How To Improve Your Credit Score and History

Your credit history is a vital part of your financial life. Every time you apply for a credit card, make a payment on your auto loan or change your residence, that information is noted in your credit history. While some information, such as your address, gender, and marital status can’t be used to make decisions about whether or not to lend you money, financial information about your credit habits can be used to determine interest rates on loans, the insurance premiums you pay, and – in some cases – whether or not you get a job.

Because your credit history is so important, it is vital that you take care to build a history that shows you in a good financial light. You can work toward building a better credit history by understanding your credit report, and working to keep the information in it accurate and positive.

What’s In Your Credit History?

Your credit report is compiled by agencies that collect information on you. Often, someone else reports this information about you to the agency. The three major credit bureaus are TransUnion, Equifax and Experian. There are smaller credit bureaus as well, but the information compiled by these major national bureaus are the three most likely to influence decisions of financial importance. Information you are likely to find in a credit history includes:

Personal identification: This is information that identifies you, including your name (and aliases), Social Security number, current address, and previous addresses. Some reports might include your marital status, as well as current and previous employers.
Lines of credit: These are your loans. It includes information on all the loans and credit cards that you have. This information includes your balances, payment schedule, limits (for credit cards), pay-off dates, and payment dates. If you make a late payment, it will show up. Credit reports include information on accounts that are 30, 60, 90, and 180 days late, as well as accounts that have been charged off. Foreclosures are also listed in your credit file.
Collection accounts: If your account, whether it is for unpaid utilities or medical bills, or whether it is for a delinquent loan, is sent to a collections company, it will show up in your credit file.
Inquiries: When someone checks your credit history, a note of it is made in your credit history. A hard inquiry is one that is initiated by you, such as when you apply for a credit card or a mortgage. A soft inquiry might be made by a credit card company or an insurance company interested in seeing whether you qualify for a “prescreened” offer. Hard inquiries affect your credit score, but soft inquiries do not.
Court records: Public court records are also included in your credit history. This includes information on judgments against you, bankruptcies, tax liens, and divorce are listed in your credit report. Your credit history will also include information about whether or not you have satisfied judgments and liens.

Information that you shouldn’t find in your credit history includes information on race, religion, and salary history. Your employer might be listed, but your salary shouldn’t be. Additionally, information about specific assets and holdings, such as bank accounts, investments and other personal assets, is not included in your credit file. Your medical history and criminal record are also not included (although criminal convictions, as public records, might be). Note, though, that if you don’t make payments on medical bills, that is noted in your credit file, even though information about your condition won’t be.

Most items remain visible in your credit file for between three and five years. Weightier issues, such as judgments and bankruptcies, might be visible for seven to 10 years. You can build a better credit history by keeping at responsible payment habits. Even if you have had a bankruptcy, you can begin to recover if you show fiscal responsibility going forward.

Once you know what is included in your credit history, you can work to improve your appearance on paper, focusing on improving items that could cast you in a negative light.

What Do Credit Bureaus Do with this Information?

Information about you is reported to the credit bureaus. Some employers report information to the bureaus, and nearly every lender and creditor makes monthly reports to the credit bureaus about your payment habits. Usually, landlords, utility companies and other non-credit service providers won’t report information to the credit bureaus unless it is negative. This means that if you are slow to pay, your cell phone service provider might notify the credit bureaus. It will count against you, and could result in a lower credit score.

Credit bureaus sell the information in your credit report to those who can be said to have a legitimate interest in knowing your level of financial responsibility. For instance, credit agencies sell information about your credit to lenders who have an interest in seeing whether or not you are likely to default. Your past history of on-time payments might lead a lender to decide that you are an acceptable risk, and likely to repay a loan. On the other hand, a history of late payments and charge-offs could indicate that you might continue the same habits, and the lender risks losing money if you default on your loan. As a result, you might be charged a higher interest rate – or denied credit altogether.

Credit bureaus don’t just sell the information to lenders. They also let insurance companies have a look at it. The information is also sold to lenders that you might not have applied with. “Prescreened” offers might be made to you, based on the information in your credit file. Employers and landlords can also have a peek at your credit report – but only if you give them permission. However, in some cases, not allowing them to look can result in rejection.

The information in your credit report is also used to create a credit score. A credit score is a numeric representation of your entire credit history. Different values are assigned to the items in your credit report, and then a complex mathematical formula is used to figure out how you rank against others with a similar profile. If you have a higher credit score, you are considered credit worthy, and likely to be approved for loans with good interest rates. If you have a lower score, though, you might run into trouble with loans.

Fair Credit Reporting Act

Now that you know a little bit about what’s in your credit report, you can figure out your rights related to your credit report. The Fair Credit Reporting Act (FCRA) was passed in an effort to make the information in your credit report more accessible to you. Some of the basic rights you have with regard to your credit report include:

Right to know what’s in your report: When you ask for the information, the credit reporting company has to provide you with everything in your credit file. Be aware that the information is reported to the bureaus, so if a creditor reports to one bureau, but not to the other, you might find variations in reports offered by different agencies. The credit bureaus do share information, but it can take some time for updates to be made. In addition to sharing what is in your report, the credit bureau must also provide you with a list of everyone who has requested your report in the last year. If requests were made with relation to employment, credit agencies have to list everyone who asked within the last two years.

Right to a free copy of your credit report each year: Once a year, you are entitled to a free credit report from each of the three credit bureaus. However, you have to request it. You can request a free report by going to www.annualcreditreport.com. You can also call 1-877-322-8228 or mail the proper form to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. If you contact the credit agencies individually, there might be confusion, and you might end up paying for your report. Instead, go through the channels set up for receiving your annual report.

In order to get your free credit report, you will have to include your name, current address, Social Security number, and birthdate. If you have moved within the last two years, you will need to offer your previous address. You may also be asked to provide security information, such as the bank where you have an auto loan, or the amount of your mortgage payment. Watch out for web sites that claim to provide “free” credit reports; the only authorized source is www.annualcreditreport.com. Many of these sites only provide you a free report after you agree to pay for a service. Additionally, you will not be contacted by phone or email, nor does this site use pop-up ads. If you are contacted by someone claiming to be from the official source, or if you see an ad, watch out – it could be a scam to get your information.

Right to a free copy of your report when you are denied credit: In most cases, if you have already received a free copy of your credit report within the last 12 months, you will have to pay to look at your credit file again. However, if you are denied credit or insurance, or if you are passed over for a job, due to information in your credit report, you can order a free copy from the agency that provided the information. You have to write to the company, though, and you have to do it within 60 days. You will need to include proof of your identity, and a copy (keep the original for yourself) of the rejection letter. The notice has to provide you with the name, address and phone number of the reporting company. You can use the information to request your free copy.

Right to a free copy of your report when your identity is stolen: If you are the victim of identity fraud, you can get a free copy to make sure that the situation is resolved. Other situations in which you can get a free copy of your credit report include if you are on welfare, or if you are unemployed and plan to look for a job in the next 60 days.

What about your credit score? Unfortunately, you are not entitled to a look at your credit score each year free of charge. Because your credit score is based on what’s in your credit history, lawmakers figure that if you know that information, you can get an idea of what your score looks like. Staring July 21, 2011, you will be able to request a free score if you are turned down for a loan. If your score results in an “adverse action” related to your finances, you will have the right to request the score that was used.

Correcting Errors in Your Credit History

There are estimates that contend that more than two-thirds of credit reports contain errors. Many of these errors are minor, having little impact on your credit score. However, some estimate that right around 25% of credit reports have inaccuracies that could seriously affect a credit score. Credit bureaus don’t double check information, though. It’s up to you to correct what’s wrong in your credit report.

The FCRA holds the credit bureaus, and the creditor, company or organization reporting the information, responsible for correcting errors once brought to their attention. If you believe that information in your credit history is inaccurate or incomplete, here are the steps you can take to have corrections made:

Write to the credit bureau: The first thing to do is to write to the credit bureau. You should write a letter that includes your name and full address. Clearly state which items are inaccurate in your credit report. Request that the items be corrected (state what would make the item accurate), or deleted. You can make a copy of your credit report, and circle the items in question to make the process easier. Also, if you have documentation supporting your claim (such as your most recent credit card statement), send a copy. Never send originals. Always keep those for yourself, including your letter to the credit bureau. When you send your letter, do it via certified mail, and ask for a return receipt. You will need this to prove that the credit bureau received your request.
Write to your reporting organization: Next, write to the organization or company that reported the information. The credit bureau must investigate within 30 days (unless your dispute is frivolous), and must send the information you provided to the reporting organization. You can speed things up by notifying the reporting organization. Call first, and then write, sending a letter with your name and address, and account number, explaining your dispute. Include copies – never originals – of supporting documentation and send via certified mail.

If you are, indeed, right, the company must correct its report, and never report the spurious information again. And the credit bureau must update your report within 30 days. The FTC has a great sample letter that can be used when you are disputing inaccurate information on your credit report:

Understand that disputing negative information that happens to be accurate will not result in its removal from your credit report. Some credit monitoring services will automatically dispute any negative item on your report – and then charge you for it. However, if the item if correct, only time can result in its removal. While most negative items, such as late payments, disappear after three to five years, under the law it is allowable to list them for up to seven years. Bankruptcies can be on your report for as longs as 10 years. If you haven’t paid a judgment, it can remain on your report until the statute of limitations runs out – even if that is longer than seven years.

Also, if information is reported in response to your applying for a job that pays more than $75,000 a year, or if you have applied for more than $150,000 in life insurance, there is no time limit. There is also no limit on reports of criminal convictions.

Disputing inaccurate items on your credit report can result in a better credit history, and a better credit score. Once you get these negative, inaccurate items off your credit report, you are likely to see better interest rates on your new loans, and be approved for credit that you might not have received before.

Should you add an account to your file? Most people are interested in having accounts deleted from their credit files. However, in some cases it can be better for your credit history to add accounts. In some cases, a local credit account from a community bank or credit union, or a local retailer, might not show up on your report. This isn’t usually a problem – unless your loan application is rejected because you have an “insufficient credit file.” In these cases, you might want to bulk up your file with accounts that might not be appearing in your report. You have two options:

You can ask your creditor to report to the agency, and they might start. However, a lender is not required to report to the credit bureau.
Ask the credit reporting agency to add it. Some agencies will add the account to your credit file if you pay a fee. The account must be verifiable, and if the creditor refuses to report, it might not be added. There is no constraint on companies to add accounts to your credit history.

Improve Your Credit History by Paying Off Debt

One of the best ways to improve your credit history, after making on-time payments, is getting your debt under control. Paying of your debt can help you look more attractive to financial services providers, and show your financial history in a better light. Here are some ideas for paying off your debt:

Budgeting: Create a realistic budget that can help you limit your spending, and start putting more money toward paying off your debt. Figure out how much your make – your income – and how much you spend. Some expenses will be fixed, but many others are flexible and can be cut from your budget. Take care of your needs, then work toward paying off your debt. Enjoying wants can come last.

Contact creditors: If you are having trouble, you can contact your creditors. Many of them are willing to work out a payment plan to help you pay your obligation without forcing financial collapse. Do this before your account is in collections, and share your sincere desire to pay off your debt. Many lenders will extend your term, or lower your interest rate, to help you make payments.

Taking care of secured debt first: When you have to make a choice about which debts to discharge, make sure that your secured debt is covered first. Secured debt includes loans that are secured by an asset. Car loans and home loans are examples of secured debt; if you don’t pay, the lender can repossess the asset and try to recoup some of the losses. Unsecured debt, though, does not have an underlying asset to secure it. Credit cards are a good example. Creditors can sue you for the unpaid portion, but they cannot repossess your home in order to get payment. If the choice has to be made, and you want to try to retain your home or car, make sure that those debts are taken care of, either with a modified arrangement with the creditor, or by making on time payments.

Credit counseling: In some cases, you might have difficulty working out a budget, or you might be overwhelmed by all of the debt. There are some reputable credit counseling organizations that can help you. Get approved company names through the U.S. Cooperative Extension Services, your local housing authority, or a respected university. These organizations can help you draw up a money management plan, and get you on the right track to paying off all of your debt.

Debt consolidation: Another option might be consolidating your debt. This means that you put all of your debt together, making one payment – and only paying one interest rate. One of the most popular means of debt consolidation is using a home equity loan to pay off all of the smaller loans. Be careful: Even though you might get a lower, tax-deductible interest rate, if you can’t make the payment on your debt consolidation home equity loan, you could lose your home.

Bankruptcy: Personal bankruptcy is one of the last options. While it may solve your debt problem, it will cause a big drop in your credit score, and it will appear on your credit history for years, making it difficult to get loans in the future. In most cases, personal bankruptcy halts collection attempts, foreclosures, and other actions related to your debt while the terms are worked out. There are two main types of personal bankruptcy:

Chapter 7: You sell all of your assets that are not exempt. (Exempt assets might be your home, car, tools you need for work, and the most basic household furnishings.) Understand that “exempt” assets differ by state. In some cases, even some of your property can be sold. The proceeds from the sale of your assets go to pay of your creditors, starting with your secured debt. Some unsecured debts may not be paid at all.
Chapter 13: You set up a plan to pay back some (or all) of your unsecured debt. Your creditors accept your plan, usually including a reduced amount that you owe. You might have to sell assets in order to meet some of your obligations. Usually, you cannot keep property if there is a security lien or unpaid mortgage on it.

Realize that personal bankruptcy will not wipe out all of your obligations. Alimony, child support, taxes, and some student loans will remain intact. Recent laws make bankruptcy more difficult, and you have to fulfill a number of obligations before you can file for bankruptcy.

Debt collectors: You have rights when it comes debt collection. Debt collectors shouldn’t be calling you before 8 a.m. local time, or after 9 p.m. Additionally, if they know your employer doesn’t want them to call you at work, debt collectors cannot contact you at your job. Debt collectors should not intimidate, harass, lie (one example is telling you a warrant will be issued for your arrest if you don’t pay), or use other unfair practices to collect your debt. Additionally, if you write to them (use certified mail) requesting that they stop contacting you, they must honor it. However, if the debt collector files a suit against you, court-related contact is usually made. But you can designate that it be made through your attorney.

Credit report statement: If you are improving your financial situation, you can include a statement on your credit file. You can write a statement explaining the circumstances that led to your current situation, and then detail what you are doing to change matters. This can be especially appropriate if your situation is the result of high medical bills, job loss, or some other financial catastrophe.

Watch Out for Scams that can Hurt Your Credit

Your credit history can be harmed by scams. Watch out for scams that promise to help you repair your credit history, but end up hurting it even worse. Some of the scams to watch out for include:

Debt relief = bankruptcy: You might think you’re getting debt relief help, but really someone is helping you file for bankruptcy. Make sure you understand exactly what is happening. If you don’t want your credit ruined by a bankruptcy, be on the look out.
Advanced fee scams: Some scams will promise you debt help, but you have to pay an upfront fee. Sometimes this fee is called application fee, or a processing fee. However, once you pay it, the company disappears. Realize, though, that there are some legitimate debt consolidation companies that charge fees, or require an application fee for loan paperwork. However, an advanced fee scam will usually not make use of the U.S. postal service, and will “guarantee” that you will get a debt consolidation loan if you pay for it. Stay away from programs that promise you a loan, and from services that use overnight or private courier services.
Debt settlement companies: These aren’t exactly scams – many are perfectly legal. However, using a debt settlement company can result in damage to your credit report. With debt settlement, you stop paying on your debts. Instead, you make payments to the debt settlement company. The company than negotiates a lower pay off for you, and uses the money you have been sending to accomplish this. Often, these companies take a large cut of your money. Plus, since you haven’t been making loan payments, your credit tanks, since these companies are reporting your missed payments to credit bureaus.

You can protect yourself from scams by realizing that most legitimate lenders will not guarantee you a loan. Additionally, many lenders will require you to pay for a credit report before they give you a debt consolidation loan. Be wary of scammers who tell you that you need to pay a fee, but won’t tell you what it is for.

Take steps to protect your identity. Some scammers pose as someone who can help you with your debt problem, and then ask for information about your bank account, Social Security number and other personal information. If you give it to a scammer, your identity can be stolen – and your credit report further harmed as more accounts are opened. Do not give out personal information over the phone or via email to those contact you asking for it. Only provide information over the phone to people that you have called – and that you know are reputable. A reputable financial organization will only ask for the last few digits of your account number, or Social Security number. There is no need to give out the full number.

Warning signs of a credit repair scam: When it comes to repairing your credit report, you might want help. However, before you begin, you should realize that a credit repair company can’t do something for you that you can’t do your for yourself. Some of the red flags that may indicate that you are dealing with a scam include:

You are not informed that you can repair your credit on your own for free.
You are told that you will have access to “insider” or “secret” techniques.
You are told you can start fresh with a new Employer Identification Number, rather than using your Social Security number.
You are told that you will be added as an “authorized user” to the account of a stranger with better credit.
You are told the improvement will be instant.
You are told to dispute all negative items in your report – even if they are accurate.
You are asked for money before the credit repair services are complete.
You are told that you will be helped to make a new identity from scratch.

Some of these actions might result in a better credit report at first, but that will wear off quickly, and then you will be in worse shape. In some cases, the actions are illegal – and you could be sent to jail.

Before you agree to credit repair services, make sure that you have a proper contract. This contract should include the total cost of services, as well as a detailed description of services that will be performed. Also, make sure that the company offers valid contact information, and that it lets you know which items you can accomplish yourself free of charge.

Identity Fraud and Your Credit History

Your credit history can be affected by identity fraud. When someone gets access to your personal information, and then poses as you, it can be devastating to your credit report – and your credit score. In some cases, identity thieves steal information when they work at organizations that collect or use personal information. Others may hack consumer credit bureaus or other networks to get the information. It is also possible to obtain personal information by stealing your mail, taking your wallet or purse, or by rummaging through your trash.

If an identity thief uses your credit card account information to rack up high charges, you can see problems as your balances balloon and your level of debt grows to cause problems with your credit history. Using identity fraud, a thief could pretend to be you, establishing phone services or TV services. They might open a loan account in your name, or even give your name to the police during an arrest. There are a number of ways that identity thieves can use your personal information to their advantage – and to the detriment of your credit report.

Protecting yourself from identity fraud: While there is no way to completely prevent identity fraud, you can reduce the chances of it happening to you. Some of the things you can do to keep track of your identity include:

Keep your purse and wallet as safe as possible. Don’t leave these items unattended in public. Only carry what you need to in your purse or wallet; memorize bank account numbers, and your Social Security number, so that you aren’t carrying your numbers and your Social Security card with you.
Be stingy about your personal information. Don’t give it out online, and don’t give it to people calling you and asking for it. Government agencies won’t call or email you asking for this information. If someone wants your information, ask why. Also, remember that your bank and other financial services companies do not need your full account numbers to verify your identity.
Look for unexplained activity on account statements. Also, check your credit report regularly for fraudulent accounts. If your statement does not arrive, it could be an indication that it has been stolen. Be aware of when your statements should arrive, take action if they are missing.
Shred documents with personal information on them before you put them in the trash. Shred or cut up expired credit cards.
Take notice of oddities, such as receiving credit cards that you didn’t apply for, or receiving a denial of credit letter, even though you didn’t apply for credit. Also, if you are receiving calls about merchandise you didn’t purchase, or calls from debt collectors on accounts that aren’t yours, it could be an indication that your identity has been stolen.

What to do if your identity is stolen: Since there is no sure way to prevent your identity from being stolen, you need to be vigilant. If you are a victim of identity fraud, you will need to take action as soon as possible.

First, contact one of the credit bureaus and place a fraud alert on your report. The bureau you contact is required to notify the other bureaus. A fraud alert can stop an identity thief from opening more accounts in your name. Additionally, you can ask that, rather than displaying your entire Social Security number on your report, that they only offer the last four digits. You can call one of the bureaus using the following numbers:

Experian: 1-888-397-3742
Equifax: 1-800-525-6285
TransUnion: 1-800-680-7289

Next, you should close the accounts that have been tampered with. Contact the institutions with the fraudulent accounts, and let them know the situation. If your bank account or credit card account is compromised, close those accounts. While you should make initial contact by phone, you should also follow up in writing. You should send copies of supporting documents along with your letter. As always, keep the originals, and send your correspondence via certified mail with return receipt. Make sure you open new accounts with new PINs and security questions.

After that, you should contact your local police. File a report about the fraud. Chances are that it won’t help you catch the criminal, but it will prove that you are trying to clear your name, and that you are following procedure. Get a copy of the police report, or, if you can’t get the report, get the name of the officer you spoke with, and the number of the police report. Keep this information in a safe place so that you can document your efforts to clear your name.

Finally, you should file a complaint with the Federal Trade Commission (FTC). Make sure to keep a record of when you filed your complaint, and take down the number attached to it. You can file a complaint with the FTC at www.ftc.gov/idtheft, or by calling 1-877-438-4338.

Keeping your credit history in the best shape is up to you. With some vigilance, you can ensure that the information in your report is accurate, and you can protect yourself from the unscrupulous.