Do you remember studying the food chain when you were in school? Everything starts with the sun. Plants absorb this energy and use it to produce their own food. Hence they are called producers. Then some animals eat these plants for their energy and are called consumers. Other animals consume these animals and so on.
I thought this week that in my previous role as an Agriculture and Natural Resource Instructor I used the term “producer” a lot. We call farmers and gardeners producers because they make food for the rest of us.
Now I can focus on the consumer side of things. Family and consumer studies examine habits and identify best practices for sensible consumption. We may think immediately about the consumption of food and drinks, but this also includes our savings and consumption behavior.
I recently received certification as a HUD (Housing and Urban Development) Housing Counselor. I can consult with new home buyers, many who are first time homeowners. Part of what helps us to be wise financial consumers is understanding financial terms that we may know but not fully understand. I enjoy going through these with the housing advice that I do. Today I thought that a review of some key terms might be helpful for you or someone you know.
Credit Report – It can be easy to confuse a credit report with a credit rating. A credit report contains information that any credit reporting agency has about a consumer. The information includes details such as the history of the accounts, the number of requests, and the number of collections. The three credit bureaus are Equifax, Experian, and Transunion. All consumers have the right to review their credit report from any agency annually at annualcreditreport.com. Because of the pandemic, anyone can view these weekly for free.
Creditworthiness – A credit score, on the other hand, is a numerical interpretation of a consumer’s creditworthiness based on information in their credit report. Credit scores are often referred to simply as FICO scores. FICO stands for Fair Isaac Corporation and is the most widely used rating model for credit and credit decisions in the United States. FICO ratings range from 300 to 850 and higher is better.
Factors that determine creditworthiness include account history (including late payments), amounts owed (the ratio of your debt to your credit limit), length of credit history, new credit, and types of credit used (including revolving loans such as credit cards and installment loans such as car loan, student loan or mortgage).
When considering buying a home, the cutoff credit score is typically 640. There may be options for a lower score, but the financing will come with significantly higher interest rates. A higher credit rating qualifies for better mortgage terms.
Debt-Income Ratio (DTI) – This is a rate that calculates a borrower’s total monthly debt, including residential and other debt, as a percentage of gross monthly income. Monthly debt includes car and student loans, as well as housing costs (principal, interest, taxes, and insurance). This ratio is often used by lenders to help qualify borrowers for a mortgage. A DTI of 36 percent is ideal for a conventional loan. Other types of loans may have a higher DTI. For example, an FHA loan may have guidelines of 43 percent for DTI.
Free one-on-one financial coaching is available through our office for anyone looking to improve their financial skills and habits.
Today I leave you with this quote from Ayn Rand: “Money is just a tool. He will take you wherever you want, but he will not replace you as a driver. “
Emily Marrison is an OSU Extension Family & Consumer Sciences Educator and can be reached at 740-622-2265.