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With all the financial upheaval over the last year, including the subprime-mortgage mess and the rescue plan for banks toppled by high-risk loans, it wouldn't be surprising if you were starting to think of "credit" as a four-letter word.
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But one point this crisis has driven home is that your credit is the financial equivalent of your good name. It's your ticket to a home or a car or a credit card, and a slip-up can come back to haunt you.
That's especially true now because the subprime crunch has spread to other types of credit. For instance, banks have been forced to write off record levels of credit-card debt, so they're requiring borrowers to have higher credit scores. A year ago, a score of 720 had lenders lining up for your business. Today, a score of 740 or 750 would get you an account but might not qualify you for the lowest rates, says Bill Hardekopf of LowCards.com.
So it's more important than ever to have a spotless credit history and a stellar score. Here are five ways to achieve both.
1. Know your starting point. If you haven't already seen your credit report, take a look now. Log on to annualcreditreport.com and get a free copy from each of the three credit bureaus -- Equifax, Experian and TransUnion. (Note: Copycat sites often require you to purchase other services in order to get a "free" credit report.)
While you're on a bureau's Web site, you'll also have the option to buy your credit score for $6 to $8 each. If you've already used your once-a-year free pass on AnnualCreditReport.com, go to myFICO.com to download your reports and scores ($15.95 for the score from one credit bureau, or $47.85 for all three).
2. Dispute any mistakes immediately. Go through your report with a fine-toothed comb and file a dispute with each bureau that reports an error. The process isn't lightning fast -- you typically have to wait 30 to 45 days for the bureau to investigate any disputes you submit -- but be persistent until any problems have been resolved. Big issues, such as an incorrect report that an account has gone to collection or is in foreclosure, could be costing you 100 points or more on your credit score.
Gerri Detweiler, credit adviser for Credit.com, says it's also important to check the dates on any negative information that's being reported. Accounts in collection are notorious for being reported long after they should have been expunged from your record. Negative items generally can be reported for seven years from when you first fell behind. Two exceptions are bankruptcies, which can be reported for ten years, and tax liens, which can stay on your record indefinitely unless you pay them.
Other things to watch out for: paid-in-full accounts that still show a balance and someone else's record appearing in your file. If the credit bureau misspells your name or reports your address incorrectly, that doesn't affect your score.
3. Lower the ratio of your outstanding debt to your credit limits. This step is especially important now because many lenders have canceled home-equity lines of credit. With less credit available, big balances send your credit ratio up and your credit score down.
If you're a long-standing customer with a good history, ask your current credit-card issuers to raise your limits. Or focus on paying down your balances so that you're using less of your available credit. Aim to keep your balance below 30% of your limit on each card.
4. Don't apply for new credit cards that you don't need. That 10% discount you're offered when you sign up for a retail card isn't worth it.
When you apply for new credit, an inquiry is made on your credit report. Each inquiry is a tiny ding, but enough dings can add up to a dent, especially if you have a short credit history. Craig Watts of Fair Isaac, the company that compiles the FICO score, says your best bet is to take on new credit only when you need it. Buying a new shirt or skirt on a whim doesn't count as a need.
5. Make your payments on time. It's best if you can pay your bill in full each month. But if you can't, pay at least the minimum, and pay on time. Late payments lower your credit score, which raises the possibility that your lender will charge you a higher rate. And if other lenders see that, they may raise your rates, too. That could mean more late payments in the future -- and thus begins the vicious cycle of credit-card debt.
If your payment date is inconvenient, call your card issuer and request a change in the date. It may take a cycle or two to get results, but lenders are often happy to work with you.
POSTED BY: Leo Leone (March 28, 2009 03:48 PM)
Stephannie, Yes. You can call and write the collections people and offer to settle the amount due if they'll pull the reports to all 3 credit bureaus. You must get this in writing. Explain that it was a stupid mistake and you're willing to work with them but you must insist on having the collection activity removed from your credit record. Also, go to MyFico.com and review the Fico Forums for many great tips on writing good will letters to creditors to drop negative information from your credit report. If you owe a bill, you should be willing to pay it off. But if you approach these people with a sincere request to make good on your debt in exchange for a cleaner credit report, you'll find they are more intersted in getting their money than punishing you by way of your creddit scores. Good Luck!
POSTED BY: Mary (March 30, 2009 02:15 PM)
We wanted to buy our first home this year but our credit is less than perfect and upon research from a financial expert who was trying to pre-qualify us, we really need to boost our scores roughly 100 points. We do not currently have any open and revolving credit cards. We want to boost our scores to buy a home so we're trying to pay things off but someone told us we really should get low balance credit cards, use them here and there and pay them immediately to boost our scores. Only I'm afraid because my "What If Calculator" said I'd take a hit of 29 points when I apply for a credit card. BUT...it said some credit cards meant for rebuilding credit won't hit as hard. How do I find these credit cards and know which is the best option and which will actually qualify us??
POSTED BY: Yavette (June 28, 2009 07:57 PM)
I have a credit score of 550. I don't own any credit cards. Would it increase my score if I get a credit card?
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