How to Build Credit - Building Your Credit History

Reader Question: I've heard that I need to build a credit history in order to get loans, but I have no idea how this works. How do I create such a history? Do I need to get some credit cards or something?

It's true that you need to build up a good credit score history to get loans, credit cards, mortgages and other types of financing. If you do you not have any credit and are looking for a way to get started off on the right foot, a credit card is the way to go.



Since payment history plays the biggest part in your credit score, the best way to build good credit is to use your card a little and pay off the balance each month. This will establish a credit history for you, and it also shows lenders that you can consistently make payments.

But proceed with caution -- it is very easy to use the card to purchase items you normally wouldn't buy because you lacked the cash to do so. If you're not careful, you can quickly end up with a large balance that you can't pay off each month. So use the card sparingly, and pay the balance off each month (or at least keep them low). This is the smartest and most responsible way to build a credit history for yourself.

Here's another good reason to keep your balances low. The second biggest part of your credit score is utilization of accounts. This refers to the portion of your credit limit that's currently being used. You can hurt your credit score if your balances are close to the card limits, so be responsible with your card usage. Use them only for an amount you can pay back in a month or two. Check out our scoring chart below for a complete breakdown of your score.



Important Note: With all of this being said, you don't have to get a credit card in order to establish a good score. In fact, I would argue that you should not obtain a new card solely for this purpose. There are ways to establish good credit without cards.

So let's summarize what we have discussed. How to build credit is a common question among consumers in general, and among home buyers in particular. Building up a good credit history will help you qualify for mortgage loans and many other types of financing. The best way to build a history is by using a credit card in small "doses," and then paying the balance off each month. It's even possible to improve your score without using cards, and you can learn more about that through the link provided above.

Hope that helps. Good luck.

Related articles:

• Understanding Your Credit Score in 2009
• FICO Scoring Chart Shows Important Factors

FICO Score Chart - Credit Scoring Chart With Important Factors

Reader Question: I am confused by all of the different things that influence my credit score. What are the biggest factors that I should be concerned with? Is there a credit score chart with these items?

There are many credit scoring charts available online, and we even have one of our own. Specifically, the chart below show the factors that determine your FICO score. There are different scoring models in use today, but FICO (short for Fair Isaac Corporation) is the one most commonly used by mortgage lenders.

Let's start with the chart itself. Here's our version:



Now let's discuss each of the five categories that makes up the FICO score chart pictured above.

Payment History = 35% -- How have you paid your bills over the years? Have you missed payments in the past? Have you had any credit accounts sent to collection? The largest chunk o f the FICO chart (35%) comprises this type of information. You can optimize this scoring factor by paying all of your bills on time. This includes car loans, credit card bills, student loans, medical bills ... everything.

Amounts Owed = 30% -- This scoring item compares your available credit limit to the amount you are currently using, across all of your credit lines. The term "utilization ratio" is often used to describe this comparison. For example, if you have a credit card with a limit of $10,000 and your balance is $9,200, then your utilization ratio is very high. You are nearly maxed out. This has a negative impact on your score, and you can also see that it's a sizable chunk of the FICO credit score chart shown above. You can optimize this scoring factor by paying down your balances.

Length of Credit History = 15% -- This element of the scoring chart refers to the length of time you have been using some form of credit. For example, if you got your first credit card when you were 18 years old, that's probably going to be the start date of your history. Keep this in mind if you ever decide to close any of your old accounts. Doing this can actually shorten your credit history, which usually hurts your overall score. Most experts recommend keeping your oldest accounts open, even if you pay the balances down. This is the third largest slice of the FICO chart above, so it's important to understand.

New Credit Accounts = 10% -- This factor takes into account your most recent credit activity (new accounts that have been opened, recent credit inquiries, etc.). Also, if you have maintained a positive history recently by paying bills on time and such, it will be reflected in this "new" category as well. This is one of the smaller pieces of the scoring chart, but still worth considering.

Types / Mix of Credit = 10% -- This refers to the different types of credit you are using. Generally speaking, having a good mix of accounts (credit cards, mortgages and other types of financing) can help improve your score.

By understanding the chart above, as well as the individual components within it, you'll be better able to (A) maintain a good FICO credit score and (B) improve it if necessary. For example, we often get emails from people wanting to know how to raise their scores fast, and our response is usually the same -- focus on the first two items listed above. Combined, they account for more than half of the scoring model.

Related articles:

• How do I increase my FICO score fast?
  
• An explanation of consumer credit reporting

How to Obtain a Free Copy of Your Credit Report Online

Reader Question: I am confused by all of the websites offering free credit reports. Why do some of them ask me to sign up for stuff? Are the legit? How do I obtain a copy of my credit report online for free ... with no strings attached?

You are not alone in your confusion. We get this question often, and we are always happy to help. Yours is really a two-part question. So let's start by answering your last question first.

1. How can you obtain your free credit report online?

There are three credit reporting agencies that maintain data on consumers within the United States. They do not share data between them, so you actually have three separate reports (one each from Experian, TransUnion and Equifax). Thus, when you obtain your credit reports online, you'll need to obtain all three of them to see the full picture.

By federal law, you are entitled to one free report per year, for all three of the companies mentioned above. Fortunately, you don't have to submit a request three times. You can obtain all three of your credit reports from one website -- AnnualCreditReport.com. This website is owned by the three reporting agencies, and it's the only site endorsed by the federal government. You can do this once a year for free, in accordance with the Fair Credit Reporting Act.

So that answers the latter part of your question (how to obtain your reports online). Now let's discuss the second part of your inquiry.

2. Why do some websites require you to sign up for something?

It sounds like you've encountered some of the websites that offer credit monitoring and/or identity theft prevention services. Many times, these sites will offer free credit reports and scores, with the caveat that you sign up for their monitoring services. In most cases, these websites are completely legal and legitimate, but their business model does create some confusion among consumers (at least in my experience).

Here's what to take away from all of this. If you want to obtain a copy of your free credit reports online, from all three of the reporting agencies, then I recommend visiting www.AnnualCreditReport.com and starting there.

Once you have obtained your information, read through it for errors. Start with your personal information (name, address, social security number) to take make sure it's all correct. Then review your list of accounts to see if there are any strange items that don't belong there. Check for duplicate entries as well, particularly as it applies to negative information on your report. For example, if you had an account sent to collections in the past and it shows up more than once, it's a duplicate entry -- and it can affect your credit score.

I know that's probably more information than you were looking for, but that's what we do here. Hope it helps you out.

Related posts:

• Understanding credit in 2009
  
• How to read your reports

Collection Agencies Reporting the Same Account Twice

Reader Question: If you have an account that was sold to multiple collection agencies, can each individual agency report the same item to the credit bureaus? This would result in multiple collection agencies reporting the same item.

It's possible that several collection agencies could report the same account to the credit reporting agencies. How many times the item was reported to the credit reporting agencies is not your primary concern. The real question and concern is, how many times does the negative item actually show up on your credit report?

• If it was reported more than once, but it was rightfully identified as the same account, then it may only show up once on your credit report.
• But if the reporting agencies treated it like a separate item each time, it might show up multiple times on your report. Now you have a duplicate entry situation that needs to be dealt with.

Duplicate entries on a credit report can certainly affect your credit score. In fact, it's one of the most commonly disputed errors that consumers deal with. So you'll need to keep an eye on your credit reports to see if the same negative item (such as an overdue account) shows up more than once.

It's worth mentioning that there is a situation where an account can show up more than once on your credit report -- legitimately. Let's say I ran up some debt on a store credit card and then stopped making payments. The store transfers the account to a collection agency. And eventually, the store writes off the debt for their own bookkeeping purposes (i.e., they "eat" the loss). This situation could produce two entries on a credit report in this way:

• The store could report my account as a "charge off."
• The collection agency could report the same account as "in collections."

So the account number would show up on my credit report twice, but with a different status for each entry -- one marked as a charge-off and the other as being in collection.

If the same exact item does appear to be listed more than once (with the same status), you can dispute this with the company that produced the erroneous report, and it's important that you do. Overdue accounts fall under the "payment history" in your credit file, and this accounts for about 35% of your overall credit score. It counts more than any other single item. This is why it's so important to ensure that negative items aren't duplicated in your payment history.

In theory, only one collection agency can handle a debt at one time. So it should not be reported by more than one agency at any given time. But there's a big of difference between theory and reality. Often, one collection agency will transfer an overdue account to a different agency, and this is often where the duplicate entry situation arises.

Hope that helps you out some. Good luck.

Understanding Credit Reports and Scores in 2009

Reader Question: With everything that's going on in the economy right now, I feel like I should have a better understanding of my credit reports and scores, how they affect me, etc. What should I understand about these things in 2009?

Whether you meant to or not, you touched on many topics all at once! :-) It has always been important for consumers to understand how credit works because it affects us in our daily lives. You also pointed out another economic truth -- understanding credit reports and scores will become even more important as we enter the 2009 economy, and all the unpredictability it brings with it.

In truth, it's tough to know where to start when answering a question like yours. It's a great question. It just covers a lot of ground. This entire blog is about understanding credit reports and scores as they relate to you, so you might start by reading through some of the previous Q&A sessions we've done.

With that being said, I'll try to make list of things you should understand about your credit in 2009 and beyond. This is certainly not an all-encompassing lesson on the subject, but just some of the things I feel are important.

• Understanding how your credit reports work and what they include is a good place to start. This information is used to produce your credit score, and that's what lenders will use (among other things) when considering you for a loan.
• It's also important to check your credit information for errors once a year or so. You are entitled to a free yearly credit report, so make use of it. If you find errors, start the dispute process to get them corrected.
• If you don't understand what's included within these documents, check out our guide to reading a credit report. It will help you make sense of the information.
• Financing will be harder to come by in 2009 than in years past, due to the economic crisis we are currently dealing with. This means you need a higher credit score in order to get a decent interest rate on a loan. Understanding how all of these things work together is the first step to success. So keep up your research!
• In addition to reviewing your reports, you should also understand where you stand with your credit score. If it's lower than average, focus on raising your score in 2009. If it's already above average ... congratulations. Work hard to keep it that way!
  

I know this doesn't answer every aspect of your question. But as I said earlier, understanding credit reports and scores is a very broad subject. It's also an important subject to understand in 2009.

So if this blog post leaves you with some more specific questions on this subject, please feel free to submit them the same way you submitted this question. There's no limit to how many questions you can submit. We want you to have a solid understanding of this subject. So fire away.

I hope that helps you out some, or at least gives you some direction for further research. Good luck.

Why is My Credit Card Company Raising My Interest Rate?

Reader Question: I just got a letter from my credit card company that said they were raising the interest rate on my credit card, even though I've never missed a single payment before. Why is this happening?

As the U.S. economy continues on its downward slide, so do the profits of the credit card companies. They are looking for any way to maximize their profits and minimize their risk in a financial environment that could produce record losses for the credit card companies. Raising interest rates on their customers is one of the ways they are maximizing their profits.

American Express recently announced a 2% - 3% interest rate increase across the board to offset the expected increase in their charge-offs. Some credit card holders have recently seen their interest rates double, even though they have paid more than the minimum payment and have always paid on time (i.e., they are loyal customers).

It appears the credit card companies expect us, their loyal and reliable customers, to help them cover their losses. I guess that's just business. Also in the works is a new regulation that will ban the credit card companies from raising interest rates on existing balances. This legislation is expected to be adopted by the Federal Reserve by the end of 2008, and it could be another reason for the sudden across-the-board interest rate hikes by the credit card companies.

Not only are credit card companies raising interest rates on their customers, but they are also lowering credit limits for many of their card holders. This means that some people will be paying higher interest on their outstanding balances, while also discovering that they are suddenly "maxed out" on credit when they need it the most. Having your limit lowered could also have a negative impact on your credit score, because it will make your utilization ratio seem higher. This ratio compares your available credit to the amount you are currently using, and it accounts for about 30% of your credit score. A lower score can hurt your chances of getting other types of financing such as car loan and mortgages.

So, you are not alone in this dilemma, and there may not be much you can do about it -- other than reducing your credit card usage, or paying them off and closing them. But, in a time when budgets are getting tighter and many are struggling to get by, it may not be possible for most consumers to do either of these things. If you are a long-time customer and have always paid your bill on time, it might not be a bad idea to call the credit card company and ask them to reconsider their rate hike. If this doesn't work, transferring your balance to another card with a lower rate may also be an option for you.

Hope that helps you out some. Good luck.

Related question:

• Why is my credit limit lower all of a sudden?
• The Best Card Offers We've Found

How a No-Limit Credit Card Can Affect Your Credit Score

Reader Question: Does a no-limit credit card hold down the available points I would obtain on my FICO score? I hear no-limit credit cards affect the score. Does the kind of bank or finance company determine how many available points I might receive on my credit score?

It is true that a no-limit credit card can have a negative impact on your score, but there are also a lot of variables involved.

Card limits are used to determine your credit utilization ratio (a financial term that describes how much of your available credit you are currently using). For example, if I have a credit card with a limit of $20,000, and my balance is $5,000, then my utilization ratio is 25%. In other words, I'm using a quarter of my available credit. This ratio accounts for 30% of my credit score -- second only to my payment history in overall importance.

With this in mind, you can see why no-limit credit cards can be a problem. The computerized scoring models used to determine your score can't determine what your available limit is, so they are unable to determine what your utilization ratio is.

The companies who offer these no-limit cards will often provide the highest balance in lieu of an actual limit (for scoring purposes). But no all companies do this. And if they don't report your highest balance, it makes it look like you are using most or all of your available credit -- and this is what affects your score.

My advice is to do some more research, based on the information I've given you, and decide if a no-limit credit card is worth the potential harm to your score. Here's an article you might want to start with: http://www.bankrate.com/brm/news/cc/20060331a1.asp

Raising My Credit Score 30 Points by December

Reader Question: Is it possible to raise my credit score 30 points by December?

Not knowing anything about your financial situation, there is no way I can answer a question like that. But I can tell you what kinds of things will raise your credit score faster than others.

For example, let's say I have some errors on my credit reports -- accounts that aren't mine, duplicate entries, items that should have come off by now, etc. -- and those errors are dragging my score down. I could theoretically dispute those items, have them corrected and/or removed, and see my credit score go up a few points in fairly short order.

I was on one of the MyFICO credit forums the other day, and a guy was explaining a situation similar to the one I've described above. He said he had some duplicate entries on two of his reports. After having those errors corrected, he saw his credit score go up by 14 points.

So it's possible that correcting several errors at once could increase your score by 30 points or more, and it might even happen within a month's time or less (depending on how responsive the credit reporting agency was).

But what if your reports are 100% accurate? In this case, the only way to improve your score is by improving your financial behavior. For instance, if you've had a history of missing bill payments in the past, then you could gradually improve your credit score by correcting that behavior. You can also boost your score by paying down your credit card balances, especially any that might be near their limits.

This is a much more gradual approach though, so I don't think it could make a 30 point difference before the end of the year. Of course, you have to start sometime if you want to increase your score ... and there's no better time than the present.

So, to summarize, you should start by making sure there aren't any errors on your credit reports. Correcting such errors can often bring a quick boost to your score. Next, establish a pattern of good financial behavior (like paying bills on time), and consider paying down your credit card balances starting with any that are nearly maxed out.

Related questions:

• How to raise your credit score fast in 2009
  
• How long does it take to improve a score significantly?

Credit Card Debt Settlement - How It Affects Your Credit Score

Reader Question: If I do a settlement on a credit card, how will it affect my credit score?

Settling the debt on your credit card will hurt your credit score. But missing payments and having them sent to collection will also hurt your score. So then it becomes a question of which option best resolves the problem for you.

Let me explain some terminology here, for the benefit of other readers. Credit card debt settlement is a technique used by people who are up to their ears in credit card debt and see no way of paying it off. Basically, you are negotiating with your creditor (in this case the card company) to pay off as much of the debt as you can. For the creditor, this can sometimes be a better option than sending the delinquent account to collection. Even if they accept less than the full balance due, they are getting something out of it ... and getting the bad account off their books at the same time.

Of course, you can bet that the credit card company is going to report the settlement, which means it will show up on your credit reports. And as you know, your score is based on the information contained within your reports, so the credit card debt settlement will hurt your score to some degree.

The next logical question is, "How much will it hurt my score?"

Unfortunately, this is not something I can answer. The effects of a credit card debt settlement vary, based on a number of factors. But I can say that, for many people, a settlement is often the best way to go. You aren't necessarily wiping the slate clean, because the settlement is still going to appear on your credit report. But it is a way to get some form of closure, instead of letting the overdue payments follow you forever.

Keep in mind also that negative information only stays on your credit report for seven years, at least in the case of debt settlements. So if you settle this year, it won't even show up on your credit history seven years from now. In a certain sense, this is better than letting your overdue payments follow and haunt you indefinitely. Additionally, negative events such as a credit card debt settlement tend to have less of an impact on your score over time. So if you can avoid any other problems, your score will gradually "rebound" over time.

If I had to rank the best possible scenarios for people with too much credit card debt (and no way to pay it off) -- in terms of best to worst option -- I would rank them like this:

• Ideal scenario = paying off all of the debt, including fees
• Next-best scenario = settling the debt, taking the credit score hit, and getting on with your life. You could then focus on repairing your score.
• Worst option = Ignoring the problem and waiting until the account gets sent to a collection agency.

In the latter two scenarios above, something is going to be reported to the credit reporting bureaus. So in both the second and third scenario, your score is going to take a hit. But with the "next-best" scenario, you are at least achieving some kind of closure.

Disclaimer: I'm not telling you which option to choose. I'm just sharing my thoughts on the matter. Debt

How Revolving Balance Affects a Credit Score

Reader Question: How much could revolving balance affect a credit score?

Revolving accounts can affect scores in many ways. If you have too many of them, it can have a negative affect on your credit score. Also, 30% of your score is based on the amounts you owe across all of your accounts. So, if the balances are near the card limits, this will have a negative affect as well.

Keeping your balances low on revolving credit and other accounts can help you maintain a good credit score. This cannot be stressed enough. If you do this, and if you make all of your bill payments on time, you'll be in great shape. But when the balance of your revolving accounts gets too high, it's going to have a negative impact.

Another thing most people don't realize is that if you only have revolving accounts, your score could be lower. Your mix of credit (meaning a good balance of installment loans, revolving accounts, retail accounts and mortgage loans) accounts for 10% of your credit score.

While it is hard to determine exactly how much revolving account balances will negatively impact your credit score, it is important to understand the components of your score and how each applies to you personally. That way you will know what steps to take to improve your credit (if necessary).

Duplicate Entries On Credit Report Can Bring Your Score Down

Reader Question: If something shows up more than once on my credit report does it bring my score down?

If you are referring to the same exact item being reported more than once (i.e., a duplicate entry on your credit report), then yes ... it can hurt your score. Unfortunately, this kind of thing happens quite often. Fortunately, there is something you can do about it.

I did some research when answering your question, and I came across a web forum where a guy was discussing his experience with duplicate entries on a credit report. In the past, he had an overdue account that was sent to collection. It was reported twice on one of his reports (you have three different reports, by the way).

He did the right thing by disputing the duplicate entries with the company that produced the erroneous credit report. He also stated that his score went up 14 points shortly after the correction was made.

Here's something to keep in mind though. It's possible for an account to show up twice on your credit report, without necessarily being a duplicate item. For example, if I stop making payments on a store credit card, and they eventually write the debt off and turn it over to a collection agency, then I'll have one entry on my report from the store. Beside the account number for this entry, it will probably be labeled as "charge off." Now, if the collection agency also reports the debt (which they probably will), it could also show up on my credit report. It would have the same account number, but the status would say "in collection" or something similar. This is not necessarily a dupe entry -- it's the same account with two different statuses.

All three of the reporting agencies have a "dispute" section of their website for this very purpose. They are required by law to review all credit report disputes such as duplicate entries in a timely manner, and they are required to make corrections when the item in question is truly an error.

How to Dispute Duplicate Entries

When disputing a duplicate item through one of the credit reporting agencies, the first thing you need to realize is that you are not their customer. The people who request consumer data from them (like mortgage lenders) are their primary customers. You are just somebody they have within their data files.

I don't tell you this to be rude, but only so you'll understand the mind set that's at work here. The law is the only thing that motivates Experian, Equifax and TransUnion to make corrections to consumer credit data. And when I say "the law," I'm referring to the Fair Credit Reporting Act (FCRA).

Here are the steps you would take to dispute duplicate entries on one (or more) of your reports.

• Gather the necessary information to support your dispute.
• Visit the website of the company (or companies) who produced the erroneous report. This would be either TransUnion.com ... Experian.com ... or Equifax.com.
• On the company's website, look for a link that says "dispute" or "online dispute." It should be pretty easy to find. FCRA laws require them to keep the dispute process simple and highly visible to consumers.
• Complete the online process and provide whatever information it asks you for. You can also dispute the item by phone or by mail.
• Be persistent. Follow up as needed and stay on top of them until they correct the duplicate entry issue.

Due to increased pressure from the government, the reporting agencies have gotten a little better about fixing their issues in a timely manner. But don't just sit back and assume they are doing it. Keep tabs on the process. Remember what I said about not being their customer.

I hope that helps you some. Good luck.

Related questions:

• How to read the information in your credit report
  
• Writing a letter to dispute an item in your report
  

Paying Down Debt Before Opening New Credit Card

Reader Question: Should I first pay down all or most of my debts before opening a new credit card to help establish history on my credit report?

I'm a little confused by your question. So forgive me if I misinterpret it. Paying down your debt before opening a new credit account doesn't really affect your credit history. Also, some kinds of debt are better than others. So it's hard for me to offer advice one way or the other.

Will this be your first credit card, or do you already have one or more accounts open? If you already have existing credit cards, you'll already have a credit history as well. Having too many cards is generally not a good idea, because it sends the signal you can't manage your finances.

If this is going to be your very first credit card, I recommend keeping the balance low. It's okay to use the card, and in fact that will help you establish your credit history. But you don't want to use too much of it. One of the factors that contributes toward your credit score is something called "credit utilization ratio." Basically, this is the percentage of your available credit that you are currently using. People who max out their credit cards have an extremely high utilization ratio, because they are using too much of their available limit. This can drag down a credit score.

We have a credit score video in the real estate videos section of our website that explains credit utilization ratio and some other things relevant to this discussion. Check it out here.

If your debt is manageable, and you're doing a good job paying it down consistently (and not missing payments), then I wouldn't worry too much about it. If you have an unusually high amount of debt, as compared to your income, then it may be an issue when you apply for a mortgage loan down the road. If your debt-to-income ratio is too high, then it can hurt your chances of getting a home loan among other things. Here's more info on debt-to-income ratio.

So to sum up, if your debt is manageable and it's not too large (when compared to your income), it might not be a big deal. The best way to maintain a good credit history is by using credit cards sparingly, and keeping the balances low. Your oldest credit account is one of the most important, because it determines the length of your credit history.

FHA Home Loans in 2009

Reader Question: Will FHA loans be available in 2009?

The FHA (Federal Housing Administration) has been helping home buyers and homeowners since 1934. A FHA home loan is one that is insured by the federal government, rather than a private insurer.

I can assume that the FHA will continue to insure mortgage loans in 2009. But recently, their focus seems to be on stemming the tide of foreclosures. They have launched some refinancing programs to help struggling homeowners refinance into more affordable fixed-rate mortgages.

While it's unlikely the FHA home loan would be discontinued in 2009, there have been some changes to the program. These changes include:

• Lowering the maximum amount from $729,750 to $625,500, effective Jan. 1, 2009
• Raising the minimum down payment from 3 percent to 3.5 percent
• A ban on seller and non-profit funded down-payment assistance

In fact, there has been a huge increase in the amount of FHA home loan applications this year, due to the restrictions placed by most lenders and private insurers who have suffered the affects of the sub-prime mortgage meltdown. Many of them require a down payment of at least 10% and rarely less than 20%. So the popularity of FHA mortgage loans will probably continue to rise in 2009 ... and beyond.

Overdue Medical Bills And Credit Scores

Reader Question: Do overdue medical and hospital bills affect your credit score?

Yes, overdue bills of any kind can affect your credit score, if they are sent to a collection agency or otherwise reported to the credit bureaus. In fact, your past payment history (including your medical bills) will affect your score more than any other single item.

Let's take the FICO score as an example. FICO is the most common scoring model used in the mortgage industry (among others). Under this model, payment history makes up 35% of your score. Your overdue medical bills will fall under this category.

But you have a certain period of time after a bill is overdue to get paid up before it goes to collection, and before it affects your credit score. I don't know the typical timeline for hospitals, but most companies will send the standard overdue notice after 30 days. Later, after 60 days, they will send a stronger notice with the threat of sending the case to a collection agency. This is their way of saying: "You still have a chance of paying this bill before it affects your credit."

After 90 days, give or take, most companies will report the overdue bills to the credit bureaus (that's where your credit reports come from), and they'll likely send the account to a collection agency as well. This is when your score can be affected, since it is based on the information within your reports.

So to summarize, any type of overdue bills -- whether they are medical payments, student loans, car payments or credit cards -- can lower your score if they are reported to the credit reporting agencies (TransUnion, Equifax and Experian). Typically, past-due payments are not reported or sent to collections right away. The billing departments typically go through a standardized process of sending a "friendly reminder," then sending a less-friendly reminder, and finally turning the whole thing over to a collection agency.

So it's best to pay your medical bills on time. If for some reason you cannot do that, be sure you pay them as soon as possible. Specifically, don't let them go overdue more than 30 - 45 days or they could be sent to collection and reported against you.

Important Note: The timelines I have explained here are just general rules. They are not legal guidelines. If a company wanted to, they could report you for being 5 days overdue on a bill payment.

Related articles:

• How will missing car payments affect my credit score?
• How long does negative information stay on your report?

How to Raise Your Credit Score Fast in 2009

Reader Question: I plan to buy a home in 2009 and will need a mortgage loan to pay for it. My credit score is a little below the national average. How can I raise my credit score fast so I can get qualified for a good loan next year?

You are not alone in your situation. Many home buyers will need to raise their scores in order to get financing next year. And like you, most of these people want to do it as fast as possible.



How to raise a credit score fast will be a hot topic in 2009. There are two main reasons for this. For one thing, you'll need good credit to get a mortgage loan in 2009 -- more so than in the past. Because of the housing / foreclosure crisis, most lenders have become stricter with their lending practices, and this includes the credit score needed to qualify for a home loan.

When you combine this with the fact that millions of Americans have bad credit, you can see the writing on the wall. A lot of home buyers will face qualification obstacles in 2009.

How to Boost Your Credit Score Fast

And with that little overview behind us, we can address the heart of your question. How can you raise your score fast in order to qualify for a home loan next year? What can you do here in the present to pave the way for future home-buying success? Here are four things you should focus on more than anything else.

1. Eliminate Bad Habits

If you have credit problems right now, they are probably the result of bad financial habits. For many people, this includes a history of not paying bills on time, maxing out credit cards, acquiring too much debt, etc. So before you move on to the other items on this list, you need to identify and eliminate any bad habits you have. This is crucial if you want to raise your credit score as quickly as possible. You have to stop the source of the problem first.

2. Review Your Credit Reports

If you have erroneous information on your credit files, it could be dragging your score down lower than it should really be. Unfortunately, data mix-ups are common within the three companies who produce credit reports -- Equifax, Experian and TransUnion. They would probably argue with me on this point, but I'm here to tell you it happens all the time. So your next step in raising your score as fast as possible is to order copies of all three reports and review them for errors.

You should also make sure that negative (but accurate) information is removed from your credit reports when the time comes. Most negative information has to come off after seven years, while bankruptcies can stay on there for up to 10 years. So if you see an item that shouldn't be on your report anymore, but it is ... you need to dispute this with the company that produced that report.

I can't stress the importance of this enough. Your credit score is based on the information within these documents. So if you want to raise your score fast you need to start by ensuring the accuracy of your reports. And you should start this review process ASAP, because it can take some time to get it sorted out.

3. Reduce Your Credit Card Balances

Credit utilization is one of the "ingredients" that will contribute to your overall score. This is an industry term that refers to the percentage of your available credit that you are currently using. If you have one or more credit cards that are near their limits (or cards that are maxed out already), then you'll have a high credit-utilization ratio ... and this is a bad thing.

On the other hand, if you have a couple of credit cards with very low balances (relative to the amount of credit available on the cards), you'll have a lower utilization ratio. So by paying down the balance on cards that are near their limits, you can raise your credit score even more.

Notice I didn't say you should cancel your credit cards / accounts. This could actually hurt your score, because the utilization ratio is an average of all your accounts. So, for example, if you cancel a card that has a really low balance, you could hurt the overall average of your credit-utilization ratio. On top of this, if you close your oldest account, you could inadvertently shorten your credit history -- and this too can hurt your score. This is why I recommend keeping the accounts but reducing the balances (in most scenarios).

4. Pay Bills on Time

You've probably heard this before, but it's a critical item -- one of the most important considerations when trying to raise a credit score fast. So it's part of my 4-part plan for boosting your score as quickly as possible.

Most mortgage lenders today use the FICO score when reviewing an applicant's financial history. There are different scoring models in use, but FICO is the one most commonly used in the mortgage industry. Your payment history on all of your bills makes up around 35% of your score, so it gets more weight than any other single item!

So if you want to raise your credit score as fast as possible, you need to combine this with the other items I've listed above. Creditors will usually send you a late-payment notification after 30 days, followed by a stronger warning after 60 days. In most cases, they will report the missed payment to the credit reporting agencies after 90 days past-due, and that's when it can show up on your report and affect your score.

So pay your bills on time! And if you are late on a payment, be sure to pay it as soon as possible. This can prevent it from showing up on your credit file. You can find a collection of tips like this one in the Improve Your Credit section of Cornett Communications (our parent website).

I hope you have enjoyed this guide to raising a credit score fast, and I hope it answers your question in a helpful way. Good luck with your home buying process next year!

Related questions:

• What is a good FICO score in this economy?
  
• How long does it take to improve a credit score significantly?
  

How Will Missing Car Payments Affect My Credit Score?

Reader Question: My income has dropped and I cannot keep up my house payments. I've been trying to sell my house but it will probably go back to the bank. I cannot afford my car payment now either. If my credit is going to get messed up with my house, will it be any worse if I lose my car too?

You may want to contact your lender and other creditors as soon as possible. Many companies are doing what they can to lower payments for borrowers and make arrangements to prevent foreclosures, defaults and repossessions. So you may be surprised at how willing they are to help.

As a consumer, it's your responsibility to keep the lines of communication open and initiate the request for help. In the end, it will cost these companies money to proceed with legal action, so it's often better for them to receive any payment right now rather than no payment at all. I have heard from many readers recently who were successful in this approach.

If it does become necessary for you to move, but you are having difficulty selling your house, you may want to consult a short sale specialist. These real estate professionals will market your home at a reduced price, often lower than the amount owed on your mortgage. When a potential buyers makes an acceptable offer on the property, the short sale professional will work with your mortgage lender to try and get the offer accepted (thereby completing the sale and helping you avoid a foreclosure situation).

With this short sale approach, the mortgage account on your credit history might be marked with a "not paid as agreed" statement. This can still hurt your credit score, but usually not as much as a foreclosure.

A home / mortgage foreclosure will have a more serious impact on your credit. It will remain on your credit report for up to 7 years (by law, it has to come off after 7 years). It's possible for your credit to rebound within a year or two of the foreclosure, as long as you pay your other bills on time and avoid any other financial problems.

As for the car payment issue:

A legal judgment will have a negative effect on your credit score, even if you eventually pay off the debt. And like a foreclosure, it will also stay on your credit for up to 7 years from the date the judgment was filed. So it might be worth the effort to reach out to company that owns the car lease to see if you can make some kind of payment arrangement to avoid legal action.

Please understand what we are not offering specific advice on whether you should turn in the car or keep it. For legal reasons, we obviously cannot make that decision for you. But it's worth the effort to avoid having another legal judgment on your credit report (resulting from the missed payments). If I were in your situation, I would try to arrange a payment plan with the lease owner. Something to think about, at any rate.

Hope that helps you some.

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• How long does bad credit stay on your report?
  
• How long does it take to improve a credit score?

Credit Card Companies Lowering Credit Limits

Reader Question: I was looking over my statement recently and I noticed the credit card company has lowered my credit limit for some reason. Then I saw something on the news about other companies lowering people's credit limits. Why is this happening? Does it affect my credit score?

Let me answer your questions one at a time:

Why are Credit Card Companies Reducing Card Limits?

While it probably doesn't make you feel any better, I can tell you that this situation has become increasingly common in the current economy. The main reason credit card companies are doing this is to reduce their risk. Most financial companies are on shaky ground right now, and we have even seen quite a few banks collapse over the last few months. This, of course, can all be tied back to the housing crisis that spread through our economy as a while.

Your question actually came at a good time, because I've been researching this lately. I was going to write about it sooner or later, and your question prompted me to make it "sooner."

The next logical question is: When lowering credit card limits how do these companies decide who to target? Which customers will have their limit reduced and which ones will be unaffected? This will vary from one card company to the next, but it seems that most are reducing limits based on their customers' credit scores and payment histories. In other words, they are lowering limits on those customers they feel are the biggest financial risk to them.

In some cases, however, the credit card companies may paint with a broader brush. For example, if their research suggests that customers with a credit score under 700 have an increased risk of missing payments in this economy, they might lower the credit card limits for everyone in that category. Like I said, the process and the reasoning will vary from one card company to the next.

You can find out if your limit has been lowered by looking at your credit card statement, or by going online to the company's website (using your online account).

Will the Lowering of My Limit Affect My Credit Score?

It might, and here's why. Credit utilization is one of the key factors that influence your overall credit score. Utilization refers to the percentage of your available credit that you are currently using. In other words, if your card has a limit of $30,000 and your current balance is $9,000, then you are using less than a third of your available credit. If you have several cards like most Americans do, they will all be factored in to determine your utilization ratio.

So, when a credit card company lowers your limit, it affects your utilization ratio -- even if your balance stays the same. From the scenario above, let's say your card limit was reduced from $30,000 to $10,000. Before the reduction, you were only using less than one third of your available limit. After the reduction, however, you would nearly be maxed out on that credit limit (by using 9K of a 10K limit). Nothing changed on your end ... it was all brought on by the company lowering your credit card limit. It may not seem fair, but it's perfectly legal.

This is how it can affect your overall credit score, by changing your utilization ratio. What can you do about it? Well, there are only a few things you have control of in this situation. Your credit card balance is one of those things. By paying down your balance, you can put your utilization ratio back into a more favorable light. This will help you improve your score. And going forward, make sure you pay all of your bills on time. This will also help you build and maintain a high score.

If your score is really low, you might want to check out our guide to repairing bad credit.

I hope this answers your question. I found a bunch of information online when I was researching this topic, so you might want to do some Internet research of your own. Just consider the date of publication when you read an article about companies lower credit card limits, since this is a timely topic.

Related questions:

• What is a good FICO score in this economy?
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My Spouse Has Bad Credit - Can We Get a Mortgage Loan?

Reader Question: I have good credit but my spouse has bad credit. How will this affect us when applying for a mortgage loan? Any ideas or advice?

When you and your spouse apply for a mortgage jointly, the income, credit, and debt-to-income of both spouses will be used to determine your interest rate and the amount of loan. If your spouse has bad credit, you may not get qualified for the loan amount and interest rate needed to purchase the type of home you desire.

If your spouse's credit is so bad that it will affect your ability to secure a mortgage, you may have to apply for it alone. This means you will only be able to use your income on the application, which may mean you will qualify for a lesser amount. One option would be to ask a close relative to co-sign on the mortgage for you. This can be helpful, but it may also be tricky since that relative will be equally responsible for the payments being made on time. So any late payments or non-payment will be reported on their credit as well as yours.

If the above suggestions are not options in your situation, you may want to start by helping your spouse to repair his or her credit. An easy way to help increase their score would be to add him or her as an authorized signer on your credit cards. Payment information will be reported on your spouse's report as well, and as long as everything is paid on time this will only help to boost their score.

Your spouse should also work on paying down the debt if the high balances are affecting their score. This will also help to improve your spouse's score. If they have more negative credit than good credit but now have the ability to handle a credit card responsibly, you should look into applying for a secured credit card. In exchange for a deposit to an account held by the credit card company, they will issue you a credit card with a limit that matches the deposit. If all goes well, and you make timely payments, they will eventually rebate the deposit back to you and convert you to a traditional credit account.

Having a spouse with bad credit is not necessarily a deal-breaker as far as mortgage loans go. But it does require some extra consideration on your part. Hopefully this article gives you some things to consider. Good luck to you and your spouse in your home buying ventures!

How to Read a Credit Report - Tips on Reading Your Reports

Reader Question: I will be ordering copies of my credit reports soon, because I plan to buy a home next year. How do I read my credit report information?

For the benefit of all readers, let me start by explaining why it's important to read the information contained in your credit file. Then we will address the "how" side of things.

I usually recommend ordering and reading your credit reports about once every two years. It's a good way to identify any errors that need to be corrected, and to spot any cases of identity theft. You should read your credit report and know what's in it, because it has a lot to do with whether or not you get approved for financing. The information in these reports is used to produce your credit scores, and those scores are used by lenders when they consider you for a loan.

This answers the "why" of reading credit reports. It helps you identify and correct erroneous information, and it can alert you to any cases of identity theft. Now let's talk about the "how" side of things.

How to Read Your Credit Information

When you receive copies of your credit report, one of the first things you'll realize is that they are broken up into three major sections. Understanding these sections will help you read them. So let's examine the main parts of a credit report and what you should know when reading through them.

Personal Information:
The section at the top of your report will contain personal information about you. This includes your name, SSN, date of birth, current address and similar items. Read this part of your credit report carefully with an eye out for errors. For example, if you see an error with the date of birth or Social Security number, you'll need to correct that information ASAP. It might be mean that your credit information is mixed up with somebody else's. Unfortunately, this happens quite often, so it's another good reason to read your credit report once or twice a year.

Account History:
This part of your report will provide a list of all credit accounts that are currently open. This will include such things as car loans, credit cards, mortgage loans, and any other accounts that remain open. Read carefully through this section of your credit report and keep an eye out for accounts that should be closed, or any accounts that aren't yours. If you find items that should no longer be listed on your report, dispute it with the company that created that particular report (TransUnion, Experian or Equifax).

The account history is an important part of your report, and it has a lot to do with your credit score. For example, if you have negative information such as late / past-due payments, this is where they will show up. Keep this in mind when you read your credit report and have all errors removed from this section.

Public Record Information:
IF you have ever had a legal action filed against you, such as bankruptcy, civil suits or other legal judgments, this is where they will show up. These items appear on your report because they affect your credit. With that being said, there are limits to how long negative information can stay on your credit report, so when you read through this section keep the following time limits in mind. Bankruptcies can stay on your credit for up to 10 years. For all other negative information, a 7-year limit applies.

Inquiry Information:
Anytime a credit makes a credit inquiry on you, it shows up on your report. For example, if you apply for a car loan and the dealer "runs your credit," they are making an inquiry that will later show up on your credit report. Read this section with an eye out for unauthorized inquiries (people need your permission to do a credit check on you).

So let's summarize everything we have covered:

• It's important to read your credit report about every two years. This allows you to correct any errors and spot potential cases of identity theft.
• Reading your credit report is not as hard as you might think. It will actually come with a reference guide explaining what each section means, and what to do if you find errors.
• If you find any errors when reading your credit reports you should begin the dispute process immediately, because it can take time to correct errors. All of the credit reporting agencies
• Pay particular attention to the account history section of your report, and also the public information section. Negative information within one of these two areas can drag down your credit score, so if there are any mistakes here you'll want to correct them as soon as you can.
• If you have any other questions about how to read a credit report or anything else related to this topic, just type your question into the box provided at the top of this blog. We will do our best to help you.
  

I hope this answers your question, and I wish you the best in your future home-buying adventures. Good luck!

Related questions:

• How do I dispute an error in my credit report?
• Other blog posts on this topic
  

Consumer Credit Reporting Agencies - An Overview

Reader Question: What is a consumer credit reporting agency and what should I know about them?

When people talk about the credit reporting agencies, they are usually referring to the three companies that collect credit information on U.S. consumers and generate reports based on that data. There are three of these companies -- Equifax, Experian and TransUnion.

Many people believe that the consumer credit reporting agencies are government entities, but this is not the case. They are privately held companies. That's right ... private companies have the right to maintain financial data on all U.S. citizens. I don't agree with the concept at all, but that's not the subject of this Q&A session.

As a consumer, the important thing to remember about the credit reporting agencies is that they produce a report that summarizes your financial history. Commonly referred to as credit reports, these documents are used by mortgage lenders and other creditors whenever you apply for financing. The lender will request the credit reports from the three agencies that maintain them, and they will review the information to see what kind of risk you may pose.

Your credit reports are put through a scoring process to produce your actual credit scores. When you apply for a mortgage loan, the lender will use your score as part of their evaluation process. If you have a good / high score, you'll have a better chance of getting a loan (and a good interest rate on the loan). The opposite is true for a low score. But this all starts with the consumer credit reporting agencies because they provide the data that is used to generate the score.

Dealing With Credit Reporting Companies

There are certain occasions where you might have to contact one or more of the credit reporting companies. For one thing, you would go through them when requesting copies of your credit reports (you have three, one for each company). And if you find errors on any of your reports, you will have to dispute the error through the consumer credit reporting agency that produced the erroneous document.

And this is where you will learn a hard lesson about these agencies. You are not their customer. The lender who pays these agencies for credit information about you is their customer. But you are not. I say this so you can understand the relationship at work, if you ever have to contact a consumer credit agency about correcting errors. In other words, don't expect great customer service when you contact these companies.

But at the same time, there are laws that govern these companies. Specifically, the Fair Credit Reporting Act (FCRA) outlines what these agencies can and cannot do. Among other things, this law limits the period of time that negative information can stay on your credit report (7 - 10 years in most cases). The FCRA also requires the credit reporting agencies to investigate disputes in a timely manner, and to remove any negative information that a consumer disputes if that information cannot be verified within 30 days.

Related questions:

• How do I dispute an error in my credit report?
• What does three credit reporting mean?

I hope this gives you a better understanding of how these consumer reporting agencies work and how they can affect your life. You can find a lot more information about this subject by reading through this blog. I listed a couple articles above that are closely related, but there are many more on the blog. The reporting category will give you a list of all Q&A sessions related to this subject.