Bank loans

ANALYZING CREDIT

• Consumer reporting agencies
• Credit-scoring systems

CONSUMER REPORTING AGENCIES

• A consumer reporting agency (CRA) is a company that compiles and keeps records on consumer payment habits and sells these reports to banks and other companies to use for evaluation creditworthiness.
• Consumer reporting agencies are sometimes called credit bureaus.
• The three largest CRAs
• Equifax
• Experian (formerly TRW)
• TransUnion

CREDIT REPORTS INCLUDE

• Personal data
• Accounts history
• Delinquent accounts
• Public records
• Inquiries

CREDIT-SCORING SYSTEMS

• A credit-scoring system can provide an efficient and unbiased method of evaluating credit.
• These scores place a numerical value on the performance or status of an applicant in various categories.

FICO

• The FICO credit-scoring system developed by Fair, Isaac and Company, Inc. has become the dominant credit-scoring system.
• The FICO score is a three-digit number that credit granters can use in making a loan approval decision.

FICO CRITERIA

• Payment history (approximately 35 percent)
• Amounts owed (approximately 30 percent)
• Length of credit history (approximately 15 percent)
• New credit (approximately 10 percent)
• Types of credit (approximately 10 percent)

Lesson 6.3 COST OF CREDIT

Identify key factors in the cost of credit

Explain the impact of negative credit ratings on consumers

GOALS

WHAT CREDIT COSTS

• Annual percentage rate
• Minimum payments
• Term

REVIEWING APR AND FINANCE CHARGE

The APR is a key aspect of comparing credit costs.

• Sum-of-digits method
• Previous balance method
• Adjusted balance method
• Average daily balance method