Credit Score from a Family Studies Perspective - Coursework Example

Credit Score from a Family Studies Perspective Credit Score from a Family Studies Perspective Introduction The credit card laws greatly benefited the credit card users since it enacted regulations to guide the interest rates. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, which was enacted in 2009, had implication on customers and lenders (Arnold, 2012). Before enactment of the credit law, complaints such as retroactive rate increases were common. Although customers still face abuses such as inappropriate denial of credit, they are minimal. The credit card laws obligate companies to notify customers 45 days before increasing interest rates or changing other fees. Additionally, the interest rates cannot be increased within the first year after opening an account unless the card has adjustable interest rate, introductory rate, if one is in a workout agreement or if one has delayed bill payment by more than 60 days. This essay discusses the credit reporting and credit scores from a family studies perspective. The paper will make use of articles from credible newspapers to demonstrate how the credit scores affect the economic and social aspect of a family. Credit score, a three- digit number that is produced using mathematical algorithm is important to both credit institutions and borrowers. The score is generated using ones credit report. To prepare the credit score ones credit report is analyzed. Credit report is a representation of a person’s credit history. Credit history is how an individual pays for borrowed items or loans. Credit score is a demonstration of ones capability of meeting their credit obligations for a period of 24 months after scoring. The scoring is by credit reporting agencies using different credit scoring models, which include FICO that is used by the three major scoring companies in United States (Wise , 2012). To award a FICO score, the agencies consider a person’s credit payment history as well as the debt owned. Other factors considered when calculating the credit score include the amount owned. The history is an assessment of the unpaid debt in relation to the credit that is available to a person. People with bad credit history often opt to disable their account. I consider this to be injudicious since affects the credit score. This is because the available credit decreases leading to low credit debt ratio (Carrns, 2012). Another factor considered when calculating the credit score is the span of credit history. By this, I mean evidence that a borrower has had access to credit in the past. It is thus important to keep old credit cards. A family that has a long history of borrowing and paying their debt will have a higher credit score than a family with a short credit history or a history of unsettled debts (“The Credit History Underclass”, 2012; Bread, 2012). New credit requested by a person accounts for 10% of the credit score. However, it can also affect the score negatively. This is because an inquiry on one’s account must be made. Excessive inquiries may be misinterpreted to mean desperation for credit, which is taken negatively by many credit card companies. It is thus important for family members to ensure they have considerable new credit to acquire loans and other things. In my opinion, it is better to build a long and credible credit history other than applying for too many credit card, which might have negative impact on credit score (Bortz, 2012). The type of credit one is using determines 10% of the credit score. Long-term credit has better score as compared to short-term loan. For example, a person with credit for mortgage is likely to get a higher credit score as compared to one with loan to be paid in installments. There are different types of credit accounts and include mortgages, retail, credit cards, and installment loan and each of them has varying credit score. It is thus crucial for families to consider the kind of credit accounts they have (Hardekopf, 2012). Payment history accounts for 35% of the credit score. For persons wanting a good credit score, it is crucial to have up to date payments. Unpaid credit has negative impacts on the credit score. Most families and individual lower their credit score when they fail to notify their creditors of missed payments. They thus end up have a credit report showing instances of late payment. The credit score is easily obtained and FICO scores, the most common, range from 300 to 850. Best borrowers have a score above the 723, the median score (The Credit History Underclass, 2012; CreditCards.com, 2010). Credit score is thus very important for families since it can determine the kind of life they live. For example, a family where all the members have a credible credit history is likely to access credit services to improve their livelihood. People are increasingly becoming dependent on credit for purchase of different things. Be it a car, house, or payment of school fees. Being able to access credit is important since it enables a person to do things one cannot pay for in a single moment. One’s credit score is important since it can determine if one will access credit or not. One’s credit history, which determines the credit score, determines the possibility of accessing credit services as well as the interest rate for the credit payment (Singletary, 2012; Bread, 2012). Credit Scores and Credit Scoring Agencies The three major credit-reporting agencies in United States are Equifax, Experian, and Trans Union. All of them make use of FICO scoring alone or in addition to other scoring models. Equifax, the oldest credit-reporting agency in United States was established in 1899. Equifax is responsible of giving credit history as well as the BEACON credit scores. Experian, which was established in 1980, provides credit reports and credit scores based on FICO scoring. Credit reporting is important because it builds the credit of clients (“Credit Rating Agencies”, 2011; Arnold, 2012). TransUnion is the third credit-reporting agency that was instituted in 1968. TransUnion provides credit scoring based on EMPIRICA scoring system. According to Wise (2012), the credit scores for different companies vary due to use of different scoring models. The scoring process is thus complex and may result in placement into different categories depending on the company involved. However, the variance in the score obtained using different model is minimal (Singletary, 2012). Credit score are important for families wanting to borrow since it determines eligibility. Since credit score is a depiction of one’s capability to repay debts, it determines the economic status of a family. Having an attractive or incredible credit score has different impacts. Most families want to purchase cars, get loan or purchase other things even when they may not have the money in cash. They thus depend on using credit cards. When you purchase an object on credit, the lender scores you so that they can determine the possibility of payment (“The Credit History Underclass, 2012”). Depending on one’s credit history, some companies refuses to lend persons. In a family where the members have a good credit history, they are capable of getting several products. Additionally, the products will be of good quality. This is because lenders look at ones credit score when determining whether to lend them the product and the quality of the product to lend. Having a bad credit history can thus prevent a family from accessing products they may wish to at all or receiving products that are different from the desired ones. The credit score determines the interest rates for loans as well as credit cards. Credit score, which is determined by ones credibility in credit payment, is a crucial determinant of a family financial status. However, different lenders look for different aspects while determining whether to lend to a person (Bortz, 2012). Getting something like a mortgage requires one to have a good credit score. Additionally, the credit score determine the interest rate you pay for the mortgage. Since the social life is determined by the ones capability to acquire different assets, the credit score thus influences the quality of life. For example, someone with a credit score of about 650 and another with a score of 750 might be able to obtain about $400,000. However, the person with a credit score of 650 will have to pay back the money with $70,000 more interest compared to the one with a sore of 750. Credit score is crucial not just for credit purposes but for making other decisions such as in job interviews (Hardekopf, 2012). Identity theft is common phenomenon as far as credit reporting and credit scores are concerned. Parents with bad credit score are likely to cash in their children’s financial and credit history. Children are likely to fall victims of identity theft since they rarely use their credit cards. Additionally, they are less likely to identify instances of inconsistencies involving their credit cards. In my opinion, identity theft tends to be common in family since family members are less likely to sue other members of family who steal their identity Parents try to justify their misconducts by arguing that they did it for the good of their family. One reason that leads to increased cases of identity theft amongst family members is that the credit check is incapable of attesting the age of the person using the card. It is very disturbing. However, other persons can also steal one’s identity I they access personal information regarding credit cards. It is thus important to guard one’s information. This can be by using credit cards while making online purchases other than debit cards (“Identity Theft & Credit Card Fraud – How to Protect Yourself”, 2012). Understanding finances is crucial for individuals, families and the society. Aspects such as investment affect the financial status of individuals and families. In many families, kinfolks inherit wealth but lack knowledge on how to invest it and end up bankrupt. One of the main causes of bankruptcy and increased poverty is poor spending. This happens even in case of credit cards. Parents should thus ensure their children understand how to use credit cards. Cares use of credit cards often read to instances of fraud (CreditCards.com, 2010). The concept of the “American Dream” was aimed at enabling American families to own homes. Although most Americans lack confidence in their government, most people support the American dream. Owning a home has been made easy such that families can attain a home even though they do not have sufficient cash to purchase one. This has been made easy by availability of mortgages (“Identity Theft & Credit Card Fraud – How to Protect Yourself”, 2012). Conclusion The card law has shaped the credit services and institutions in United States. Customers can now borrow using their credit reports and credit scores without fear of uncertainties. The American dream has enabled many families. Parents with bad credit score are likely to cash in their children’s financial and credit history. In a family where the members have a good credit history, they are capable of getting several products. It is thus important to keep a good credit history for borrowing purposes. Additionally, high credit score demonstrate a sense of responsibility. References Credit Rating Agencies. (2011, Aug 5). New York Times, p. Online: http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_rating_agencies/index.html. Identity Theft & Credit Card Fraud – How to Protect Yourself. (2012). The Wall Strreet Journal, pp. Online: http://guides.wsj.com/personal-finance/credit/how-to-protect-yourself-from-identity-theft/. The Credit History Underclass. (2012, May 30). New York Times, p. A28. Arnold, C. (2012, Feb 21). CARD Act may have cost consumers billions. Forbes, pp. Online: http://www.forbes.com/sites/moneybuilder/2012/02/21/card-act-may-have-cost-consumers-billions/. Bortz, D. (2012, April 16). 6 Surprising Ways to Boost Your Credit Score. U. S. News, pp. Online: http://money.usnews.com/money/personal-finance/articles/2012/04/16/6-surprising-ways-to-boost-your-credit-score. Bread, W. (2012, Oct 9). 5 Credit-Score Disasters to Avoid. US News, pp. Online: http://money.usnews.com/money/blogs/my-money/2012/10/09/5-credit-score-disasters-to-avoid. Carrns, A. (2012, Sep 26). Why Credit Scores Aren’t Always What They Seem. New York Times, pp. Online: http://bucks.blogs.nytimes.com/2012/09/26/why-credit-scores-arent-always-what-they-seem/. CreditCards.com. (2010, Jan 11). What the new credit card law means for you. FOX BUSINESS, pp. Online: http://www.foxbusiness.com/personal-finance/2010/01/11/new-credit-card-law-means/. Hardekopf, B. (2012, Jan 10). This Week in Credit Card News. Forbs, pp. Online: http://www.forbes.com/sites/moneybuilder/2012/10/01/this-week-in-credit-card-news-84/. Singletary, M. (2012, July 18). Keeping credit bureaus in check. Washington Post, pp. Online: http://www.washingtonpost.com/business/economy/keeping-credit-bureaus-in-check/2012/07/17/gJQAFIn2rW_story.html. Wise , L. (2012, Sep 25). Whats your credit score? It depends. Startribune, p. online: http://www.startribune.com/business/yourmoney/171268601.html?refer=y. Read More