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You are here: Home / Money / Financial Consumers

October 22, 2021

Financial Consumers

Do you remember studying the food chain long ago? Plants capture energy from the sun to produce their own food, and are therefore called “producers.” The animals that eat those plants, or other animals, are labeled  “consumers.” When we think of humans as consumers, we may immediately think about our consumption of food and drink. However, we also use the term consumers when describing our financial saving and spending habits.

Part of what helps us to be wise financial consumers is to understand financial terms that we may be familiar with, but not completely understand. Here is a review of a few key terms that might be helpful for you or someone you know.

Person using laptop to look up financial information

Credit Report – It can be easy to confuse a credit report with a credit score. A credit report contains information that each credit bureau has about a consumer. Information includes details such as history of accounts, number of inquiries, and number of collections. The three credit reporting agencies are Equifax, Experian, and Transunion. All consumers have the right to check their credit report from each agency annually at annualcreditreport.com. Because of the ongoing pandemic, everyone can check these weekly for free.

Credit Score – A credit score, on the other hand, is a numerical interpretation of a consumer’s  creditworthiness based on information in his or her credit report. Credit scores are often referred to simply as FICO scores. FICO stands for Fair Isaac Corporation and is the most used scoring model for lending and credit decisions in the U.S. FICO scores range from 300 to 850 and higher is better.

Factors that make up the credit score include account history (including late payments), amounts owed (ratio of what you owe compared to your credit limit), length of credit history, new credit, and types of credit used (including revolving credit such as credit cards and installment credit like a car loan, student loan, or mortgage).

When considering the purchase of a home, a credit score of 640 or higher is usually required. There may be options for a lower score, but financing will come with some significantly higher interest rates. A higher credit score will qualify for better mortgage terms.

Piggy bank, toy house, magnifying glass

Debt to Income (DTI) Ratio – This is a ratio that calculates a borrower’s total monthly debt, including housing and other debt obligations, as a percentage of gross monthly income. Monthly debt includes auto and student loan payments as well as housing expenses (principal, interest, taxes, and insurance). This ratio is frequently used by lenders to qualify borrowers for a mortgage. A DTI of 36 percent or lower is considered ideal for a conventional loan. Other types of loans can have higher DTI.

Today I’ll leave you with this quote from Ayn Rand , “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

 

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WRITTEN BY: Emily Marrison, Extension Educator, Family and Consumer Sciences, Ohio State University Extension, Coshocton County

REVIEWED BY: Courtney Woelfl, Program Specialist, Healthy Finances, Family and Consumer Sciences, Ohio State University Extension

PHOTO CREDITS:

  • https://unsplash.com/photos/bmj1Vl77ZWM
  • https://unsplash.com/photos/NpTbVOkkom8

SOURCES:

  • Egan, J. What’s the most important factor of your credit score? Experian. August 29, 2021. https://www.experian.com/blogs/ask-experian/what-factor-has-the-biggest-impact-on-credit-score/
  • What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important? Consumer Financial Protection Bureau. November 15, 2019. https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/#:~:text=Your%20debt%2Dto%2Dincome%20ratio,money%20you%20plan%20to%20borrow

REFERENCES:

  • Mortgages key terms. Consumer Financial Protection Bureau. Retrieved October 18, 2021. https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/?_gl=1*17g9u5n*_ga*MTg0NTk3MTQyNy4xNjMwNDMwODA4*_ga_DBYJL30CHS*MTYzNDU4NzgxMi40LjEuMTYzNDU4ODI0OS4w

Categories: Money
Tags: credit report, credit score, debt-to-income ratio, finances, money management

Avatar for Emily Marrison
Avatar for Emily Marrison

About Emily Marrison

Emily Marrison serves as the Family and Consumer Sciences Educator for OSU Extension in Coshocton County. Emily has BS and MS degrees in Food Science & Nutrition from Ohio State and worked for Abbott Nutrition for 9 years in Product Research & Development. She joined OSU Extension as an Agriculture and Natural Resources Educator in 2012. She has also been co-owner of a food truck. She is mom to two delightful adolescents, and wife to an Extension educator with the same passion for helping people where they are. All these experiences contribute to her love of teaching about food (food labeling, food safety, Dining with Diabetes), finances (teen financial literacy, money management) and family (co-parenting, and communication, and transition planning).

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