LO 3.3.3: Predict how different debt management strategies will impact a client’s credit score.

Question 1

Credit Score

Answer 1

AKA FICO score (Fair Isaac Corporation, largest best-known provider of credit scores)
* Determined by individual’s credit report info

Question 2

Credit Score Categories

Answer 2

5 categories weighted in credit score:

• 1) Payment History
• 2) Amounts owed
• 3) Length of credit history
• 4) New credit
• 5) credit Mix
• • P.A.L.N.M

Question 3

Payment history

Answer 3

• 35% of credit score; most heavily weighted factor
• Lenders want to know if individuals paid past credit accounts on time
• Bankruptcies, foreclosures, and liens will negatively affect payment history

Question 4

Amounts owed

Answer 4

• Measures how much owed relative to how much credit available
• 30% of credit score
• Owing money is not necessarily negative; but when high % of credit is used, this may indicate to the lender that the individual is close to being overextended.

Question 5

Length of credit history

Answer 5

• 15% of credit score
• The longer the credit history, better the credit score
• Takes into consideration long credit accts that have been established
• And how recently individual used certain accts

Question 6

New credit

Answer 6

• 10% of credit score
• Measures how many new accts the individual owns
• Opening several new accts in short time period can lower a credit score

Question 7

Credit mix

Answer 7

• 10% of credit score
• Mix of various types of credit (e.g. credit cards, retail accts, installment loans, and mortgages)
• Better to have a mix of types of credit accts
• Too many accts can hurt credit score — varies by individual.
• Credit cards need to be used responsibly; closing accounts does not make them go away— the history stays for this part of the credit score.

Question 8

Actions that have a positive impact on credit score

Answer 8

Consistently making payments on time can greatly improve client’s credit score

* Using a low percentage of available credit; 
* Low percentage can have greater positive impact than not using available credit at all
* Long history of responsible use will gradually build score

Question 9

Actions that have a negative impact on credit score

Answer 9

• using a high percentage of available credit.
  
  • Closing credit card accounts that have been held for a long time can lower.
  • Too many new credit inquiries lowers score, but not by much
  • Shopping for rates at multiple lenders are typically treated as a single inquiry;
    
    • • Client should seek out most favorable rates.