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5 STEPS FOR IMPROVING YOUR CREDIT RATING
Blotches on your credit report cost you. But, don't despair. It's never too late to become credit worthy -- just get started, and remember that it won't happen overnight.
Here are 5 steps for improving your credit rating:
1. Order your credit reports
Find out what the top three credit bureaus -- Equifax, Trans Union and Experian -- are saying about you. It's likely that they're all slightly different. Yes, different! Creditors don't have to report to all three credit bureaus, so they typically report to the credit bureau to which they also subscribe.
Useful phone numbers
and addresses
Federal Trade Commission consumer response center (877) 382-4357
Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111
Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-0949
(888) 397-3742
Trans Union Corp.
760 W. Sproul Rd.
Springfield, PA 19064-0390
(800) 888-4213
Time and money is wasted, says Steve Rhode, president and co-founder of Myvesta.org, if you only order a report from one credit bureau.
Thanks to a new federal law you'll now be entitled to one free credit report from each of these credit reporting agencies per year. The program rolled out across the nation one geographical region at a time with all consumers eligible on Sept. 1, 2005.
The reports will not automatically be sent out. Each consumer must request their reports one of these three ways. Go to www.annualcreditreport.com, which is the only authorized source for consumers to access their annual credit report online for free. Or, call 877-322-8228. Lastly, you may complete the form on the back of the Annual Credit Report Request brochure, and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281.
One more caveat: you'll be able to order all three credit reports at one time, or at different times throughout the year. It's your choice. But, be sure to order from the centralized agency. If you go directly to the credit reporting agencies, you will be charged unless you fit another criteria for a free report.
The new ruling doesn't replace the other ways to receive a free credit report. You're still entitled to a free credit report if: you've been denied credit, insurance or employment based on your credit report; you're applying for unemployment or receive public assistance; and you currently reside in a state that already offers an annual free credit report from each credit reporting agency (Colorado, Maine, Massachusetts, Maryland, New Jersey and Vermont. Georgia residents are entitled to two free annual credit reports from each credit reporting agency.)
You can also order a credit report from each bureau for around $9.
2. Examine your reports carefully
Nearly every consumer has an error on at least one credit report from one of the major credit bureaus, says Rhode. Credit bureaus generate your report on information they receive from your creditors; they don't verify.
Keeping your credit report a true reflection of you is -- like it or not -- your job. Get ready to clean and polish. Carefully look for everything from typing errors, outdated and incomplete information to inaccurate account histories. You'll want to make a thorough list of items you dispute and why. Be meticulous.
If the negative information in your report is true, only time and improved habits can change that. Late payments and charged-off accounts remain on your report for seven years; bankruptcies for 10. Most creditors, however, look for a pattern of payment rather than focusing on one-time or rare occurrences; so consistent on-time bill payments will improve those blemishes.
3. Double-D strategy -- dispute and document
Remember, a bad report costs you money. So, it pays to be thorough! You can either complete the dispute form provided with your credit report or write a letter. Clearly identify each mistake and state why it's wrong. A recommendation is to send a photocopy of your credit report with the mistakes circled to the reporting credit bureau. Include copies of supporting documents.
Document, document, document. Keep copies and records of all the forms, letters and documentation that you send the credit bureaus, plus dates sent. The credit bureau must investigate any relevant dispute within 30 days of receiving your letter. Any item that is not verified as accurate by a creditor is removed.
Sometimes it's necessary to contact your creditors to resolve mistakes. Bankrate's how to fix your credit report will help you tackle the serious errors.
If the credit bureau makes any changes to your credit file, it will send you the results and a free, updated copy of your credit report. Once a negative item is removed from your report, the credit bureau cannot put it back on unless a creditor verifies its accuracy and completeness -- and sends you written notice.
4. Solve and dissolve debt
Now's the time to devise a spending plan that reduces your debt and sets you up to pay on time, every time.
If you're having difficulty making payments, be proactive. Call your creditors and negotiate to keep your accounts current and from being reported as delinquent or "bad debt." You can ask for reduced monthly payments, or even change due dates to balance out your monthly bills.
The same strategy can be used for fixed-loan payments. Remember, though, that this is a short-term strategy. You'll pay more interest to extend the repayment schedule, but it allows you to stay current and save your credit rating. Use the extra money to pay off debts one at a time, gradually increasing payments to other debts.
Deal with any collection accounts. Unpaid collections are worse than paid collections. You can negotiate a pay-off settlement that reduces your bill, plus demand that all derogatory remarks are removed from your credit report or at least reported as paid in full. Be sure to get verbal agreements in writing before sending off your payment.
Slowly close out unneeded or unused credit accounts. Most experts recommend carrying between two and four major cards. But, be cautious when canceling because closing accounts can negatively impact your credit score, commonly called a FICO score. FICO considers the ratio of total debts to total available credit. A good rule of thumb is to keep your revolving debt to 50 percent of your available credit.
Remember that cutting up the card doesn't close out the account. Here's a step-by-step guide to smartly close out your account.
Other tips:
Close out your newest accounts so that you don't lose your longer credit history.
Close out accounts slowly over several months.
Verify that all accounts you've closed are reported as "closed by consumer" for the best report.
Even if creditors offer to raise credit limits, allow yourself only moderate credit limits.
Keep your balances low and avoid revolving balances.
5. Add stability to your credit file
You can also work to add positive information and show stability in your credit file.
You may have been denied credit because of an insufficient credit file, yet you have credit. Some creditors -- such as, travel, entertainment, gasoline card companies, local banks and credit unions -- may not report your credit history to the credit bureaus. You can try asking the credit grantors to report your account information and monthly payment history to a credit-reporting agency. Not all will do that. So, in the future, before opening a new account, ask if your on-time payments will be reported monthly to a credit-reporting agency, recommends Myvesta.org.
If you have really bad credit -- perhaps even filed bankruptcy -- don't let your credit status go dormant. "The faster you begin to re-establish good credit, where you pay on time, every time," says Craig Watts, consumer affairs manager of the Fair, Isaac and Company, "the faster you'll improve your credit score."
Build a solid credit history. A secured credit card offers those with no credit and those repairing their credit this opportunity. Shop around for the best deal available, but limit your applications. Credit bureaus look at how many new accounts you've opened, and the number of "inquiries" for new accounts that are listed. A sudden flurry of "inquiries" results in a lower score, because many times consumers anticipating money problems increase their credit lines. Inquiries made by creditors wanting to make "prescreened" credit offers are not counted.
Lastly, open a savings account at your bank. This shows creditors that you are working to save and that you have reserves to repay debts.
By Dani M. Arthurr • Bankrate.com
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12 THINGS YOU NEVER KNEW ABOUT YOUR CREDIT REPORT
Most people have heard about the alligators in New York's sewers and the little kid with cancer who wants a zillion postcards.
Unfortunately, those aren't the only myths floating around out there. For example, a lot of the things that people "know" about credit reports and FICO scores have about as much validity as those monstrous Manhattan alligators.
So here's a look at 12 common credit report myths and what the truth really is.
1. Paying my debts will make my credit report instantly pristine.
A credit report is a history of your payments, not just a snapshot of where you are at the moment, says Maxine Sweet, vice president of public affairs for Experian, one of the three major credit-reporting agencies. As the author of popular Web column Ask Max, she continuously reminds people that you can't change the past.
2. I must give permission for a company to see my credit report.
It's scary, but the fact is that unless it's for employment purposes, your signature or consent is irrelative.
3. Credit counseling always destroys my credit score.
Attending a credit counselor's debt management program is not considered negative in the scoring models.
"We don't want consumers to consider credit counseling as detrimental to their scores as filing bankruptcy," says John Ulzheimer, partner channel manager at Fair Isaac Corp., or FICO.
However, when the credit counselor negotiates a lesser contractual obligation, the lender decides how he wants to report that. So if your $500 monthly payment is refigured for $300, the creditor may either legally report that as $200 in arrears every month or reward you for not filing bankruptcy by reporting the account as up-to-date.
Although credit counseling does not greatly influence your credit score, it is apparent on the report that you've been through counseling -- and that is something individual lenders may not like. Their responses vary greatly. Some will consider you radioactive and not deal with you for years. Others will charge you higher rates. A few may even cut you a break.
In the real world, says John Waskin, executive director of BillFree American Credit Counselors in Huntersville, N.C., auto lenders tolerate credit counseling the least.
"Once most car dealers see that you're on debt management or credit counseling, they have an opportunity to take advantage and charge you an exorbitant rate," he says.
Others, such as GMAC, will actually improve your score to give you a loan after you've worked with credit counseling for at least eight months because this route paints you as a responsible person. But as a blanket rule, he asks potential clients to delay joining his program until after the transportation loans are settled.
On the credit card side, "if you call Bank of America or First USA three times and ask three different people, you'll get three different answers," Waskin adds. "Approximately 45 percent of underwriters say credit counseling is a good thing, 25 percent think this is akin to bankruptcy."
The remaining 30 percent vary their answers, depending on their mood that day.
4. Canceling credit cards boosts my score.
Open accounts spells available, potential debt, so better close them, runs the legend. But experts agree that most creditors want to see at least two or three pieces of active credit to prove you can manage debt responsibly.
And, Ulzheimer chimes in, those unused cards lying in your jewelry box aren't wreaking havoc with your score.
"The myth is that they look ominous to potential lenders," he explains. "Reality is that paying your bills on time and not being overextended is more important than having $5,000 worth of available credit on a card you're not using. We continue to evaluate this 'open to buy' statistic, and we simply don't find it falling into one of those highly predictive areas."
On the other hand, extremes never look good. Opening one charge account occasionally to take advantage of a 10 percent offer is negligible. Going wild and signing up for 15 during the holiday season probably would invite a decreased score, he notes.
5. Too many inquiries hurt my score.
Once upon a time, this statement was true. But get with the times -- in this millennium, the credit agencies recognize a shopping mindset when they see one. If a batch of mortgage or car loan inquiries arrive within a 30-day period, they don't count at all, Ulzheimer assures.
"Outside that 30-day period, if we locate a mortgage or car inquiry that occurred 180 days ago, and then see more mortgage or auto-related hits in the accompanying 14-day window, we err on the consumer's side and still assume she's shopping for one item," he explains.
"We really feel like we are capturing the true consumer experience and not holding it against them for being an aggressive or smart rate shopper," he adds.
Furthermore, there's no such thing as some fixed number of points associated with these inquiries, Ulzheimer says.
"Inevitably when a consumer or a lender evaluates a credit file, they think this item must be worth 20 points, this is worth 100 points," he says. "In reality we try to evaluate credit reports so that the information is given a reasonable or statistically valid number of points."
In English, that means FICO is designed to predict the likelihood of an account going bad under given circumstances. Some things have predictive value and some don't. Inquiries fall in the middle.
"They're not incredibly predictive, so they're in the model but they don't drive the boat," Ulzheimer says.
6. Checking my own credit report harms my standing.
The reporting agencies distinguish between soft and hard pulls. When Target calls to check before issuing its line of credit, the agencies chalk that up as a hard pull and it counts against your score. Personal requests and credit counselors -- if they do it correctly, so insist on this as part of your agreement terms -- fall under soft pulls, which do not reflect on the evaluation.
Using a company that promises credit reports as a perk can turn this myth into a self-fulfilling prophecy, however, says Deborah McNaughton, owner of Professional Credit Counselors and author of the Get Out of Debt Kit. Because they are merchants in disguise, their freebie costs you. Citizens must go directly to the three bureaus if they want a soft pull. Ditto FICO.
"Pulling your credit scores is quite empowering," says Ulzheimer. "You have a choice: you can either be very aggressive with your credit management and pull your score with some regularity or take a more passive approach once a year to see where all those credit cards actually sit."
7. FICO scores are locked in for six months.
Fair Isaac and Company's models are dynamic, meaning they change as soon as data on the credit report changes.
"When we calculate a score, for all intents and purposes it then goes away and is recalculated the next time someone pulls your file," says Ulzheimer.
8. I don't need to check my credit report if I pay my bills on time.
When the Consumer Federation of America and the National Credit Reporting Association analyzed credit scores in the summer of 2002, they discovered that 78 percent of the files were missing a revolving account in good standing, while 33 percent of files lacked a mortgage account that had never been late. Twenty-nine percent contained conflicting information on how many times the consumer had been 60 days late on payments.
"There can be a lot of other activity going on that you don't have any clue about," McNaughton notes.
In her experience, 80 percent of all credit reports have erroneous information ranging from a wrong birth date to accounts you never applied for.
9. All credit reports are the same.
Way wrong. These days, most creditors across the country do report their information to all three major agencies: TransUnion, Equifax and Experian.
But, "That was not true in the past," Sweet admits.
And, because they are separate companies, the speed in which they update records isn't necessarily equal.
Additionally, the agencies use inquiry activity to update your address, phone numbers, employment status and the like. Because creditors typically pull only one company's report, it's possible that, say, TransUnion doesn't show your current address.
According to McNaughton, she's never seen a client yet for whom all three reports spit out the same records and scoring.
10. A divorce decree automatically severs joint accounts.
The judge may have rubber-stamped your plans to divide credit card, car and house payments, but that carries absolutely no legal weight with the creditors themselves, Sweet reminds.
"We see so many people who, a year or two after the divorce, are just outraged and hurt because their credit report reflects their ex-spouse's missed payments," she says.
Unfortunately, at that point, they are helpless to erase the damage.
Divorcing parties must contact the creditors and either close current accounts or have the booted name sign a letter of consent for this action. And assuming certain debts isn't a unilateral decision on your part, notes Sweet. Creditors typically do a credit check on your name, and if they don't deem you financially stable enough to assume that $30,000 car loan, for instance, they won't agree to remove the other person.
11. Bad news comes off in seven years.
Some of it does. Chapter 13 (reorganization of debt) disappears seven years from the filing date. But if you filed Chapter 7 bankruptcy (exoneration of all debt), the window is 10 years from the filing date.
On the good news side, accounts in bankruptcy can be deleted seven years after the date of your first missed payment, so those individual pieces may disappear before the word "bankruptcy" on your report. And if you pay off or close an account that had no delinquencies or problems, it, too, remains on the record for 10 years rather than the previous seven, say Experian experts. Again, this means positive information hangs around longer, as a consumer benefit.
12. I can always pay someone to fix or repair my credit.
"Virtually any time someone says that, they're lying," Waskin says.
Yes, you can clear up erroneous information posted to your account, such as a repossessed car that you didn't purchase in the first place, but if you paid your Sears bill three months late in 1997, that's a hard fact.
Companies claiming to fix your credit deliver on their promises by generating a flood of dispute letters to the credit reporting agencies, which means the listing must come off at that time. But if you can't prove the information in question is incorrect, the agency slaps it right back into the file after 30 days.
"I had a client who wanted to negotiate a debt to a clothing store. We called the store, which had sold the paper to someone else and had no record of this transaction. The middleman sold it to yet another company, which didn't know what the heck I was talking about," Waskin says.
"So we told the credit reporting company if it couldn't verify the amount owned, it must take it off my client's record. But the consumer can do that without spending money for a company to write that letter."
By Julie Sturgeon • Bankrate.com
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CREDIT BASICS
Generally speaking, "good credit" means paying your bills on time and maintaining a personal financial profile that helps to make lenders confident that you will make mortgage payments on time. Good credit also means that you are not "overextended" or borrowing so much that you are putting yourself at risk for financial problems.
Good credit makes it easier to get a loan when you need it, and helps you get lower interest rates when you borrow.
Take a few minutes to learn about credit, credit ratings and and how to avoid overextending yourself financially.
Why is credit important?
Good credit makes it easier to get loans, credit cards, and better interest rates when you borrow. Credit problems, on the other hand, make it harder to get a loan or lower interest rate often when you could use some help the most.
Unfortunately, credit problems don't go away overnight. Late payments a year or more ago can affect your credit history today. Major problems, like bankruptcy or a loan default, appear on your credit record for years.
What lenders look for:
Lenders evaluate credit risk, the likelihood that a borrower will make payments on time and pay off the loan. Some lenders have very strict guidelines and evaluate borrowers "by the book". At Countrywide Home Loans’ Full Spectrum® Lending Division, we're dedicated to getting the whole story so we can work with you to find a loan solution that's right for you.
To judge credit risk, lenders typically look at:
Income: Regular and documentable income from earnings, commissions, investments, rental payments and other sources. Lenders look for a steady income from month to month and a stable work history.
Assets: Savings, investments, retirement funds, cars and other valuables that are "liquid" or easily converted into cash.
Liabilities: Debts such as mortgage loans, home equity loans, credit card balances, car loans, student loans and other consumer debt.
Other Financial Information: Situations that could affect payments, such as lawsuits, collection activity, recent bankruptcy or property foreclosure, obligation to pay alimony or child support, or being a co-signer on another loan.
Payment History: Making timely mortgage or rent payments is very important. Paying late just once by 30 days or more can affect both the loan and the interest rate offered you. Late payments on credit cards, car payments and other bills are also factors.
Credit Reports: National credit bureaus collect information and provide reports to home lenders and other creditors. Credit reports include details on credit accounts and information on your payment history.
Debt-to-Income: Monthly debt expenses and income get converted to a debt-to-income ratio. While there isn't a standard, lenders often have a maximum number that they will allow a borrower to have.
All the factors listed above work together to affect a person's credit. That's why people with good income and prompt payment histories but a lot of debt might have trouble getting loans. And why individuals with plenty of income and few debts could also have problems if they're often late paying bills or have not established credit.
But here's the good news. Anyone can improve his or her credit rating over time.
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