Pesonal finance 6th madura chapter 07 assessing and securing your credit

Personal Finance

SIXTH EDITION

Chapter 7
Assessing and
Securing Your Credit

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Chapter Objective
7.1 Provide a background on credit
7.2 Describe the role of credit bureaus
7.3 Provide a background on identity theft
7.4 Explain how to protect against identity theft
7.5 Discuss how to respond to identity theft
7.6 Explain how credit assessment and security fit within your financial plan

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Background on Credit (1 of 6)

•

Credit: funds provided by a creditor to a borrower that will be repaid by the borrower in
the future with interest

•

Types of credit

–
–

Non-installment credit: credit provided for a short period, such as department store credit
Installment credit: credit provided for specific purchases, with interest charged on the amount
borrowed

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Background on Credit (2 of 6)

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Revolving open-end credit: credit provided up to a specified maximum amount based on
income and credit history; interest is charged each month on the remaining balance

•

Advantages of using credit

–
–

Helps build a good credit score
Eliminates the need for carrying cash or writing checks

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Background on Credit (3 of 6)

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Disadvantages of using credit

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Excessive spending



–

Easier to avoid considering costs when using credit

A large accumulation of debt



Especially when making only the minimum payment

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Background on Credit (4 of 6)

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Credit rights

–
–

Equal Credit Opportunity Act helps protect debtors from unethical creditors
Financial Reform Act of 2010 established the Consumer Financial Protection Bureau





Regulates online checking accounts, credit cards, and student loan
To ensure accurate consumer information and prevent deceptive practices
May also regulate credit rating bureaus

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Background on Credit (5 of 6)

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Background on Credit (6 of 6)

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Credit history

–
–

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Often begins with timely payment of utility bills
Built by paying bills in a timely manner

Credit insurance

–

Can cover payments under adverse conditions

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Financial Planning Online (1 of 3)

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Go to the consumer credit section of

•

This site provides information on how to establish, use, and protect credit.

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Credit Bureaus (1 of 11)

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Credit bureaus provide credit reports documenting your credit payment history

•

Credit reports: reports provided by credit bureaus to document a person’s credit
payment history

•

Primary credit bureaus are Equifax, Experian and Trans Union

•

Free credit reports available annually

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Credit Bureaus (2 of 11)

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Credit Reports Provided by Credit Bureaus

1.

Report number, date, and name to distinguish this report from others

2.

Identifying information such as name, spouse’s name, birthdate, Social Security number,
addresses, occupation, etc.

3.

Potentially negative information from public records such as bankruptcy and tax liens

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Credit Bureaus (3 of 11)

4.
5.
6.

Accounts turned over to collection agencies, as well as resolution of these accounts
All account information, both open and closed accounts are included
List of companies that have requested your credit report

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Credit Bureaus (4 of 11)
EXHIBIT 7.2 A Sample Credit Report

Credit Bureau

Please address all future correspondence to:

Report Number 716-80

Credit Bureau

08/28/13

P.O. Box 0000
City, State, Zip Code
(888) 000–0000

Personal Information

Cynthia Zubicki

Social Security Number: 000-00-0000

120 Greenmeadow Drive
Durham, NC 27704
Previous Addresses:

Last Reported Employment: Architect

264 Concord Road
Gilbert, AZ 85296
401 Brownell Road
Chandler, AZ 85226

Public Record Information
Bankruptcy filed 04/12; Durham District Court; Case Number 873JM34; Liabilities: $56,987; Assets: $672

Collection Agency Account Information

North Shore Collection Agency (888) 000–0000
Collection Reported 11/12; Assigned 1/12 to North Shore Collection Agency; Client: Gilbert Medical Center; Amount: $1,267; Paid Collection Account
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Credit Bureaus (5 of 11)
EXHIBIT 7.2 A Sample Credit Report

Credit Account Information
Company Name

Account

Reported

Number

Durham Savings

8762096

Date Opened

Individual or Joint

02/15

I

Months

Date of Last

Review

Activity

6

11/14

High Credit

Terms

Balance

Past

Status

Date

Due

$4,897

$2,958

04/15
Paid as

Bank

Agreed

Macy’s

109–82-43176

06/15

I

36

01/15

$2,000

$0

Paid as

02/15

Agreed

Chester Auto

873092851

03/15

I

Finance

27

02/15

$2,400

$50

$300

$200

Paid 120
days past
due date

Previous Payment History: 2 times 30 days late; 2 times 60 days late

Inquiries

05/27/04 Citibank; 10/15/15 Bloomingdale’s; 03/21/15 Home Depot

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03/15


Credit Bureaus (6 of 11)

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Credit score

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Numerical rating indicating creditworthiness

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Creditors rely on this score to help determine whether or not to extend a loan

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Can affect the interest rate received on loans

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Credit Bureaus (7 of 11)

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Score affected by many factors



Credit payment history

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Credit utilization

–

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15% of score

New credit

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

30% of score

Credit history

–



35% of score

10% of score

Different types of credit

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10% of score

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Credit Bureaus (8 of 11)

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Different scores among bureaus

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Bureaus don’t always have access to the same information

Interpreting FICO credit scores

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Range from 350–850, with 600 being considered a good score
Correcting credit score mistakes

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Contact credit bureau that issued the inaccurate report
Credit bureau required to investigate within 30 days

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Credit Bureaus (9 of 11)

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Improving your credit score

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–
–
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Catch up on late payments and reduce debt
Review household budget and cut back on necessary expenses
Destroy credit cards, but keep accounts open
Call creditors if unable to make payments on time

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Credit Bureaus (10 of 11)

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Reviewing your credit report

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At least twice a year for accuracy, to correct errors, to identify deficiencies



Make sure report is accurate



Review the types of information used by lenders



See what kind of information lowers credit rating and try to eliminate deficiencies

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Credit Bureaus (11 of 11)

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Financial Planning Online (2 of 3)

•

Go to the consumer information section of

•

This Web site provides information on obtaining a free credit report.

•

The Credit Karma app can also help you access your credit score, monitor it, and
devise a plan to improve it

•

Search for “Credit Karma” on your mobile device

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Identity Theft: A Threat to Your Credit (1 of 17)

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Identity theft: theft that occurs when an individual, without permission, uses your
identifying information for his or her personal gain

•

Goal may be to acquire money or goods or to establish a new identity for criminal
purposes

•

Impacts about 15 million people each year, costing about $50 billion

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Identity Theft: A Threat to Your Credit (2 of 17)

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The cost of identity theft

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Personal costs

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Feeling of violation and insecurity
Problems getting a job
Being hounded for debt that isn’t yours
Turned down for credit

Financial costs

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


Average individual loss is $1,500
Time and money to repair the damage
Individuals will spend an average of 600 hours dealing with damage control necessitated by identity theft

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Identity Theft: A Threat to Your Credit (3 of 17)

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Identity theft tactics

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Shoulder surfing: Tactic used when an identity thief stands close to you in a public place and
reads the number of your credit card as you conduct business

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Dumpster diving: Tactic used when an identity thief goes through your trash for discarded items
that reveal personal information that can be used for fraudulent purposes

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Identity Theft: A Threat to Your Credit (4 of 17)

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Skimming: Tactic used when a store employee steals your credit card number by copying the
information contained in the magnetic strip on the card

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Pretexting: Tactic used when an identity thief poses as an employee of a company with which
you conduct business, to solicit your personal information

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