Do you remember studying the food chain when you were in school? It all starts with the sun. Plants capture this energy and produce their own food from it. Therefore, they are called producers. Then some animals eat those plants for their energy and they are called consumers. Other animals consume these animals and so on.
I was thinking this week that in my former role as an agriculture and natural resources extension educator, I used the term “producers” often. We call farmers and gardeners producers because they are producing food for the rest of us.
Now, I get to focus on the consumer side of things. Family and consumer sciences examines habits and identifies the best practices for wise consumption. We may immediately think about consumption of food and drink, but this also includes our consumer saving and spending habits.
Recently, I received certification as a HUD (Housing and Urban Development) Housing Counselor. I get to consult with new homebuyers, many who are first time homeowners. 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. I enjoy walking through these with the housing counseling that I do. Today, I thought a review of a few 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 score. A credit report contains information that each credit bureau has on 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 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, the cutoff credit score is usually 640. 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.
Debt to Income (DTI) Ratio – This is a rate 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 is considered ideal for a conventional loan. Other types of loans can have higher DTI. For example, an FHA loan can have guidelines of 43 percent for DTI.
Free Individual Financial Coaching is available through our office for anyone looking to improve their financial knowledge and habits.
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.”
Emily Marrison is an OSU Extension Family & Consumer Sciences Educator and may be reached at 740-622-2265.
