

What Is Credit Scoring?

“Credit scoring” is a system creditors use to help determine whether or not to offer you additional credit, and how much you will pay for it. When you apply for

credit the creditor or lender will request your report and score from one of the big three bureaus—Equifax, Experian, or TransUnion—and sometimes (for example, when applying for a mortgage) they will pull reports and scores from all three. Your “credit worthiness” comes from calculating your credit history against a system called the Fair Isaac Model. Fair Isaac (FICO) uses a variety of factors to determine your score: your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts. 

What Can Affect My Credit Score(s)?

A credit score is a number generated by a mathematical formula that is meant to predict credit worthiness. Credit scores range from 300-850. The higher your score is, the more likely you are to get the best rates & terms of a loan. The lower your score is, the less likely you are to be approved or to be offered the best rates & terms.

Common Negative Items Include:

Credit Inquiries

Late Payments 30 Day/60 Day/90 Day 

Charge Offs / Collections

Bankruptcies / Judgements 

Settlements  

Tax Liens

Student Loans  

Evictions

Foreclosures

Repossession

**More Recent Negative Items On Your Report Will Always Have A Greater Impact On Your Score Than Older Items

Payment history (35% contribution on the FICO scale): A record of negative information can lower a consumer's credit rating or score. In general risk scoring systems look for any of the following; charge offs, collections, late payments, repossessions, foreclosures, settlements, bankruptcies, liens, and judgements. Within this category, FICO considers the severity of the negative item, the age of the negative items and the prevalence of negative items. Newer unpaid or delinquent debt is considered worse than older unpaid or delinquent debts.

Debt (30% contribution on the FICO score): This considers the amount and type of debt carried by a consumer as reflected on their credit reports. The amount of debt you have divided by your total credit limit is called the credit utilization ratio.

•     Revolving debt: This is credit card debt, retail card debt and some petroleum cards. And while home equity lines of credit have revolving terms the bulk of debt considered is true unsecured revolving debt incurred on plastic. The most important measurement from this category is called "Revolving Utilization", which is the relationship between the consumer's aggregate credit card balances and the available credit card limits, also called "open to buy". This is expressed as a percentage and is calculated by dividing the aggregate credit card balances by the aggregate credit limits and multiplying the result by 100, thus yielding the utilization percentage. The higher that percentage, the lower the cardholder's score will likely be. This is why closing credit cards is generally not a good idea for someone trying to improve their credit scores. Closing one or more credit card accounts will reduce their total available credit limits and likely increase the utilization   percentage unless the cardholder reduces their balances at the same pace.
     

•     Installment debt: This is debt where there is a fixed payment for a fixed period of time. An auto loan is a good example as the cardholder is generally making the same payment for 36, 48, or 60 months. While installment debt is considered in risk scoring systems, it is a distant second in its importance behind the revolving credit card debt. Installment debt is generally secured by an asset like a car, home, or boat. As such, consumers will use extraordinary efforts to make their payments so their asset is not repossessed by the lender for non-payment.
      

•     Open debt: This is the least common type of debt. This is debt that must be paid in full each month. An example is any one of the variety of charge cards that are "pay in full" products. The American Express Green card is a common example. Open debt is treated like revolving credit card debt in older versions of the FICO scoring system but is excluded from the revolving utilization calculation in newer versions.
  
  
  

Time in file (Credit File Age) (15% contribution on the FICO scale): The older the cardholder's credit report, the more stable it is, in general. As such, their score should benefit from an old credit report. This "age" is determined two ways; the age of the cardholder's credit file and the average age of the accounts on their credit file. The age of their credit file is determined by the oldest account's "date opened", which sets the age of the credit file. The average age is set by averaging the age of every account on the credit report, whether open or closed.

Account Diversity (10% contribution on the FICO scale): A cardholder's credit score will benefit by having a diverse set of account types on their credit file. Having experience across multiple account types (installment, revolving, auto, mortgage, cards, etc.) is generally a good thing for their scores because they are proving the ability to manage different account types.

The Search for a New Credit (Credit inquiries) (10% contribution on the FICO scale): An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. 

Inquiries that have no effect on the creditworthiness of a consumer (also known as "soft inquiries"), which remain on a consumer's credit reports for 6 months and are never visible to lenders or credit scoring models, are:   

•     Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.

•     A creditor also checks its customers' credit files periodically. This is referred to     as Account Management, Account Maintenance or Account Review. 

•     A credit counseling agency, with the client's permission, can obtain a client's credit     report with     no adverse action 

•     A consumer can check his or her own credit report without impacting     creditworthiness. This is referred to as a "consumer     disclosure" inquiry.   

•     Employment screening inquiries    

•     Insurance related inquiries    

•     Utility related inquiries

Inquiries that can have an effect on the creditworthiness of a consumer, and are visible to lenders and credit scoring models, (also known as "hard inquiries") are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries can, but do not always, affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.

The final outcome of those calculations is referred to as your FICO® score. FICO scores range from 300 - 850, but the majority of scores fall between the 600s and 700s. While a FICO score above 700 will get you a very good mortgage rate a score above 740 or so will get you an even better rate, saving you thousands of dollars. A score below 700 will make getting a loan with favorable terms very difficult.

What Is A Credit Report?

A credit report is a consumer's financial report card. Lenders report their history with you to the credit bureaus, and the credit reports are the summary. It lists the types of credit you use, how long your accounts have been open, and whether you pay your bills on time (among other factors). Credit card companies, banks, mortgage companies, auto loan and insurance companies, landlords and employers use credit reports to check on your credit history before deciding on doing business with you. Why? They know that if you were responsible in the past, you are likely to be responsible in the future (and vice versa).

https://en.wikipedia.org/wiki/Credit_history

 A credit report is a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments.[2] A borrower's credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.[2]

In many countries, when a customer submits an application for credit from a bank, credit card company, or a store, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. The gathered records are then used by lenders to determine an individual's credit worthiness; that is, determining an individual's ability and track record of repaying a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid regularly and on time, and therefore focus particularly on missed payments and may not, for example, consider an overpayment as an offset for a missed payment.