You need to stay on top of your credit because it really does affect your whole financial life! | ||
| --Liz Weston, MSN Money Personal Finance Columnist and Author of Your Credit Score (FT Press, 2007) | ||
Your credit report and credit score are two of your most powerful financial tools. The better you look on paper, the less cards are going to cost you, and the more money you can make off them. Your rates on other loans and your premiums on insurance policies will likely be lower as well. And the next time your credit is checked when you apply for a job or an apartment, you’ll likely pass with flying colors.
If you have a lousy credit picture, you’ll pay more for everything—not just this year, but for the next seven years and maybe longer. You won’t be offered great deals on cards, and, what’s worse, you might be putting your family finances at great risk.
If the slightest thing happens to make you look worse on paper, you might go from just squeaking by to facing financial devastation. The rates on all your cards might quickly jump to as high as 30%. Then, if you lose your job, it could be harder to find a new one. Soon you might be facing bankruptcy. But it doesn’t have to be that way.
If you keep your credit report in good shape and as error-free as possible, your credit score—that three-digit number lenders use to decide how much of a risk you are—will be as high as possible. With a high credit score, you’ll have a powerful foot in the door for negotiating low-rate loans. A credit report in tip-top shape will also mean lower insurance premiums and better job opportunities.
With so much at stake, it seems only natural that everyone would want to accurately maintain their credit profiles. But until the Fair and Accurate Credit Transactions Act (FACTA)passed in 2003, that wasn’t an easy thing to do.
FACTA has helped consumers gain better access to their credit reports and, fortunately, it’s a lot easier now for you and I to manage our credit. In this chapter, I tell you what you need to know about credit reports. I explain how to get any errors on yours corrected and tell you how to keep your credit report in tip-top shape. Then I show you how to improve your credit score—which might be easier than you think, even if your credit is currently in bad shape.
To improve your credit report, you first have to get a copy of it and then scour your report, looking for mistakes. Here’s how to go about it:
Experts have recommended for years that consumers check their credit report annually for errors and signs of misuse. It’s good advice because you’ll likely find errors, and, in many cases, your credit report provides the first sign of identity theft.
The three largest credit reporting agencies previously charged fees if you wanted copies of your credit reports which, by the way, were also very hard to understand. Since FACTA, you’re entitled to a yearly free credit report from each of the three major credit bureaus. Not only are the reports now free, but they’re also more comprehensible. So set a yearly date—perhaps tax day, the first day of winter, or even your birthday—and order a free copy of your credit report from each bureau. You need to get reports from each bureau because your credit history as reported by each will likely vary. This will result in three unique credit reports—three unique opportunities for error.
Better yet, stagger the reports by ordering one every four months from a different bureau. That way, you’ll be able to keep closer tabs on your credit record throughout the year—and make sure your identity hasn’t been stolen. Please note that your credit history as reported by each bureau will likely vary. This will result in three unique credit reports.
The best way to obtain your free credit reports is to visit annualcreditreport.com, which is the official site set up by the federal government and sponsored by the three main reporting agencies—Equifax, Experian, and TransUnion. You can request a report online, download the request form and mail it in, or simply make a toll-free call to 877-322-8228.
As part of the verification process, both online and over the phone, expect to answer some questions that only you should be able to answer. If you make your request online, you’ll be able to see your report as soon as your identity has been verified. Phone and mail requests take up to 15 days to process.
Remember these two important tips when requesting your credit report:
Watch out for spam. Annualcreditreport.com will not request personal information through emails, phone calls, or pop-up ads. If you receive any of these, assume it’s spam or a scammer. Do not click on any links, respond to any emails, or provide information over the phone.
Don’t go to the individual credit bureaus’ sites to request your reports. If you do, you might have to sign up for a free 7-day or 30-day trial to get it. If you don’t opt out of the service before the trial period expires, you’ll be charged a monthly fee. There’s nothing free about that!
Your credit report includes assorted personal details, such as your name, where you live now as well as past addresses, your Social Security number, your date of birth, and your spouse’s name (if you have one). Sometimes information regarding your employment history also appears.
Tip
The fastest way to build your credit is to ensure that each of your creditors report your payment history to all three bureaus. The good news is most reputable credit card companies report to all three bureaus, but not all do. Some creditors, particularly smaller companies, only report to one or two bureaus—which is a good example of why it’s important to get all three reports. And, some creditors don’t even report to any credit bureaus.
Most, if not all, of your credit card accounts and other loans should appear on your report, and for each one, you should be able to see when you opened the account, your highest balance, your current balance, and your payment history.
Your credit report also shows information that’s available from public records, including criminal convictions, bankruptcy, tax liens, court judgments, and overdue child support. Negative information such as this can stay on your credit report for seven to ten years, and there’s no time limit on convictions.
Finally, your credit report lists inquiries—the names of lenders, landlords, insurers, or employers who have viewed your credit report. Some might be from your current lenders, and others might be from banks considering whether to send you a preapproved credit card offer in the mail.
Errors on credit reports are common. Twenty-five percent of them contain errors so serious that they could result in the denial of credit, according to a survey by the U.S. Public Interest Research Group. Having a major error on a credit report is a pretty serious problem, but such errors can usually be corrected fairly easily—although it generally does take time.
First, you have to find the mistakes. Make sure:
Your name, address, Social Security number, and date of birth are correct.
All the accounts are yours. If you see any accounts that you don’t remember opening, you might be a victim of identity theft. (See Chapter 6, “Watch Out: Traps and Scams Can Cost You Big Bucks,” for advice.) Someone else’s account also could have been “given” to you by mistake.
No late payments are showing for accounts you know you paid by the due date.
Outdated information doesn’t appear, such as a tax lien that you straightened out a decade ago.
Each account shows only once. You don’t want the same exact account showing twice on your report.
No accounts are missing.
Nothing else is incorrect, outdated, or incomplete.
Here are five frequent problems with credit reports:
Confusion between your report and the report for someone who has the same name—. It might be as simple as the difference between “Sr.” and “Jr.” or John L. Smith and John M. Smith. Maybe you use your middle initial for some accounts and don’t use it for others—or maybe someone in the bureau keyed your name incorrectly. This is a good example of what’s called a “split file” in industry lingo—which “can be a problem, since all the ‘good’ credit accounts may be split between two files,” explains Mark Enderle of Preferred Credit Solutions. (Visit CardRatings.com/Book for a link to Preferred Credit Solutions.)
Clerical errors—. For example, someone could have spelled your name incorrectly, transposed your Social Security number, or entered an incorrect address—any of these could pose a problem.
Inaccurate information from creditors—. This might happen if, for example, a lender incorrectly reports an address where you never lived.
Incorrect Social Security number—. Often, it’s simply a typo, but if you’re married, your spouse’s number might have been entered instead of yours. Or maybe you have other authorized users on an account, such as your teens who you let use your card.
Merged file—. This is where data from one person is combined with the data of another person. “This happens quite often and can be very deleterious to one’s score,” reports Enderle. One reason why this happens has to do with the way the credit bureaus compare Social Security numbers. “Only seven of the nine digits need to match,” Ederle explains, “because they wanted to limit the ‘kick outs’ on clerical errors.” The result is that people with the same or very similar names or similar Social Security numbers are merged together.
Tip
It’s not always easy to find these mistakes, but if you see information that doesn’t belong to you—or might not belong to you—your identity could have been stolen, and you should investigate. But don’t panic—it’s quite easy for creditors to mess up our files. Contact the credit reporting agency to inquire. (If an identity thief seems to be at work, see Chapter 6 for advice.)
If you find errors on your credit report, follow these simple steps:
The fastest way to start your “dispute,” as they call it, is to go online for detailed and up-to-date instructions (see the following for credit bureau websites). Make sure you follow the directions given by the credit bureau in question.
Copy and send along these key items with your dispute letter to the credit bureau:
Your credit report—. Highlight all errors on the copy you’ll be sending, numbering each problematic item—1, 2, 3, and so on.
Any documents that help make your case—. Never send an original, but always include documentation. If a store card account shows an unpaid balance, send along a copy of your cancelled check. Number these documents to match the ones you attach to your credit report.
Your driver’s license—. Including a copy of your driver’s license may prevent delays in disputing errors. Always provide as clear of a picture as possible. Make sure your driver’s license (or state ID card) is current, showing your correct name and address. The bureaus don’t need your driver’s license number, so if it makes you feel better, just mark it out.
Send disputes in writing.
Documented proof—This provides proof that you have disputed an error on your credit report. Make sure you keep a copy for your records.
Send your letter via certified mail, return receipt requested. Hang on to the return receipt to prove when the credit reporting agency receives your dispute.
Remember the 30-day window. The credit bureaus have 30 days after receiving your letter to let you know the results of their investigation into your complaint. If the information that you are disputing cannot be verified, they must delete it.
Be sure to include the following in your complaint:
Your name—. Always give your full name when filing a dispute. Other people might have the same or a similar name, which is often why files become mixed. Follow this format: first, middle, last, Senior, Junior, I, II, III.
Your Social Security number—. Always include your Social Security number, which helps ensure that the credit bureau pulls the right report. In some cases, such as when a father and son live at the same address, the name and address might be identical, but the Social Security number should always be unique.
Your address—. When you initiate disputes, the credit bureaus look at your address, but do not weigh it as heavily as your name and Social Security number in verifying that you are who you say you are. Still, it pays to make sure that you give your current address correctly, and if you’ve been living there for less than two years, give your previous address as well.
Your date of birth—. Including your date of birth is another way to make sure the bureau pulls the correct credit report.
The name of the creditor or collection agency—. If you don’t know the name, just use the spelling as you see it listed on your credit report. If you’re listing the name of the collection agency, also list the name of the original creditor below it.
The account number—. Use the number you find on the credit report so they can still follow your complaint even if they have the incorrect account number.
The reason for your dispute and what you want changed—. Calmly, clearly, and politely explain your concerns and your proposed remedy.
The results of the research you conducted—. You want your dispute understood and the next step to be obvious. So it pays to nose around a little to see if you can figure out what happened.
I have never had an account with the Yuma Department store. I live in upstate New York and have never been to Yuma. I checked online and see that someone with my name happens to live in Yuma. My hunch is that our reports got mixed up. Could you please remove this account from my credit report? Many thanks.
Type your dispute letters. You want to avoid having your dispute delayed just because someone cannot read your handwriting. Be sure to sign your letter.
Tip
If your dispute occurs when you’re trying to get a major loan, let the credit bureau know that you’d like it to rush the process and that you want the lender to receive an updated copy of your credit report. You can also request that all creditors within the last 6 months be notified of any corrections made to your report and that any employers who have gotten a copy of your report within the last 24 months receive a corrected copy.
What if...
You get the bureau to delete an item that was on your report incorrectly. Be sure you keep the notification from the credit bureau. If the creditor later reinserts the same item, the credit reporting agency has to notify you within five business days, and you’ll have your proof ready.
A disputed item is verified as correct and remains unchanged on your credit report. Make direct contact with the creditors or collection agencies that are reporting inaccurate information about you. Explain the errors and request that they make the corrections from their end.
If this doesn’t work, you can contact the Federal Trade Commission (ftc.gov) and file a complaint. You can also call 877-382-4357 and request help from the FTC’s dispute referral system, which was set up to help solve problem disputes.
Also, you have the right to initiate another dispute. However, it’s a good idea to wait 60 days between follow-up disputes. Otherwise, a credit reporting agency might take advantage of its right to deem a dispute as “frivolous,” which might happen if you dispute the same item within a short period of time.
A credit bureau decides your dispute is frivolous. Uh oh. It can terminate the investigation and put the onus on you. You might have to provide documented proof showing cause for the change to be made before a new investigation will begin.
Bankruptcy should always be a last resort. (See Chapter 5, “How to Slash Your Debt and Keep Your Hard-Earned Money for Yourself,” for bankruptcy alternatives.) If you haven’t filed yet, take your time and don’t rush the process. It’s more important to cover all your bases and avoid making a mistake that could cost you later.
It’s imperative that you obtain the most current payment information if you will be filing for bankruptcy. You need to know how much is owed and where you can send payment. Call each creditor for the information. If the creditor has turned over your account to a collection agency, get that agency’s contact information and then call there for the information.
It’s important to identify all your accounts. Your bankruptcy attorney will need this information to complete the process. If you owe money to creditors or collection agencies that don’t show on your credit report, find the most recent billing statements or collection letters that you’ve received.
It’s not easy to deal with collection agencies and impatient creditors. They’re the pros, and by the time you have to turn to them, you may be feeling pretty low. Here are my tips for getting through the encounter:
Don’t let them bully or upset you about outstanding balances. Just get the information you need. All you have to say is, “Thanks. I’ll call back soon.”
Don’t give them time for a rebuttal. Just hang up. If they push the matter, then only as a last resort, tell them you will be filing bankruptcy. Give them the name and number of your attorney and end the call.
Don’t play games. Sometimes people call creditors and suggest that they might declare bankruptcy, just for an edge in negotiating a settlement. You absolutely do not want to use this tactic if you plan to follow through with the bankruptcy, as it will likely backfire on you. As noted by bankruptcy expert John Ventura,
If you are going to file bankruptcy, you should not waste your time talking to creditors at all because your creditors are going to be notified by the court to stop contacting you about the debt as soon as you file.
After your bankruptcy has been discharged, your accounts from all other creditors not included in the settlement will appear differently on your credit report, depending on the type of bankruptcy:
Chapter 13—. The accounts included in a Chapter 13 bankruptcy remain on your credit report for seven years. (A Chapter 13 bankruptcy enables you to keep your property, and you agree to a three- to five-year repayment plan. Successful completion of the plan will result in a discharge of your remaining unsecured debt.)
Chapter 7—. The accounts included in a Chapter 7 bankruptcy remain on your credit report for ten years. (A Chapter 7 bankruptcy reduces unsecured debt by discharging or wiping it out. You’re usually able to keep your home and automobile if you keep making payments on them.)
The bankruptcy laws were rewritten in 2005 to make it more difficult to file under Chapter 7. If your income is higher than the median income for a family of your size in your state, you must pass a “means test” before you can file under Chapter 7. (For more information on means testing, including median income tables by state and family size, visit usdoj.gov/ust.)
Before you file for bankruptcy, defaulted accounts usually go to collections or charge-off status. When a creditor turns over a defaulted account to a collection agency, it normally stops reporting account information to the credit bureaus. The bill collector then tries to get you to pay and reports account information. The creditor is out of the loop.
By the time your attorney sends your creditors notice of the account being included in bankruptcy, it may no longer be in their computer system. Therefore, they might fail to notify credit reporting agencies to update the account to a zero balance and include it in bankruptcy status. Bottom line: Be very careful during this process so that this doesn’t happen to you.
If you have a complaint with how a creditor is reporting your account information, you can file a complaint with the FTC and with your state’s attorney general. Your bankruptcy attorney can also file complaints against creditors who do not report your information accurately.
When a creditor fails to update account information, an account could be listed in collections or charge-off status when it’s not. This could be a serious problem when you apply for new credit. A potential lender might assume that you still owe on the debt and decline your credit application.
The most efficient way to fix this problem is to do the following:
Obtain a copy of your bankruptcy and discharge papers from your attorney or the courthouse. (You might incur a copy fee.)
Make three copies of the section that lists all the creditors and collection agencies that were included in the bankruptcy—usually this is called Schedule F.
Forward all these documents to all the credit reporting agencies (listed earlier in the chapter), requesting that they update each creditor included in the bankruptcy to properly reflect a zero balance.
Finally, if a creditor or collection agency isn’t honoring your bankruptcy and is continuing collection efforts, contact your bankruptcy lawyer. Give your lawyer the name and address of the company bothering you so that he or she can send an official notice. Follow up with your lawyer if the creditor persists in harassing you. Creditors can be held accountable if they do not cease after bankruptcy notification.
As with all consumer issues, knowing your consumer rights throughout the bankruptcy process is essential. Taking a proactive approach at the onset of the process will help you on your road to credit recovery.
I hope you never have to follow my bankruptcy-related tips for improving your credit report, but if some of the details help motivate you to avoid a bankruptcy, that’d be great.
Do everything you can to limit your spending and to take good care of your credit report following bankruptcy. In sum, if you want to build and keep a great credit report, follow this advice from Gerri Detweiler, Marc Eisenson, and Nancy Castleman, the coauthors of Slash Your Debt (Financial Literacy Center, 2001):
...avoid late payments, and to have at least one major credit card [a secured card is a good option] that you pay on time, and over time. Some would argue that it’s the single strongest reference on a credit report. The reason? Because statistics have shown that people who have paid major credit cards on time in the past are likely to pay new ones on time, too.
Have you ever wondered whether you have “good” or “bad” credit, and how lenders determine whether you’re creditworthy? If so, you’re not alone. Consumer advocates have wanted this information for decades, but the way creditors determine creditworthiness was shrouded in secrecy for many years. Thanks to FACTA, the legislation that also brought us free credit reports, the magic formula creditors use has been revealed—at least, to some extent.
Now you can request not only your credit score, but also an explanation of the factors used to compute the score. Unfortunately, credit scores generally aren’t free, but as I explain, it’s money well spent in the cause of improving your all-important credit score.
Fair Isaac and Co. (FICO) develops the credit scores used by the major credit card issuers and in 75% of the nation’s mortgage decisions. According to the Fair Isaac website, myfico.com, 90% of the nation’s largest banks use FICO scores when evaluating loans.
As of this writing, a FICO score in the 700+ range is considered attractive, and the average score is 690. However, that might soon change because FICO is refining its credit scores so they’re more accurate. The new system, known as FICO 08, will look more closely at delinquent payments and credit histories. If you were more than 90 days late on one credit card bill a few years ago, but you’ve been promptly paying all your other card bills as well as your mortgage, you’ll fare better under the new FICO system. If you tend to be late on lots of bills, your score will be even lower than it is now.
Before they give you a credit card or loan, lenders want to be able to predict with some level of certainty that you’ll actually pay them back. The riskier you appear when compared to other people, the more you will have to pay, if you can get a loan at all.
Scoring systems compare details on the credit reports of people who pay their bills on time, looking for what they have in common—and, similarly, what people who don’t pay their bills have in common. The formulas weigh various factors, trying to predict whether a new customer is likely to always pay on time.
As you might expect, credit scoring can get pretty complicated. Nearly every branch of the financial industry has customized scoring systems that serve as a basis to compare the scores of potential borrowers—homeowners, cardholders, and so on.
The higher your score, the better you appear. The more risky you appear...you know the drill. But what you might not know is just how much a low score could cost you. Look at these numbers from myfico.com, which show how your credit score will likely impact the amount you’d pay on a 30-year, $300,000 mortgage (consult the website for the latest numbers):
FICO® Score | APR | Monthly Payment |
|---|---|---|
760–850 | 6.290% | $1,855 |
700–759 | 6.512% | $1,899 |
660–699 | 6.796% | $1,955 |
620–659 | 7.606% | $2,119 |
580–619 | 9.451% | $2,512 |
500–579 | 10.31% | $2,702 |
With a low credit score, you would have to pay $847 more every month than someone with a high score. Isn’t that amazing? Similarly, a credit score of around 720 can potentially save you thousands of dollars in credit card finance charges when compared to a credit score in the mid-600s.
Let’s look at a breakdown of the criteria on credit reports that FICO uses to create credit scores.
If you fail to pay your bills on time, your score will suffer. The longer you go without paying, the worse the damage can be. The good news is that the damage isn’t permanent—the effect of late payments, charge-offs, collections, and judgments normally starts to gradually fade after a few months when you pay your bills on time. Also, late payments on credit cards aren’t normally reported to the credit bureaus unless they are 30 days or more late.
Tip
One of the fastest ways to increase your credit score is to pay down debt and increase your credit limits. Some card issuers give instant credit line increases just for the asking, and you can get a credit line increase online in seconds!
Utilization is the difference between the combined credit limits on all your accounts and the total amount you owe. If you have lots of cards and are very close to your limits on them, your utilization will be high and your credit score low. The more of your available credit that you’re using, the lower your score. The way the math works, it’s much better to have several accounts with low balances than it is to have fewer accounts at or near the credit limit. The basic equation to determine utilization is this:
Current balance ÷ Credit limit = Utilization
Lower utilization is better. Ideally, you should keep your changes limited to 10% or less of your individual credit limits. The lower your utilization, the higher your score is likely to be.
The longer you have credit card and other accounts with lenders, the better. When you’re first starting out, establishing credit isn’t always easy. So apply for one or two credit cards, get a store card, and make consistent, on-time payments. Over time, you’ll establish a good payment history, and before you know it, you’ll probably be flooded with applications for low-rate credit.
In the past, you could give your credit score a big boost by simply becoming an authorized user on another person’s established credit accounts. A common example is a parent adding their son or daughter to one of their credit card accounts. But in 2007, Fair Isaac announced that authorized user accounts will no longer factor into their credit scoring formula. The rollout for this change began in September 2007. Your best bet in light of this announcement? Build up a good, solid payment history in your own name! And the good news is that the FICO 08 is supposed to restore authorized used credit accounts to the calculation of FICO 08 credit scores.
Tip
When applying for credit, get your own credit report first from each bureau. I recommend all three bureaus because you won’t know which report the bankers will want to see. When you get your own credit report, it’s called a soft inquiry and will not hurt your score. Make sure it’s in tip-top shape before you apply for new credit, as I explained earlier in this chapter.
Unnecessary credit inquiries hurt your score—especially if your overall credit file is small to begin with (which the industry calls a “thin file”) or if you have a bad credit history.
Shopping for a mortgage or a new auto? Fortunately, all home loan applications made within a certain period of time count as only one inquiry—it used to be 14 days, but newer versions of the FICO formula make it 45 days. Similarly, all auto-related credit inquiries made within a certain time span are counted as one.
Having different types of credit can help your scores. People with the best credit scores tend to have both revolving credit (credit cards or lines of credit) and installment loans (mortgages or car loans) on their credit reports.
Tip
Keep in mind how much each of these different factors affects your scores. Periodically, you might want to “violate” one of the least consequential factors. For example, to take full advantage of various low-introductory rate card offers, you might want to “let yourself” have more than two or three credit cards because the mix of credit accounts for only 10% of your score. Especially if you have good utilization on your existing accounts, it won’t likely be a big problem because utilization accounts for 30% of your score. (Utilization is a much bigger factor than your mix of credit.)
Of course not, that would be too easy! Although Fair Isaac does provide the dominant scoring models, and lenders use multiple scoring systems and models, often adding additional criteria of their own. Unfortunately, we get access to only a few of these other scores, which generally don’t even match the scores creditors see.
Consumers can also obtain other credit scores, which are commonly known as FAKO scores, because they often mimic FICO scores. FAKO scores tend to be less expensive.
Another scoring system worth noting is the VantageScore, which was launched in March 2006 by Experian, Equifax, and TransUnion. This score applies one formula to data from all three bureaus and uses a different scoring range than the 300-850 range associated with FICO. Your VantageScore will fall within a range of 501 to 990, with higher scores representing a lower likelihood of risk. Another unique aspect is that you are given a letter grade on a scale ranging from A to F.
You have a lot of alternatives. As of this writing, you can find a couple of free credit score trial offers on CardRatings.com that include free credit monitoring—click on “Credit Information” from our home page for your current options. If you would prefer not to sign up for a trial offer, you will have to pay for your score(s). The fee is usually around $15 per score.
I recommend picking one system or product and sticking with it. Don’t bother looking at multiple scoring systems because doing so can get confusing. Stick with the FICO scores from the three biggest credit bureaus, which you can order through a link at CardRatings.com/Book.
Each time you view your credit scores, you will normally see negative items listed that are hurting your scores. Focus on improving those particular areas, and check your scores regularly to monitor your progress. Persistence will pay off.
Finally, when monitoring your score, it’s a good idea to give yourself a cushion, to be on the safe side. One reason for this is that sometimes, lenders will see a different score than you do. As MSNBC Personal Finance Columnist Liz Weston succinctly states, “get your scores as high as possible to give yourself a cushion, since credit scores change constantly and lenders may use different versions of the FICO formula that produce somewhat different results.”
Tip
Speaking of lenders, their advice can be useful for getting a loan, but it’s not always good for your credit scores. If you’re told to consolidate and close accounts, be careful how you go about this. Compliance with this lenders’ advice often results in lower credit scores. My advice is to pay down your debts and not close your accounts unless the lender says that you must do so to qualify for the loan, and you have no other options.
There you have it, all the information on credit reports and scores that you need to make yourself look as appetizing as possible to those sharks...whoops, I mean lenders! Remember, the better you make yourself look, the more they’ll want you and the better terms you’ll enjoy. And the better terms you can qualify for, the more money you’ll keep in your bank account. Bon appétit.