How to Improve  

Credit Basics


Your Credit Score


Report and Dispute Inaccurate Information on Your Credit Report

To dispute inaccurate information on your Experian, Trans Union or Equifax credit report, write to the bureau that supplied the information. In your letter be sure to include:

  • Your full name, first, middle and last and including any applicable suffixes (Jr., Sr., II, etc.)

  • Your complete mailing address

  • Your date of birth

  • Your Social Security number (this is necessary to access your credit report)

  • The name and account number of the creditor and item in question

  • The specific reason for your disagreement with the disputed item

  • Your signature

Mail disputes to:

1 (888) EXPERIAN

Equifax Information Services
1 (800) 378-2732
P.O. Box 740241
Atlanta, GA 30374-0241

Trans Union Corporation
1 (800) 916-8800
P.O. Box 390
Springfield, PA 19064-0390


  Establish a Good Credit History as Soon AS Possible

If you do not have a well-established credit history, you should begin to build one.

The trick is to start small: try applying for credit with a local business, such as a department store or a local bank or credit union. These local merchants may have lower credit standards than larger lenders. Before you apply for credit, make sure the credit grantor reports credit history information to one of the major U.S. credit bureaus so you can build your history.

Other options if you are having difficulty opening a credit account include asking a friend or family member to cosign your loan or credit card application or obtaining a secured card, which is guaranteed by a deposit you make with the card issuer.

Actively Monitor and Manage Your Credit
While the most obvious thing you can do to build a solid credit history is to pay your bills on time, you can also take steps to protect your credit standing and make sure your credit report is accurate when you apply for credit.

Many credit reports contain inaccuracies, usually caused by innocent errors but occasionally by fraud (such as identity fraud, in which a thief uses someone else's name to open credit accounts). The Fair Credit Reporting Act ensures your right to dispute such inaccuracies in your credit report without charge. (For information about how to do this, see our Dispute Information.)

To effectively use this right, you need to be aware of what information appears on your credit report. One easy and inexpensive way to do this is by signing up for a free trial of the CreditCheck Monitoring Service [link to order form], which includes a free copy of your credit report.

You can also plan a credit strategy much like you would a budget to improve your credit worthiness. Taking steps like applying for a major credit card if you only have local credit, closing old unused credit accounts, and keeping tabs on the number of inquiries in your report can improve your credit status. See our tips on Handling Your Credit to Prepare for the Future for details.

Skip the "Credit Repair" Clinics
Although some consumers pay credit clinics hundreds or even thousands of dollars to "fix" their credit reports, only time can improve bad credit. The Federal Trade Commission has investigated and reported at length on these often-fraudulent "clinics." And some credit repair plans actually encourage you to commit fraud yourself by attempting to create a second credit identity.

The key fact: There is nothing a credit repair clinic can legally do to fix a credit report that you can't do yourself for free.

Consumer credit reports contain easy-to-follow instructions for disputing inaccurate information at no charge. Inaccurate information will be changed or deleted. Accurate information that shows negative payment habits will usually remain on a credit report for seven years, with bankruptcies remaining up to 10 years. Federal law mandates this.


  Major Life Events Impact Your Credit

Many major life changes, such as marriage and divorce, purchasing a home, or having a child are also financial changes that involve your credit.

Marriage & Divorce
While marriage can open financial opportunities for people who are now able to pool their resources most effectively, it also involves new responsibilities and issues for personal credit.

  • Changing your name. If you change your name--at marriage or any other time-it is important that you make sure your creditors and the credit bureaus are notified of the change. Otherwise, you might lose your credit history.
  • Keep credit in your own name. Women especially must take care to keep some credit in their own name-Judy Smith, rather than Mrs. John Smith, for example. Every year women who have never paid a bill late are denied credit because they have no credit history in their own names.
  • Joint accounts mean joint responsibility. This is true even if a divorce decree includes provisions about one of the parties paying the bills. As far as a creditor is concerned, you are both responsible for the bills, even if only one of you ran up the charges. Arrangements must be made with the creditor, either through changing the account or closing it entirely and opening a new one, if one of you is to be released from liability for the debt.

Purchasing a Home
Buying a home-especially the first time-makes significant demands on personal credit. It requires a solid credit rating, and once it takes place it can dramatically change some credit dynamics. On the one hand, homeowners build equity-an asset that contributes to their net worth-with each mortgage payment. They also establish another level of credit history and stability by making their mortgage payments on time. On the other hand, a mortgage is a large loan, and may impact things like your debt-to-income ratio in the first years of the loan.

Having Children
Beginning a family is another life change that puts demands on your credit. Many parents find that their credit card bills soar as they equip their homes and lifestyles to welcome and accommodate their children. But it's especially important to take good care of your credit when you take on the added responsibility of children, using it wisely and managing it well. That way you know your credit will be available when you need it-like 8 years from now when those tiny infants head off for college.

The Death of a Spouse
If you have a joint account with your spouse, by law a creditor cannot automatically close the account or change the terms because of the death of your spouse. More than likely, the creditor may ask you to update your application or reapply in your own name. The creditor will then decide whether to continue to extend you credit or change your credit limits. While your application is being reviewed, the creditor must let you use the account without new restrictions.


  Improve Your Credit Profile To Get Better Credit Deals

When you apply for credit, the lender will undoubtedly check your credit report. The information in your credit history helps lenders decide how much credit and what interest rate you are eligible for. The better your credit history, the more likely you are to qualify for the best credit deals.

But what will they be looking for?

Pay Your Bills on Time
Creditors always look for indications that the prospective borrower is a good credit risk: a person who will pay back his or her debts in a timely fashion. Obviously, a history of on-time payments demonstrates that you are just such a person.

But that doesn't mean your credit history must be perfect for you to qualify-few people's are, after all. "Good" credit can include a few minor dings in your report, such as:

  • Up to two credit card payments 30 days late.
  • One installment payment, such as an auto or student loan payment, 30 days late.

No payments of any kind should be more than 60 days late and there should be no outstanding public record debts such as judgments or liens.

Keep Your Debt Load Reasonable
One factor any creditor must assess before offering credit is the total debt of the person applying. If a large portion of your income each month is already committed to paying off other debt, the lender will wonder if you may have trouble paying back an additional loan.

As a rule of thumb, financial experts say that non-mortgage debt payments should not exceed 10-15% of your take home pay each month. If your debts are currently too high, consider ways to pay some down before you apply for new credit.

A note about cosigning: If you cosign somebody else's loan, the outstanding amount is considered your debt, even if the individual for whom you cosigned is paying all the bills. Because cosigning means you have promised to pay back the loan if the other party does not, it is considered one of your liabilities. So think carefully before you cosign, even for someone you know will pay the debt; it does impact your credit.

Avoid Unnecessary Inquiries
Whenever you authorize a creditor, employer, or other business to check your credit report, an "inquiry" is added to the report itself-a note that someone has checked your credit. (Checking your own credit report, however, does not lodge an inquiry.) An inquiry usually stays on your credit report for two years.

A lender considering you for a loan will look at the number of inquiries recorded there and when they took place. A large number of inquiries occurring in a short period of time may be interpreted as a sign that you are either:

  • Applying for lots of credit because of financial difficulty.
  • Overextending yourself by taking on more debt than you can actually repay.

Therefore, it's always a good idea to minimize inquiries into your credit report. If you're shopping around for mortgages, for example, don't let every lender you consider run a credit check. You might have to settle for slightly more approximate estimates on what the lenders can offer you, since they can't verify your credit history. But that's still better than as a less solid credit risk and wants to charge a higher rate.

Eliminate Excess Unused Credit
Just as a high number of inquiries suggests you may be overextending yourself, a lot of available credit means you have the capability to overextend yourself in the future, even if you have not done so in the past.

Although people may perceive having several credit cards with high limits a sign that they have good credit, too much of this good thing can make them seem like a poorer credit risk.

The lender needs to be reasonably sure that you will continue to be able to repay your debt in the future. But if you have thousands of dollars of unused credit available, you might spend it all the month after your loan goes through and suddenly have more debt than you can pay off.

To prevent this concern from arising, you should close unused credit accounts before applying for a large loan, and/or consider having your credit limits reduced. If you do either of these things, make sure to ask the creditors to record that the account was closed or changed at the consumer's request-you don't want anyone to get the impression the bank closed the account because of problems with your payment habits.



The Fair Credit Reporting Act Benefits Credit-Active Consumers

The Fair Credit Reporting Act, or FCRA, is a law that originally went into effect in 1971 and that was beefed up considerably, in 1997, by amendments passed in Congress. The original FCRA protected your rights as a credit-active consumer by placing limits on who may see a copy of your credit report. It mandated that, while you yourself may request a copy at any time, no one else may legally review your report unless they intend to:

  • Conduct a credit transaction.
  • Make an employment decision.
  • Underwrite insurance.
  • Conduct a legitimate business transaction.

The 1971 FCRA also provided that your credit report may be reviewed in response to a court order or federal grand jury subpoena.

Anyone who knowingly and willfully obtains a credit report under false pretenses may be fined up to $5,000 and imprisoned for up to one year.

The new version of the law that went into effect on September 30, 1997 further protects credit-active consumers and gives them more control over their credit information.

Highlights of the updated version of the FCRA law are summarized below.

Credit Reports

  • Anyone reviewing your credit report for any reason other than those listed above is now guilty of a felony, instead of a misdemeanor as in the old law. Credit bureaus and other information providers must take careful precautions to make sure that they are disclosing credit information to users who are obtaining it for legal, permissible purposes as outlined in the FCRA. Any credit grantor or other entity that wants to obtain credit reports from a credit bureau must certify to the bureau the legally authorized purpose(s) for which it will use the reports.
  • Free credit reports must be provided once a year to victims of identity fraud and anyone who is unemployed or poor. Individuals who have been denied credit may obtain a free credit report within 60 days, instead of 30 days as in the old law. Anyone else who requests a credit report will be charged up to $8.00 per report (this price will be adjusted for inflation).
  • Potential employers may no longer use credit reports to make employment decisions without the consent of the job applicant. Before the potential employer can deny offering the job to the applicant based on the information in the credit report, the applicant must receive a copy of the report.

Credit Disputes

  • When a consumer disputes credit information on his or her credit report, the three major credit bureaus, Experian, formerly TRW, Equifax, and TransUnion, must notify each other of the reinvestigation. In the past, it was the consumer's responsibility to notify each bureau.
  • Under the updated law, credit bureaus are required to use information supplied by the consumer as well as the credit grantor when reinvestigating inaccurate credit information. This was not a requirement under the old law, and bureaus relied primarily on the credit grantor's version.
  • Reinvestigations requested by consumers must be completed within 30 days by the major credit bureaus.
  • If the completeness or accuracy of any data reported by a credit grantor to a credit bureau continues to be disputed by a consumer after the information has been reinvestigated by the credit grantor, the credit grantor may not report the information to the credit bureaus without indicating that it is still being disputed by the consumer.
  • Bureaus as well as credit grantors (such as banks or retailers) must provide consumers with better notices of their rights. In the past, when a consumer was denied credit, the credit grantor was required to include the name and address of the credit bureau that supplied the report on which the decision was based. Under the new law, the following information must also be included:
    • Phone number of the credit bureau (including a toll-free number if it is one of the three major bureaus).
    • A statement that the credit bureau did not make the decision to take adverse action.
    • Notice of the consumer's right to obtain a free copy of the report from the credit bureau by submitting a written request within 60 days.
    • Notice of the consumer's right to dispute the accuracy or completeness of the information in his or her report with the credit bureau.

Credit Accuracy

  • Banks, retailers, and credit card issuers that report credit information to credit bureaus are now, for the first time, held responsible for ensuring that the information they report is as accurate as they can make it (i.e., they must use information supplied by the consumer to correct or update their own records before reporting it). In addition, these credit grantors are required to assist credit bureaus in reinvestigations.
  • If a consumer closes out a credit account, the credit bureau, bank, or retailer must label the account as one in good standing that was closed at the consumer's request. In the past, creditors many times assumed that if an account was closed, it was done at the request of the credit grantor, and this was interpreted as negative payment behavior on the part of the consumer.

Credit Offers

  • Prescreened lists, which banks, retailers, and credit card issuers purchase from credit bureaus and use to identify qualified and interested consumers to whom they market credit cards and other retail loans, have also been affected by the FCRA amendment. Under the old law, companies who used the lists were required to send "firm" credit offers to creditworthy consumers, meaning that even if it was determined later that the consumer did not qualify, the offer could not be withdrawn. Under the new law, card issuers can withdraw an offer of credit if the consumer does not meet the prescreening criteria.
  • Banks are required to provide consumers with a new prescreening disclosure that explains that the offer results from prescreening by a credit bureau, and that consumers may notify the credit bureau if they wish to be dropped from future prescreening.
  • The three major bureaus must provide a joint toll-free number for consumers to call who wish to opt out of prescreened lists.

Credit Clinics
Credit repair clinics often charge consumers hundreds or thousands of dollars to allegedly "fix" bad credit reports. Although these clinics claim to be able to eliminate negative credit information from a consumer's file, if the negative information is accurate, it will remain on the consumer's credit report for up to 10 years. This is mandated by Federal law. If the consumer pays the credit repair clinic before it performs its services, the consumer may lose a great deal of money. Under the new law, credit repair clinics may no longer collect a fee before performing their services.



Know Your Consumer Credit Rights

Federal law carefully regulates how information about your credit can be used. The two most important laws for credit-active consumers are probably the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).

The ECOA mandates that every consumer who applies for credit has an equal chance to obtain it. This is not a guarantee that credit will be granted, but rather that the factors used to determine whether an application is accepted or rejected will be consistent and consistently applied for all applicants.

The FCRA ensures that consumers' rights and privacy are protected even as the credit reporting industry makes it possible for credit histories to be transmitted so quickly that stores can offer instant credit to consumers who qualify.

How Can I Learn More About Credit and The Law?
The federal government maintains several informative World Wide Web sites with lots of information about consumer credit issues. These two relate to the FCRA specifically:

  • (summarizes the law)
  • (gives the actual text of the law)

Requirements for Accessing Credit Reports
To guard against abuse and to protect your privacy, the FCRA requires that all businesses must meet the following requirements before they are allowed to access credit information:

  • Proof of a permissible purpose under federal law
  • A background check and on-site inspection of the business
  • A current business license
  • A signed contract requiring the business to use the data properly

The only time your credit report can be accessed without your permission is in prescreening for credit offers or if a judge subpoenas your credit information. You can opt out of prescreening by contacting the three major credit bureaus, although you will then receive no more pre-approved credit card offers.

Accepted or Rejected?
You have the right to know whether your application for credit was accepted or rejected within 30 days of filing it. If it was rejected, you have the right to know why. The creditor must either immediately give you the specific reasons your application was rejected or provide you with reasons if you ask for them within 60 days. Indefinite or vague reasons are illegal, so ask for specifics.

If you have been denied credit because of the contents of a credit report, the creditor must also provide you with information about how to contact the credit bureau that supplied the credit report. This is one of the few circumstances under which you are entitled to a free credit report directly from the credit bureau.

What If There Is Inaccurate Information in My Credit Report?
The law guarantees your right to dispute inaccurate information on your credit report free of charge. If you find an error in your credit report, simply call or write to the credit bureau. The bureau will check with the source of the information and send you an update. The dispute process can take up to 30 days. If you still disagree with the information, you can add your own statement to the credit report. For more detailed information about how to contact the credit bureaus to dispute inaccuracies on your report, see our Dispute Information.



What Is Your Credit Score and How Is It Computed?

Credit scoring is a scientific method that uses statistical models to assess an individual's credit worthiness based on their credit history and current credit accounts. Credit scoring was first developed in the 1950s, but has come into increasing use in the last two decades.

In the early 1980s the three major credit bureaus, Experian, Equifax and Trans Union all worked with the Fair, Isaac company to develop generic scoring models that allow each bureau to offer a score based solely on the contents of the credit bureau's data about an individual. Creditors-especially those in the mortgage industry-frequently use the scores when deciding who receives loans. They can order your score, commonly called a FICO score, from one of the bureaus, but it only draws upon information from your credit report. Individual creditors often also consider other information, such as your salary or how long you have been employed at the same company when making loan decisions.

Each credit bureau has its own unique system for compiling credit scores. However, the scoring models have been normalized so that a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Equifax indicates the same creditworthiness as a score of 700 from Trans Union or Experian, even though the calculations used to determine those scores are different at each bureau.

A computer-generated score is compiled using information from an individual's credit report, such as how much money is owed and whether payments have been made on time. Then that score is compared to the credit performance of consumers with similar profiles. The scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points-a credit score--helps predict how likely it is that you will repay a loan and make payments on time.

Credit scores range from 375 to 900 points, but those numbers mean little on their own. They become meaningful and useful within the context of a particular lender's own cutoff points and underwriting guidelines.

In general, you are likely to be considered a better credit risk if your FICO score is high. Under mortgage lending guidelines, for example, a score of 650 or above indicates a very good credit history. People with these scores will usually find obtaining credit quick and easy, and will have a good chance to get it on favorable terms.

Scores between 620 and 650 (average FICO scores fall into this range) indicate basically good credit, but also suggest to lenders that they should look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit. People with scores in this range have a good chance at obtaining credit at a good rate, but may have to provide additional documentation and explanations to the lender before a large loan is approved. This means that their loan closing may take longer, making their experience more like that of borrowers in the days before credit scoring, when every individual was researched.

A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk-but it does not mean that they can't get credit. The process will probably be lengthier and, as noted, the terms may be less appealing, but often credit can still be obtained.



Understand How Credit Reporting Works

You are most likely already familiar with the concept of "credit," the reputation for paying your bills on time that makes it possible for you to obtain money or goods with the understanding that you will pay for them later.

In fact, you probably have already put your credit to work for you. You employed it when you obtained an auto or student loan, used your credit card to pay for a trip or new suit, or were chosen as the tenant for your rented apartment or house. A solid history of paying your bills may also have been just the objective character reference needed to help you land your job, too.

But even if you use your credit every day, you may have questions about the credit industry and how it affects you. In today's society, credit is much more complicated than keeping a tally at the local grocery. As a credit-active consumer, you need to know how credit reporting works and what your credit report contains.

What Is a Credit Bureau?
A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers' credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports. When you apply for a new credit card or loan, the credit grantor orders your credit report from at least one credit bureau and analyzes the information to decide whether to grant you credit. The credit bureau charges the credit grantor a fee for every credit report sold.

Although credit-reporting agencies provide your credit report to lenders when you apply for credit, they do not make actual lending decisions. It is up to individual lenders to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit.

The Three Consumer Credit Bureaus
There are three major credit bureaus providing nationwide coverage of consumer credit information in the United States: Equifax, Experian, and Trans Union. Although many national lending institutions report consumer credit information to all three, smaller banks and other credit grantors may report to only one-or even none. Therefore, your credit report from one credit bureau is not necessarily exactly the same as your credit report from another.

What Exactly Is a Credit Report?
A consumer credit report is a document that contains a factual record of an individual's credit payment history. Credit grantors are permitted by law to review your credit report to objectively determine whether to grant you credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, or home mortgage. As those people pay their bills, most lenders report credit payment information to credit bureaus. So most of the information in your consumer credit report comes directly from the companies you do business with.

What Information Does a Credit Report Contain?
A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.

Identifying information includes:

  • Your name
  • Your current and previous addresses
  • Your Social Security number
  • Your year of birth
  • Your current and previous employers
  • If you're married, your spouse's name

Credit information includes credit accounts or loans you have with:

  • Banks
  • Retailers
  • Credit card issuers
  • Other lenders

Public record information includes any information that's contained in state and county court records, like:

  • Bankruptcies
  • Tax liens
  • Monetary judgments

Inquiries indicate to other credit grantors that you have applied for new credit that could result in additional debt. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself.

(A credit risk score may also be included when your report is provided to a credit grantor, although it is not included on consumer review reports. The ways to calculate and use a credit score vary widely, so a score has little meaning outside of the context of a particular lender's unique guidelines for use. Therefore, it is not included on consumer review reports.)

What is a Credit Risk Score?
A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness. The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals, and business practices. Your risk score will change over time as your credit history develops. See What Is a Credit Score? For more detailed information.

Does a Credit Report Contain Other, Unrelated Personal Information?
No. Your consumer credit report does not contain information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.

How Long Does Information Stay on My Credit Report?
Positive credit information remains on your report indefinitely, although information about an account will cycle off your report if no new information is reported about it for seven years. (Thus, a closed account will disappear from your report seven years after it is reported closed by the credit grantor.)

Most negative information remains for up to 7 years. Bankruptcies can remain on your credit report for up to 10 years. Other public record information can remain for up to 7 years.

Most inquiries stay on your credit report for up to two years.

What Is a Mortgage Report?
A mortgage report is a special credit report that lenders use prior to deciding whether or not to extend you a home loan. Each report is compiled from credit reports from two or three credit bureaus. The mortgage credit reporting company purchases credit reports from the credit bureaus, combines them, and manually verifies specific information such as employment, credit account balances, and public record information.

What Is an Employment Report?
An employment report is a modified credit report that helps potential and current employers make hiring and promoting decisions. The employment report contains much of the same information about your loans and credit cards that your credit report has listed. However, your marital status, year of birth, and account numbers are omitted from the employment report.

Who May Check My Credit Report?
Federal law carefully regulates how credit reports can be used and by whom. By law, you have the right to obtain your own reports at a reasonable price. Before they can access consumer credit information, businesses must offer proof that they will be using the data for no other purpose than that allowed by federal law.



Before You Cosign a Loan, Understand Your Obligations

What would you do if a friend or family member asked you to cosign a loan? Before you answer, make sure you understand what your obligations are.

When you agree to cosign for someone else's debt, you are essentially guaranteeing payment if that person defaults. You are being asked to take a risk that a professional lender will not take. Think about it: the lender would not need a cosigner if the borrower were a good risk.

Cosigning Means You're Financially Responsible-Consider the Risks
The obligations associated with cosigning a loan can be more than people expect. So before you put your autograph on the dotted line agreeing to cosign a loan, the Federal Trade Commission requires the creditor to give you information explaining your commitment. It states:

"You are being asked to guarantee this debt. Think carefully before you do. If the borrower that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become part of your credit record. This notice is not the contract that makes you liable for the debt."

If you are thinking about cosigning you should consider the following:

  • Be sure you can afford to pay the loan. If you're asked to pay and you can't, you could be sued or your credit rating could be damaged.
  • Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.
  • Before you pledge property to secure the loan, such as your home or car, be sure to understand all the consequences. If the borrower fails to pay, you could lose these items.
  • You may have to pay the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs in addition to the outstanding debt.
    * Ask the lender to calculate the money you might owe. You may also negotiate specific terms of your obligation.
  • Ask the lender to agree, in writing, to notify you if the borrower misses a payment. Doing this will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
  • Make sure you get copies of all the important contracts.
  • Check your state law for additional cosigner rights.

When Is It Worthwhile to Cosign?
When it's important to you that the borrower get credit, and you have good reason to believe the borrower will repay the debt, it can be worthwhile to cosign for a loan or credit card.

Parents often cosign for their adult children who have ample income to qualify individually, but lack a solid credit or employment history. By cosigning, parents help their children receive a loan and establish credit in their own name.

Similarly, sometimes a spouse or family member will cosign for a small loan or credit line to help an individual establish or rebuild credit in their own name.

Although the statistics on cosigning support that it's a relatively high risk, that's not always the case. There have been many successful situations where cosigning served the interests of all parties. Statistically, though, the risk often outweighs the benefit. Some studies show that three out of four cosigners end up having to repay the loan for the original borrower, so it's important to take steps to protect yourself if you do cosign.

If you are worried about some of the risks that cosigning carries, you may be able to negotiate specific terms of your obligation. For example, you might want to have your liability limited to paying the principal balance on the loan, but not late charges, court costs, or attorney's fees. In this case, ask the lender to include a statement in the contract like: "The cosigner will be responsible only for the principal balance on this loan at the time of default."

If You Need a Cosigner
If you're in need of someone to cosign a loan for you, talk with family or friends and explain to them that they'll be helping you to reestablish your credit. Understand that cosigning is a big step for the person agreeing to sign for you, so make sure you make them feel as comfortable as possible about cosigning for you. Show them you'll be able to repay the loan. Remember that if you fail to repay the debt and the cosigner has to step in to repay it but can't afford it, then you both will have damaged credit histories. Therefore, the credit you obtain will carry a double weight of responsibility-your obligation to the lender to repay what you borrow and your obligation to your cosigner to live up to the investment they're making in you.

Whatever your involvement in a cosigned credit transaction, remember that cosigning means extra obligations for everyone involved and consider your decision carefully.



Check Your Credit Report Regularly

Detect Identity Fraud Early
We all know we should check our credit card statements every month for charges that we haven't made. But that only catches the thief who uses an account you know you have.

In the past few years identity fraud has risen dramatically. In this insidious form of credit fraud, a thief steals your good credit by taking over or opening accounts in your name, running up large balances, and leaving you to deal with the collectors when they come calling.

New accounts opened with your identity will appear on your credit report, revealing identity fraud to you. If you don't check your credit report, it could be months before the credit grantor, fed up with nonpayment, turns the account over to a collector who tracks you down and demands payment for a loan you've never even heard of.

As with much less problematic inaccuracies, identity fraud is something you can detect and remedy most effectively by checking your credit history thoroughly and on a routine basis.

Become an Informed Consumer of Credit Services
Your credit report can have a dramatic impact on your financial stability. With good credit, you can obtain benefits of all kinds--a home mortgage or lease on an apartment, an auto loan, low-interest credit cards, and more-with ease. But if your credit history is poor, many of these financial options may be unavailable to you. Either way, you have a right to know what to expect when a lender runs a credit check on you.

Aside from paying your bills regularly and on time, the single most important thing you can to be aware of the contents of your credit report.

Studies have shown that many credit files contain inaccuracies that can harm your credit rating, leading to rejections when you apply for loans, insurance, even a job. Often the result of simple human error, they can be caused by anything from a clerical error to a computer glitch in which your file is mixed with that of someone with a similar name.

That's why it's essential that you check all of your credit files-and monitor your credit regularly--to protect your good credit standing, even if you always pay all your bills on time.

And if your credit is less than perfect now, checking your report will help you identify lingering problems so you can deal with them effectively and move on toward an improved credit standing. Whatever your situation, reviewing your report regularly is the only way to be sure that you will go into any credit conversations knowing everything lenders will know.



Finding Your Credit Score Can Be Difficult

It can be difficult. Currently, there is no law requiring that credit scores be released to consumers, and credit bureaus do not include the scores on copies of credit reports provided to consumers.

The three major credit bureaus, Experian, Equifax and Trans Union, worked with the Fair, Isaac company to develop generic scoring models that allow each bureau to offer a score based solely on their credit report data on you. Because the scores are created differently by the credit bureaus and used differently by lenders, Fair, Isaac and the credit bureaus have said that knowing a score is of little use to the consumer, and may simply be confusing.

However, Fair, Isaac is currently negotiating with the bureaus to change contract agreements that could allow lenders to more freely disclose credit scores to consumers. The company said it is responding to increased public curiosity about the scores. Some lenders already have started revealing scores to potential borrowers if they ask. And as consumer awareness of credit scoring, and FICO scores in particular, grows, more and more lenders are willing to discuss it.

All lenders should, however, tell you the reasons provided for a low score if that score is a factor in delaying or denying your loan application. A list of "score reason codes" comes with each credit score report a lender receives. The codes explain the top reasons your score was not higher, such as too many inquiries or delinquency on accounts.



Improve Your Credit Score And Develop a Solid Credit History

The first thing to remember is that your credit score can vary from month to month-even day to day, sometimes. This is because it is calculated based on the credit data available for you at the credit bureau on the day the score is requested by a lender.

But there are some specific ways to improve your credit score. First, when a lender receives your credit score, it includes "score reason codes" to explain the top reasons your score was not higher. These codes can give you an idea of how you should start improving your score, such as closing unused credit accounts or being more diligent about making payments on time.

Additionally, here are some general suggestions to help you develop a solid credit history and influence your score for the better:

  • Pay your bills consistently and on time. And take heart-the scoring models all take into account the fact that everyone misses a payment once in a while. Also, negative information loses its potency over time: a recent late payment is weighted more heavily than a late payment four years ago.
  • Check your credit report and remove any errors. By making sure that only your accurate credit history appears on your report, you ensure that the credit score it generates isn't lowered by inaccurate information.
  • Keep your debt reasonable. One rule of thumb: for a good credit score, your account balances should be below 75% of your available credit. For example, if you have a $2000 credit limit, you should have a balance of no more than $1500.
  • Maintain only a reasonable amount of unused credit. While it's good to have a cushion of credit available, having ready access to thousands of dollars of debt makes you a poorer credit risk.
  • Avoid too many inquiries. Inquiries are interpreted as a sign that you have been actively seeking credit, and may be in financial difficulties or in the process of overextending yourself.



Managing Your Credit Wisely Improves Your Chances For a Good Mortgage

Whether you're a first-time buyer or a seasoned homeowner looking to move up to a bigger or better house, how you have managed your consumer credit rating can have a real impact on both the amount and terms of your next mortgage.

Naturally, if you have kept your credit use reasonable and always paid your bills on time, you will most likely have very few difficulties obtaining a mortgage loan. But what if you are one of the many Americans whose credit report is less than perfect?

Contrary to popular belief, it is not impossible to obtain a mortgage with an imperfect credit rating. After all, mortgage lenders are in the business of providing loans, and have it in their interest as well as yours to find an appropriate way to finance your home purchase.

Credit Doesn't Necessarily Have to Be "Perfect" to Be Good
In the case of a single bad mark on an otherwise good credit history, many mortgage lenders will simply ask for a written explanation of the late payment. If the explanation is reasonable and believable, many lenders will overlook the isolated problem-especially if it occurred some time ago and your credit has been good since.

Indeed, as far as lenders are concerned, the most important time period in your credit history is just the preceding year or two.

According to guidelines established by the Federal National Mortgage Association (Fannie Mae), indicators of good credit do include some leeway for occasional late payments. Thus lenders will look at:

  • Revolving credit (e.g., credit cards), which should show no payments 60 days or more late and no more than two payments 30 days late;
  • Installment credit (e.g., an auto loan), which should show no payments 60 days or more late and no more than one payment 30 days late;
  • Housing payments (e.g., mortgage or rent), which should-not surprisingly-show no late payments (this can be proven by the payment history from a mortgage lender or by the borrower's canceled checks for the past 12 months).

Credit Scoring Broadens Scope of Lenders' Considerations
As credit scoring in mortgage loan decisions has become more sophisticated, lenders have also begun looking at other factors in your credit history as well. They might be concerned if your credit cards are "maxed out" (indicating possible future difficulties in managing debt and making payments) or, conversely, if you have large lines of credit available (that you could at some future time run up into unmanageable debt).

Some lenders will also look at how many inquiries have been made into your credit report recently, interpreting a large number of inquiries as a sign that you have applied for a large amount of credit lately. Applying for numerous lines of credit might indicate that you have been turned down by several other lenders or that you are in the process of accumulating new credit accounts which might leave you with too much credit available to be a good credit risk.

"Compensating Factors" Can Make a Difference
Credit scoring can also work to your benefit, helping to overcome potential problems like a high debt-to-income ratio or a slightly imperfect credit past. Scoring also considers "compensating factors" that Fannie Mae guidelines indicate might justify some degree of risk to the lender. These compensating factors include:

  • A large down payment;
  • An energy-efficient property (e.g., with up-to-date heating and power systems);
  • Previous large housing payments (such as high rent), which show the borrower's ability to channel a larger-than-normal proportion of income to payments;
  • A history of good credit and the potential to accumulate savings in the future (despite a current low net worth);
  • The likelihood of career advancement and earnings increases due to strong education or job training (this is particularly helpful to young borrowers who carry student loan debt);
  • A substantial net worth (despite current low earnings).

Knowing about these compensating factors-and which of them are at play in your own situation-can help you to get the loan you need for the home you really want. But you also need to know what your credit history looks like on paper to be able to optimize your borrowing ability.

For example, you may have cut up a credit card years ago, but never bothered to actually close the account. This account shows up on your credit report as available credit, which lenders may think adds to your risk. The time to close this unused and unnecessary account is before you apply for a mortgage.

In addition, you will want to be confident that the information in your credit report is accurate. Inaccuracies in your credit report-or, worse, the damage done by credit or identity fraud-can seriously impact mortgage lenders' likelihood of offering you a loan.

Reviewing Your Credit Report Puts You In Control
Many financial planning experts recommend checking your credit report on a regular basis in order to keep tabs on the information placed on it. Routine checking on your part allows you to stay on top of what credit grantors-including mortgage lenders-will read about you when they check your credit history, and enables you to correct any inaccuracies and catch fraud before these problems impact your mortgage loan. Disputing inaccuracies can take up to 30 days to resolve, so taking care of them well in advance of applying for a mortgage is also important.

The CreditCheck Monitoring Service makes it easy for you to stay on top of the information in your credit report, and gives you a free copy of your report when you sign up for a free trial membership.

The information provided by your credit report can be invaluable in understanding your credit rating as mortgage lenders see it, enabling you to correct inaccuracies and know best how to present your correct credit history and circumstances in order to get the mortgage you seek.



The Art of Getting Credit

Paying cash for products and services seems to be a practice that occurred in a different era. Today, credit is a way of life, and plastic has evolved into the currency of choice. Virtually anything-gas, groceries, doctors' visits, clothing, vacations, even cars--can be purchased with credit cards.

Yet many consumers are unclear about the best way to go about establishing and maintaining a good credit history.

What Creditors Look For
Creditors are in business to make money and avoid losses. Typically, creditors will analyze the information provided in your credit application and will access a credit report from one or more of the 3 major credit bureaus, Experian, formerly known as TRW, Equifax, or Trans Union.

When deciding whether to grant credit or a loan, creditors will consider a number of different factors, such as your income, how long you have lived at your current address, what kinds of assets you have, the balances in your checking and savings accounts, your promptness in paying bills, how long you have been working for the same company, and how much you owe other creditors.

All creditors have slightly different criteria, and they will make a judgment about the creditworthiness and potential risk of each applicant.

How to Establish Credit
There are a number of ways to establish credit. If you have a steady income and have lived in the same area for at least a year, try one of these approaches:

  • Apply for credit with a local business, such as a department store or a local bank or credit union. These local merchants may have lower credit standards than larger lenders.
  • Apply for credit with an oil company or local department store.
  • Take out a small loan from a local bank or credit union-even if you have no immediate need for the money. Make payments on time and consider the interest expense an investment in establishing a good credit history.
  • Take advantage of secured lines of credit offered by some lenders. By depositing a specific amount into a special account, you receive a credit card with a limit that equals your deposit. (For example, if you deposit $1,000, your credit limit will be $1,000.)
  • Before you apply for credit, make sure the creditor or lender reports credit history information to one of the credit bureaus so you can build your credit history.

Pay Your Bills on Time
Although creditors have different criteria for granting credit, there are a number of actions which most creditors rank as indicative of a poor credit risk, including:

  • Frequent late payments
  • Unpaid bills
  • Repossessions
  • Accounts turned over to a collection agency
  • Legal judgments
  • Liens
  • Bankruptcies

Paying your bills on time is the best way to maintain a good credit rating and be considered a good credit risk. However, there are a number of legitimate circumstances which can cause you to become behind in your payments, such as illness, injury, or the loss of your job.

Talk to Your Creditors
If you begin to fall behind in your payments, contact your creditors immediately. Most are willing to work out an alternative payment schedule with you if you expect to repay your loan or balance within a reasonable period of time.

Creditors and lenders want to collect their money at the least possible cost. By working with you before the situation becomes critical, they can save time and money on collection efforts, and they know up front when to expect payment.



Credit Scoring Benefits Consumers

The widespread use of credit scoring allows for speedy, objective analysis of credit histories. In the early 1980s, the three major credit bureaus, Experian, Equifax and Trans Union all worked with the Fair, Isaac company to develop generic scoring models that allow each bureau to offer a score based solely on their data about an individual. A computer-generated score is compiled using information from your credit report, such as whether payments have been on time. Then that score is compared to the credit performance of consumers with similar profiles. The scoring system awards points for each factor that helps predict who is most likely to repay a debt and produces a single number-your credit score.

Credit scoring has allowed companies to offer "instant credit," which was unheard of in years past. As you browse through aisles of washing machines or peek into the windows of new cars, a prospective lender can order your score and, if they like what they see, give you loan or credit approval on the spot. It also means that borrowers are less likely to experience problems with individual lenders' prejudices. Because credit scoring is objective and based on large volumes of verified statistical data, credit scoring brings a new level of fairness to the credit-granting process.



About 30 Factors Influence Your Credit Score

A credit score or credit bureau risk score is based on information drawn from your credit report. About 30 individual factors are used to determine the score. Certain factors, such as payment history, have more weight than others, such as the length of your credit history. However, a factor may be more important to your credit score than to someone else's score because of differences in individuals' credit reports. Also, each factor's importance can change as your credit report changes. Factors can be categorized in five areas:

  • Payment history. Payment information on credit cards, installment loans (such as a car loan), mortgage loans or finance company accounts. Are there public record items, such as judgments or bankruptcy, and collection items? Details on late or missed payments, including how much was owed, how late the payments were and how recently they occurred. How many accounts show no late payments. According to Fair Isaac, this category usually determines about 35% of your score.
  • Outstanding debt. Amount owed on all accounts and on different types of accounts, such as credit cards or installment loans. How many accounts have balances? How close are you to each credit limit? According to Fair Isaac, this category usually determines about 30% of your score.
  • Credit history. How long have you been building a credit history? How long specific accounts have been established and how long since you used each account? According to Fair Isaac, this category usually determines about 15% of your score.
  • Pursuit of new credit. How many inquiries and new accounts does your report show, and how recent are they? How long has it been since the most recent inquiry? Whether you have made on-time payments to re-build your credit after a period of frequent late payments. According to Fair Isaac, this category usually determines about 10% of your score.
  • Types of credit in use. How many accounts are reported for bank cards, travel and entertainment cards, department store cards, installment loans, and so on. According to Fair Isaac, this category usually determines about 10% of your score.

Also informative is the list of "reasons" that may be provided to account for why a score isn't higher. When lenders request your credit score, they also receive a list of the four most significant reasons your score is not higher. Although lenders do not have to tell you your score, they should share the reasons listed on the report with you.

The possible FICO reasons are:

  • Amount owed on accounts is too high.
  • Delinquency on accounts.
  • Too few bank revolving accounts.
  • Too many bank or national revolving accounts.
  • Too many accounts with balances.
  • Consumer finance accounts.
  • Account payment history too new to rate.
  • Too many recent inquiries in the last 12 months.
  • Too many accounts opened in the last 12 months.
  • Proportion of balances to credit limits is too high on revolving accounts.
  • Amount owed on revolving accounts is too high.
  • Length of revolving credit history is too short.
  • Time since delinquency is too recent or unknown.
  • Length of credit history is too short.
  • Lack of recent bank revolving information.
  • Lack of recent revolving account information.
  • No recent non-mortgage balance information.
  • Number of accounts with delinquency.
  • Too few accounts currently paid as agreed.
  • Time since derogatory public record or collection.
  • Amount past due on accounts.
  • Serious delinquency, derogatory public record, or collection.
  • Too many bank or national revolving accounts with balances.
  • No recent revolving balances.
  • Proportion of loan balances to loan amounts is too high.
  • Lack of recent installment loan information.
  • Date of last inquiry too recent.
  • Time since most recent account opening too short.
  • Number of revolving accounts.
  • Number of bank revolving or other revolving accounts.
  • Number of established accounts.
  • No recent bankcard balances.
  • Too few accounts with recent payment information.

Keep in mind that your credit report changes day to day as you make payments or increase balances. If you pay off your credit cards in full every month but your credit score is compiled before your payments are reported to the credit bureau, your score will reflect those balances. Generally, the total balance on your last statement is the amount shown on your credit report.