How to Establish and Keep a Good Credit Record
Many people don't know what their credit score is, or if they have one at all. Learn how to boost your rating and get the credit you deserve.
Your Credit Score
Whether you left school before Eisenhower became president or received your diploma yesterday, you're always being graded on how you handle credit. What's more, the score you get -- a number ranging from 300 to 850 -- is no trifling matter. That number (known as the Fair Isaac Corporation or FICO score, named for the analytical company that devised it) determines the rates you get on your mortgage and car loans, and even whether you are approved for a new apartment.
For instance, say a score of 650 gets you a mortgage rate of about 7.9 percent. Boost your score to 750 and you could qualify for an interest rate that's 1 or even 2 percentage points lower, saving thousands over the life of a 30-year, fixed-rate loan. That's enough to make even a back-of-the class slacker pay attention. Yet many consumers don't know their score. And some people -- particularly older women -- don't even have a FICO score, typically because their mortgage and credit cards are in the name of their spouses.
"But all marriages end, even the happy ones," points out Ginita Wall, director of the Women's Institute for Financial Education (www.wife.org) and coauthor of It's More Than Money, It's Your Life (Wiley, 2003). "And if a woman does not have credit in her name, she is going to have problems." For instance, if she wants to start a business later in life or simply open a department store charge account, she needs to show that she handles credit well. Without a good FICO score, lenders tend to be skittish about extending credit.
It is relatively easy to establish a credit history, but difficult to fix your record if you've mismanaged credit in the past. Still, making the right moves boosts that credit score.
Find Out Your Standing
Credit bureaus are required to provide consumers with a free annual credit report. You can also purchase a credit report -- although not your FICO score -- from the three major credit bureaus: Experian (www.experian.com; 888-397-3742); TransUnion (www.transunion.com; 800-916-8800); and Equifax (www.equifax.com; 800-685-1111).
Fair Isaac offers all three reports plus your FICO score (www.myfico.com). Costs vary, as does the amount of information each report provides, but any one report should give a good bird's-eye view of your credit.
However, to get the most comprehensive overview of your credit, it's a good idea to invest in all three reports. That's because some creditors may report to one bureau but not another. Or if those creditors report to every bureau, they may do so at different times of the month. So your scores with each bureau will differ slightly.
"Generally, if your score is 680 or higher, you can apply for credit with confidence," says Stephen Snyder, financial expert and author of Do You Make These 38 Mistakes With Your Credit? (Bellwether, 2004).
Improve Your Grade
Now that you have what is essentially your credit management report card, look for ways to boost your grade. Make sure that the information in the report is accurate. Do you recognize all of the accounts listed? Sometimes information from someone with a similar name may end up in your file. For instance, Robert Downey may find accounts on his report that belong to Robert Downey Jr. If you've ever had your wallet stolen, pay extra attention. "Smart identity thieves will open an account in your name and pay on it reliably before they start using it fraudulently," says Craig Watts, public affairs manager for the Fair Isaac Corporation. If you see an unfamiliar account, call the creditor right away.
If you're in a dispute over a charge, bear in mind that it may show up on your report as being paid late or not at all, a factor that can damage your FICO score. For instance, Wall once had problems getting a mortgage because she was disputing a charge for returned merchandise.
Next, check to see if your report contains four two-digit codes. These "reason codes" explain why your score isn't higher, says Snyder. For example, you may need to improve your mix of credit by adding a major credit card to a file containing mainly department store cards. Perhaps you are maxing out your limits. "If you have $10,000 in credit and are using $9,000, you can improve your score by paying down your debt," says Watts. Sometimes you have to let time pass for your score to improve. Mistakes such as paying late stay on your report for seven years. "But the older the information, generally the less damaging it is," says Gerri Detweiler, author of The Ultimate Credit Handbook: How to Cut Your Debt and Have a Lifetime of Great Credit (Plume, 2003).
If you're in serious trouble -- with bankruptcy, a tax lien, or judgment -- you can write a 100-word statement that the credit bureaus will include in the report. "You can say, 'I was going through a divorce and my ex was supposed to pay the bills but did not,'" says Wall. Snyder feels lenders rarely if ever give such statements the consideration they deserve anymore, but it certainly can't hurt to try.
Divorce, incidentally, is one the biggest causes of credit problems. A judge may state that your ex-spouse is responsible for half of the Visa bill, but if your name is on the account, beware.
"You still have a contract with the creditor and the divorce decree has nothing to do with that," warns Maxine Sweet, vice president of consumer education for Experian. If you can't pay off all joint accounts immediately, Sweet's advice is for both parties to take out personal consolidation loans to pay off debts. "That totally breaks your tie to your ex," she explains.
If You Have No Credit
If your credit history is a blank slate, getting credit immediately may take time. On the plus side, at least you're starting with a clean record and can begin building a history right away. Open a credit account (department store cards are generally easy to get) and keep it active for six months and one day -- the length of time needed to generate a FICO score. Of course, you don't have to wait that long if you are married and can become a joint cardholder on your spouse's account. Such piggybacking instantly taps into your spouse's entire credit history -- a smart move if it's a stellar record.
As you build a history, keep in mind that revolving credit -- such as Visa and MasterCard -- counts more toward a score than installment loans such as mortgages, which have a fixed monthly payment. "With a credit card, you determine how much of your credit limit you will charge and whether you will pay the minimum or the amount in full," says Sweet. In short, it provides a better snapshot of how you handle money.
If you have trouble getting a card, a secured card may be an excellent choice. As its name suggests, you secure your credit with your own savings. For instance, if you stash $100 in savings with the lending institution, you can borrow up to $100. Tuck away $1,000 and the limit jumps that much.
One caution: Even though your balance is guaranteed by the deposit, you will still be charged a fee if you're late or skip a payment. Treat it like a regular credit card; pay on time.
Once you've held a secured card for six months, apply for a regular credit or department store card. Whatever you do, don't apply for too many cards at once. It just makes it harder to get a card at all.
"Whenever you apply for credit, you give the lender permission to look at your report," explains Snyder. "Each inquiry, each time someone looks at your report, it lowers your score." That's because the more inquiries your report shows, the more you've been applying for credit. Watts says people who apply for credit frequently are a statistically higher risk, so even just a simple inquiry can be damaging. To keep inquiries from affecting your score, open new credit accounts only when you really need them. Try not to take advantage of some minor incentive, such as a free toaster or getting a 10-percent discount on any purchases you make that day. Focus on your long-term goal and don't let those minor distractions become obstacles to your goal.
Finally, keep your credit score high by paying on time. "That is absolutely the most critical thing," says Sweet. As with school, tardy students rarely make the grade.
Credit Repair: Service or Scam?
If you've had credit concerns at all, you've probably noticed the ads on television or the Internet from companies that claim to "erase" bad credit or "eliminate" bankruptcies and judgments against you. For a fee, of course.
As appealing as it sounds, according to the U.S. Federal Trade Commission (FTC), there's very little that these so-called credit repair companies can do for you that you can't do for yourself for free. Moreover, some of the things such companies promise may not be legal.
For example, no one can legally remove any accurate information from your credit report, whether that information is positive or not. And lying about negative information in an attempt to remove it is a federal crime. If you're caught, you could be looking at a fine or jail time.
As a rule, the FTC warns consumers to avoid companies that do the following:
- Ask for payment before they provide any service.
- Tell you to dispute all information in your credit report, even information you know is correct.
- Advise you to create a new credit report or credit identity.
If you've paid a credit repair company and believe you've been scammed, contact your local consumer affairs office or state attorney general. For more information about legal credit services, go to the FTC Web site at www.ftc.gov.
A former editor at Money magazine, Karen Cheney writes frequently on family money issues from her home in Pennsylvania.
Originally published in Better Homes and Gardens magazine, October 2004.