Improve
your credit score in 5 steps
We know
more than ever about how credit scores are calculated. Learn how
to clean up your record, polish it to a new gleam and reap the financial
rewards.
So you’ve
had a few problems getting the bills paid lately, and you’re
wondering what you can do to repair the damage.
You’ve
got plenty of company. There are more than 30 million people in
the United States with credit blemishes severe enough (score under
620) to make obtaining loans and credit cards with reasonable terms
difficult.
Or maybe
your credit is OK, but you'd like to make it better. After all,
the better your credit, the lower the interest rates you can score
on mortgages, car loans and credit cards.Check out your options.
Shop for rates
before you borrow.
New glimpses into the once-secret process of credit scoring have
made it easier than ever to improve your credit -- and reversed
some of the advice we personal finance journalists once gave consumers
about managing plastic.
(For
the uninitiated, credit scores are three-digit numbers increasingly
used by lenders when evaluating your creditworthiness. Insurers,
employers and landlords also use the scores in evaluating the applications
they get. Scores range from 300 to 850. Only about 11% of the surveyed
population ranks above 800; 29% ranks between 750 and 799.)
Anyone
who wants to improve a credit score should first do some basic housekeeping:
Get a copy of your credit report from one of the three major credit
bureaus, scour it for any mistakes and ask the bureau to remove
incorrect information. Once that’s accomplished, you can start
to work on burnishing your score.
Here,
then, are the five steps to credit repair:
Pay
your bills on time
Payment history is the single most important factor in determining
your credit score, making up 35% of the total. Since recent history
carries more weight than what happened five years ago, getting in
the habit of making on-time payments is an incredibly powerful way
to start rebuilding your credit rating.
Likewise,
delinquent payments can devastate your score. Missing even one payment
can knock 50 to 100 points off a good score. Skipping payments for
a single month on all your bills can lower your number from a respectable
707 to the dismal range of 562 to 632, according to a new credit
score simulator at MyFico.com, a joint venture between leading credit
scorer Fair Isaac & Co. and credit bureau Equifax.
The simulator
lets you see the impact of various credit behaviors on a sample
score. For $12.95, consumers can order their own scores and see
how a wider array of actions, from opening new accounts to maxing
out their credit cards, could affect their numbers.
Tip:
I’ve found the best way to avoid late payments is to put as
many of our bills on automatic as possible. Our mortgage lender,
utilities and phone service providers are happy to take their payments
directly from our checking account each month. Online bill-payment
systems are another way to ease monthly check-writing chore, and
many provide reminder services so you don’t forget a bill.
The latest versions of Quicken and Money have good reminder features,
as well.
Pay
down your debts -- and consider charging less
Lenders like to see plenty of breathing room between the amount
of debt reported on your credit cards and your total credit limits.
The more debt you pay off, the wider that gap and the better your
credit score.
What
many people don’t know is that credit scores don’t distinguish
between those who carry a balance on their cards and those who don’t.
So charging less can also improve your score -- even if you pay
off your credit cards each month.
Your
credit-card issuer takes a look at your account once every month
or so and reports the outstanding balance on that day to the credit
bureaus. This snapshot doesn’t reflect whether you pay off
that balance a few days later or whether you carry it from month
to month.
Tip:
If you plan to apply for a mortgage, car loan or other major credit
account in the next year, start paying down those balances now.
And if you’re in the habit of charging everything in sight
to your cards -- to gain more frequent flier miles, say -- consider
switching more to cash in the months before you apply. Depending
on your situation, the loss of a few miles could be more than made
up for by a better score, and thus a lower interest rate.
This
kind of advice, by the way, makes the folks at Fair Isaac more than
a little nervous. Credit scorers and lenders don’t want to
see people “artificially” changing their behavior to pump
up their scores. Moderation in using plastic is never a bad thing,
however, and if the desire for a better score has you using credit
more wisely, who’s the loser? Oh, other than the fee-charging,
interest-rate-boosting credit-card companies, of course.
Don’t
close old, paid-off accounts
We used to tell people to close accounts they weren’t using.
Now here’s the word from Craig Watts of Fair Isaac’s consumer
affairs office: “Closing accounts can never help your score,
and often it can hurt.”
This
knowledge is frustrating to those who want to simplify their lives
and reduce the opportunities for identity theft by closing unused
accounts. But credit facts are credit facts.
Shutting
down credit accounts lowers the total credit available to you and
makes any balances you have loom larger in credit score calculations.
If you close your oldest accounts, it can actually shorten the length
of your reported credit history and make you seem less credit-worthy.
Of course,
perhaps you can afford not to care too much about the effect of
closing an account. If you don’t use your cards much and your
score is already high, the damage caused by shutting down more recent
unused accounts will be minimal and may be well worth the peace
of mind.
If you
do carry balances or charge a lot, however, leave all your old accounts
open, especially if you’re about to apply for new credit.
Tip:
Keep all this in mind the next time a department store clerk offers
you a 10% discount for signing up for a new card. Each new account
can put a small ding on your credit score, and offer a new opportunity
for credit thieves. Since closing accounts can hurt, it’s better
to apply only for credit you really need.
Don’t
be afraid of credit counseling
If you’re overloaded with high-interest debt and are in danger
of falling behind on your payments -- or you already have -- consider
working with a nonprofit agency such as Consumer Credit Counseling
Service to set up a debt repayment plan. These services can negotiate
lower interest rates and help you pay off your bills within a few
years.
Contrary
to what you might have heard, credit counseling probably won’t
hurt your credit score. It used to, but about three years ago Fair
Isaac discovered that people in debt-repayment plans were no more
likely to default or go bankrupt than other consumers.
“Today
the FICO score ignores any and all references in a credit report
to credit counseling or debt management programs,” Watts said.
Those
references to credit counseling, by the way, are typically removed
from a credit report after a consumer has successfully completed
a repayment plan. That means there’s no lasting reminder on
your credit history.
Watts
notes that a few lenders still use the old scoring system, which
punishes folks on debt repayment plans. Obviously, you’ll want
to avoid those lenders -- and perhaps all lenders until you’ve
dug your way out of credit trouble.
Tip:
Don’t confuse legitimate, nonprofit credit counseling services
with fly-by-night outfits or so-called debt settlement firms. Debt
settlement will hurt your credit score, since you’re paying
less than you owe, and fly-by-night firms can disappear with your
payments, making your credit even worse.
Stay
out of bankruptcy if you can
Bankruptcy is the nuclear bomb of the credit world -- worse than
delinquencies, loans or collections. Its impact, however, depends
on how many black marks you made on your credit before you filed.
Bankruptcy
can knock 200 points, or more, off the score of someone with otherwise
good credit. People with multiple delinquencies or collections on
their reports will see less decline because their scores are low
to begin with. Either way, recovering from a bankruptcy can be tough.
Once a score is pushed below 620, which bankruptcy inevitably does,
credit becomes scarce and far more expensive.
High-interest
lenders love recent bankruptcies, because they know consumers aren’t
allowed to file again for another six years -- plenty of time to
squeeze out lots of high-rate payments.
Mainstream
lenders, however, generally will reject consumers with a bankruptcy
on their record -- and bankruptcies are reported for up to 10 years.
Knowing
your credit score, and the potential impact of a bankruptcy, might
help you steel your resolve to pay off your bills and improve your
credit situation. Or you may decide you can’t make matters
much worse, and file anyway.
Final
tip: Once you know the impact on your score, get good objective
advice before filing for bankruptcy. Attorneys may be overly eager
for you to file, while consumer credit counselors may be overly
eager that you not. Books such as Robin Leonard’s “Money
Troubles: Legal Strategies to Cope with Your Debts” offers
a more balanced view of the risks and benefits of bankruptcy.
More
on Improving Your Credit Report
Under
the law, both the CRA and the organization that provided the information
to the
CRA, such as a bank or credit card company, have responsibilities
for correcting inaccurate or incomplete information in your report.
To protect all your rights under the law, contact both the CRA and
the information provider if you have a dispute.
First,
tell the CRA in writing what information you believe is inaccurate.
Include copies (not originals) of documents that support your position.
In addition to providing your complete name and address, your letter
should clearly identify each item in your report you dispute, state
the facts and explain why you dispute the information, and request
deletion or correction. You may want to enclose a copy of your report
with the items in question circled. Your letter may look something
like the one below. Send your letter by certified mail, return receipt
requested, so you can document what the CRA received. Keep copies
of your dispute letter and enclosures.
Sample Dispute Letter
Date
Your Name
Your Address
Your City, State, Zip Code
Complaint
Department
Name of Credit Reporting Agency
Address
City, State, Zip Code
Dear
Sir or Madam:
I am
writing to dispute the following information in my file. The items
I dispute also are encircled on the attached copy of the report
I received.
This
item (identify item(s) disputed by name of source, such as creditors
or tax court, and identify type of item, such as credit account,
judgment, etc.) is (inaccurate or incomplete) because (describe
what is inaccurate or incomplete and why). I am requesting that
the item be deleted (or request another specific change) to correct
the information.
Enclosed
are copies of (use this sentence if applicable and describe any
enclosed documentation, such as payment records, court documents)
supporting my position. Please reinvestigate this (these) matter(s)
and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your
name
Enclosures:
(List what you are enclosing)
CRAs must reinvestigate the item(s) in question—usually within
30 days—unless they consider your dispute frivolous. They also
must forward all relevant data you provide about the dispute to
the information provider. After the information provider receives
notice of a dispute from the CRA, it must investigate, review all
relevant information provided by the CRA, and report the results
to the CRA. If the information provider finds the disputed information
to be inaccurate, it must notify all nationwide CRAs so that they
can correct this information in your file.
Disputed
information that cannot be verified must be deleted from your file.
If your
report contains inaccurate information, the CRA must correct it.
If an item is incomplete, the CRA must complete it. For example,
if your file showed that you were late making payments, but failed
to show that you were no longer delinquent, the CRA must show that
your payments are now current.
If your file shows an account that belongs only to another person,
the CRA must delete it.
When the reinvestigation is complete, the CRA must give you the
written results and a free copy of your report if the dispute results
in a change. If an item is changed or removed, the CRA cannot put
the disputed information back in your file unless the information
provider verifies its accuracy and completeness, and the CRA gives
you a written notice of its intent to reinsert the items that includes
the name, address, and phone number of the provider.
If you
request, the CRA must send notices of any correction to anyone who
received your report in the past six months. You can have a corrected
copy of your report sent to anyone who received a copy during the
past two years for employment purposes. If a reinvestigation does
not resolve your dispute, ask the CRA to include your statement
of the dispute in your file and in future reports.
In addition
to writing to the CRA, you should tell the creditor or other information
provider in writing that you dispute an item. Be sure to include
copies (not originals) of documents that support your position.
Many providers specify an address for disputes. If the provider
continues to report the disputed item to any CRA after receiving
your notice, it must include a notice that you dispute the item.
If you are correct—that is, if the information is not accurate—the
information provider may not report it again.
Accurate Negative Information
When negative information in your report is accurate, only the passage
of time can assure its removal. Accurate negative information generally
can stay on your report for seven years. There are certain exceptions:
Bankruptcy
information may be reported for 10 years.
Credit information reported in response to an application for a
job with a salary of more than $75,000 has no time limit.
Information about criminal convictions has no time limit.
Credit information reported because of an application for more than
$150,000 worth of credit or life insurance has no time limit.
Default information concerning U.S. Government insured or guaranteed
student loans can be reported for seven years after certain guarantor
actions.
Information about a lawsuit or an unpaid judgment against you can
be reported for seven years or until the statute of limitations
runs out, whichever is longer.
Seven-year Reporting Period
There is a standard method for calculating the seven-year reporting
period. Generally, the period runs from the date that the event
took place.
With
regard to any delinquent account placed for collection—internally
or by referral to a third-party debt collector, whichever is earlier—charged
to profit and loss, or subjected to any similar action, the seven-year
period is calculated from the date of the delinquency that occurred
immediately before the collection activity, charge to profit and
loss, or similar action. For example, assume that your payments
on a loan were late in January, but that you caught up in February.
You were late again in May, but caught up in July. You were again
late in September, but did not catch up before the account was turned
over to a collection agency in December. You made no more payments
on the account, and it is charged to profit and loss in July of
the following year.
Under
the FCRA, the January and May late payments each can be reported
for seven years. The collection activity and the charge to profit
and loss can be reported for seven years from the date of the September
payment, which was the delinquency that occurred immediately before
those activities.
Adding
Accounts to Your File
Your credit file may not reflect all your credit accounts. Although
most national department store and all-purpose bank credit card
accounts will be included in your file, not all creditors supply
information to CRAs: Some travel, entertainment, gasoline card companies,
local retailers, and credit unions are among those creditors that
don't.
If you've
been told that you were denied credit because of an "insufficient
credit file" or "no credit file" and you have accounts
with creditors that don't appear in your credit file, ask the CRA
to add this information to future reports. Although they are not
required to do so, many CRAs will add verifiable accounts for a
fee. However, understand that if these creditors do not report to
the CRA on a regular basis, the added items will not be updated
in your file.
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