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Clean Up Your Credit

March 15th, 2009 4:11 PM by Lehel Szucs

Clean Up Your Credit

f you haven't already done so, start by taking a look at your credit report. Log on to AnnualCredit-Report.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 of buying your credit score for $6 to $8. 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).

Go through your report with a fine-tooth comb and file a dispute immediately 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 the problems have been resolved. Big issues, such as an incorrect notation that an account has gone to collection or a home is in foreclosure, could cost 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. Negative items, such as collections accounts, may generally be reported for seven years from when you first fell behind. Two exceptions are bankruptcies, which may be reported for ten years, and tax liens, which may stay on your record indefinitely until you pay them.

Other things to watch out for: paid-in-full accounts that still show a balance and someone else's record that appears in your file. If the credit bureau misspells your name or reports your address incorrectly, that won't affect your score. Balancing act. It's important to minimize the ratio of your outstanding debt to your credit limit (what's known as your credit-utilization ratio) for each card you hold. If you're near your limits and a long-standing customer with a good history, you could ask your current card issuers to raise your limits. Or you can focus on paying down your balances so that you're using less of your available credit. A good rule of thumb is to aim to keep your balance below 30% of your limit on each card.

If you're concerned that a recently frozen home-equity line of credit will tip the utilization scales, don't worry. Ethan Dornhelm, of Fair Isaac, the company that compiles the FICO score, says the scoring model excludes HELOCs from such calculations.

And don't apply for new credit cards you don't need. That 10% discount a retailer offers when you sign up for its 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 your credit history is short. Craig Watts, of Fair Isaac, says that your best bet is to take on new credit only when you need it.

Pay your bill in full each month if you can. If you can't, pay at least the minimum, and make your payments on time. Late payments lower your credit score and may automatically trigger a higher rate. And if other lenders see that, they may raise your rate, too. That could result in more late payments in the future-and thus set off a 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.

MAKING SENSE OF THE STORY FOR CONSUMERS

· Consumers considering the purchase of a home should first get their credit and finances in order. Reducing spending, limiting credit card balances to no more than 25 percent of the available balance, and monitoring credit reports are highly recommended by most financial experts. Even borrowers with less than ideal credit scores and credit histories still may qualify for a home loan. Some lenders will be more forgiving if the borrower has started meeting monthly debt obligations in the last six to 12 months. Consumers can view their credit reports from Experian, Equifax, and TransUnion by visiting www.annualcreditreport.com. The free credit reports will provide a borrower’s credit history, but not the credit score. The credit score can be purchased for approximately $10 from the credit reporting bureaus.

 · Borrowers who already have received their free annual credit report can purchase a copy from www.myfico.com. The cost is approximately $16 for the score from one credit bureau, or $50 for all three.

 · Good credit doesn’t mean simply paying bills on time; it also can mean job stability. Most lenders require borrowers to have worked for the same employer for at least one year, possibly longer before they will approve the home loan application. For self-employed individuals, most lenders will want at least two years of tax returns before approving a conventional loan.

· Many large financial institutions have been forced to write off high levels of credit card debt. As a result, borrowers are being required to have higher FICO scores than previously required. A year ago, a FICO score of 720 was considered excellent. By today’s standards, a credit score of 740 or higher likely will mean the borrower is approved, but not necessarily at the best interest rate possible, according to an executive with LowCards.com.

· Inaccuracies on a credit report can be disputed with each credit reporting agency. Typically, the process takes 30 to 45 days for the bureau to investigate the dispute. Although this process can be time-consuming, it is well worth the time and effort. Incorrect notations, such as an account that has gone to collection or a home in foreclosure, could cost the borrower 100 points or more on their credit score.

· Credit advisors recommend that borrowers pay their accounts in full each month, if possible. If that is not feasible, then borrowers should pay at least the minimum amount owed, and ensure the payments are made on time. Late payments will likely lower a credit score and could automatically result in a higher interest rate. 

Posted in:General
Posted by Lehel Szucs on March 15th, 2009 4:11 PM

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