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HSFPP Weekly Update # 172—Why Checking Your Credit Report Is Important / How Your Credit Score Is Figured

Message from Bob: Last week’s story In the New$... told you how to order a free credit report: “... go to http://www.annualcreditreport.com and fill out the form. The form can either be submitted online or printed and mailed to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281. You can also order a report over the phone by calling toll free (877) 322-8228.” Following that story, a school teacher who attended last week’s in-service let me and others know that, if anyone under 18 tries to order the free credit report online, they will be denied because they are a minor.

I’ve had three phone calls with the Federal Trade Commission to try to find out how a minor can check his or her credit file. Does the minor have to write to the Annual Credit Report Request Service to get a free credit report or does his or her parent or guardian need to write the letter? Requiring parents to write the letter can be a problem because, according to a report from the Better Business Bureau, parents are responsible for a large percentage of identity fraud, opening accounts with utilities and other forms of credit in their children’s names when they could no longer get credit in their own name because of their credit history. Once I get an opinion from the FTC legal department, I will let you know. If other teachers or county agents have had minors check their credit report and had no problem, please let me know how they did it, and please share this information with others. I hoped to have an answer in this week’s update, but I don’t want to delay this week’s update any further.

 

Note to educators:
Doing in-service training not only helps educators who use the program; it also helps me improve the program. Not only do I learn from you how valuable our weekly updates are, I also find out what topics we need to include to help you teach core concepts. If you did not come to the in-service training this month, but you have ideas for future lessons, please e-mail your suggestions to rflashma@uky.edu.

This is extremely important because some of the core concepts have been moved to lower grade levels and I need to know what are appropriate topics for me to cover.

Assignment for History / Social Studies Classes: Research the history of credit scoring in the U.S., as well as the various issues associated with credit records, and write a short essay on the subject.

 

Web Site Pick of the Week:

http://www.practicalmoneyskills.com/english/at_home/consumers/credit/
Visa’s “Practical Money Skills for Life” Web site relates to the subject of this week’s update. It includes lessons, games, quizzes, and links to other Web sites worth checking out.

http://www.practicalmoneyskills.com/english/at_school/teachers/
For the benefit of educators who attended the in-service training session in Elizabethtown, I’m providing a link to the specific page that deals with lessons plans for various age groups; these can be used either before or after your Reality Store activities.

 

In the New$...Research Shows Credit Reports Contain Inaccurate Information That Can Reduce Your Credit Score

by Robert H. Flashman, Ph.D., University of Kentucky Cooperative Extension

 “Research for [a Consumer Federation of America] study, conducted during the summer of 2002, analyzed the credit scores of more than 500,000 consumers, and extensively reviewed the files of more than 1,700 individuals, maintained by the three major credit repositories – Equifax, Experian, and Trans Union.”

“The analysis of 51 representative files for consistencies and inconsistencies revealed reasons for ... differences in scores ... Seventy eight percent of files were missing a revolving account in good standing while one-third (33 percent) of files were missing a mortgage account that had never been late ... In 43 percent of the files, reports on the same accounts conflicted in regard to how often consumers had been late by 30 days. In 29 percent of the files, there was conflicting information about how many times the consumer had been 60 days late. And in 24 percent of the files, conflicts existed about 90-day delinquencies. Reported delinquencies have a large effect on credit scores.”

Credit score is broken into 5 parts.

What does all this mean? Knowing how credit scores are devised will help you understand how your current and future behavior in using credit and paying off debt affects how much you will pay for loans.

Payment history is the most important item in your credit score, comprising 35% of the total score. For most teenagers, paying bills on time—credit cards and installment loans on your vehicle or computer—is the most important thing you can do to build a good credit record.

The amount you owe on outstanding loans comprises 30% of your credit score. Because of this, it’s a good idea not to open more accounts than you plan to use. From the beginning, select the best credit card, the financial institution that provides the lowest interest rate on credit cards, and the least expensive loans. Many students who go on to postsecondary education—college, university, or community college, for instance—can join that institution’s credit union. If you are on work-study assistance, your monthly loan payment can be deducted directly from your biweekly paycheck so that you always pay on time.                       

Length of credit history comprises15% of your credit score. The longer you hold the same credit card, the higher your score goes. It is therefore better to keep the same credit card with low interest rates than to switch to a new card with lower interest for the first six months; that new account might rise to higher rate than your existing card, something the institution offering you the new account probably won’t emphasize. Your score also rises based on activity. Therefore, holding a lot of credit cards that you do not use does not raise your score. Having a lot of credit, such as the lines of credit available on all those credit cards you do not use now, but could use, might even prevent you from getting a loan to buy the set of wheels you want.           

New credit comprises 10% of your credit score. It is calculated based on several items; most importantly, by the number of recently opened accounts, as well as the amount of time since new accounts have been opened.

Finally, the types of credit you use comprise 10% of your credit score. Clearly, using advance loans on your paycheck, which, in Kentucky, charge an annual interest rate of 390%, will not raise your credit score; but making at least your minimum monthly credit card payment on time will. Of course, if you pay your monthly credit card balance in full, this will raise your credit rating even more. Unfortunately, the credit scoring companies do not disclose in detail how your behavior affects your credit score or how they determine your score.

Sources: (1) Research on credit report errors has been excerpted from “Millions of Americans Jeopardized by Inaccurate Credit Scores” [News Release]. Consumer Federation of America, 12/17/02. (2) Credit score section adapted from the Financial Tip of the Week, a weekly service of the Iowa State University Financial Counseling Clinic, 9/16/06.

 

Activity for Students:

1.) What do you think is the best way for a teen to learn to manage credit wisely? Explain.

 

2.) For the purchases that a teenager typically makes, and with the limited amount of money that most teens have, do you think it is necessary for teens to have credit cards?
Yes ___   No ___. Explain.

 

3.) Do you have a credit card? Yes ___   No ___.

 

4.) If Yes, do you make your monthly payments on time every month? Yes ___   No ___.

 

5.) If you have a credit card, do you pay your full balance each month? Yes ___   No ___.

 

6.) If No, do you pay only the minimum balance most months? Yes ___   No ___.

 

7.) If No, please explain why you sometimes carry a balance.

 

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of this Web site is to assist county extension agents, credit union educators, and high school teachers in improving the economic well-being of our constituency, beginning with today’s students; and also, to assist teachers in Kentucky in meeting KERA’s goal that all students become technologically literate. Weekly Updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators.