Can You Erase Bad Credit?
It is relatively easy to establish a credit history,
but difficult to erase bad credit if you've
mismanaged credit in the past. Still, making the
right moves boosts that credit score.
FIND OUT YOUR STANDING
A law passed last year requires credit bureaus to
provide consumers with a free annual credit report.
However, the law is being implemented differently
from state to state and it will take all of 2005
before every state will be able to offer free reports
to residents (check www.ftc.gov for updates).
In the meantime, anyone can still get a credit report,
but you'll have to pay for it. You can buy those
reports--although not your FICO score--from the three
major credit bureaus: Experian (www.experian.com; 888/397-3742);
TransUnion (www.transunion.com; 800/916-8800); and
Equifax (www.equifax.com; 800/685-1111).
Fair Isaac offers all three reports plus your FICO score
(www.myfico.com). Costs vary, as does the amount of
information each report provides, but any one report
should give a good bird's-eye view of your credit.
However, to get the most comprehensive overview of
your credit, it's a good idea to invest in all three
reports. That's because some creditors may report to
one bureau but not another. Or, if those creditors
report to every bureau, they may do so at different
times of the month. So your scores with each bureau
will differ slightly.
"Generally, if your score is 680 or higher, you can
apply for credit with confidence," says Stephen Snyder,
financial expert and author of Do You Make These 38
Mistakes With Your Credit?
IMPROVING YOUR GRADE
Now that you have what is essentially your credit-management
report card, look for ways to erase bad credit and
boost your grade. Make sure that the information in the
report is accurate. Do you recognize all of the accounts
listed? Sometimes information from someone with a similar
name may end up in your file. For instance, Robert Downey
may find accounts on his report that belong to
Robert Downey, Jr. If you've ever had your wallet stolen,
pay extra attention. "Smart identity thieves will open an
account in your name and pay on it reliably before they
start using it fraudulently," says Craig Watts, public
affairs manager for the Fair Isaac Corporation.
If you see an unfamiliar account, call the creditor
right away.
If you're in a dispute over a charge, bear in mind that
it may show up on your report as being paid late or not
at all, a factor that can damage your FICO score. For instance,
Wall once had problems getting a mortgage because she was
disputing a charge for returned merchandise.
Next, check to see if your report contains four two-digit codes.
These "reason codes" explain why your score isn't higher,
says Snyder. For example, you may need to improve your mix
of credit by adding a major credit card to a file containing
mainly department store cards. Perhaps you are maxing out
your limits. "If you have $10,000 in credit and are using
$9,000, you can improve your score by paying down your debt,"
says Watts. Sometimes you have to let time pass for your
score to improve. Mistakes such as paying late stay on your
report for seven years. "But the older the information,
generally the less damaging it is," says Gerri Detweiler,
author of The Ultimate credit Handbook: How to Cut Your Debt
and Have a Lifetime of Great Credit.
If you're in serious trouble--with bankruptcy, a tax lien,
or judgment--you can write a 100-word statement that the
credit bureaus will include in the report. "You can say,
"I was going through a divorce and my ex was supposed to
pay the bills but did not,'" says Wall. Snyder feels
lenders rarely if ever give such statements the
consideration they deserve anymore, but it certainly
can't hurt to try.
Divorce, incidentally, is one the biggest causes of credit
problems. A judge may state that your ex-spouse is responsible
for half of the Visa bill, but if your name is on the account,
beware.
"You still have a contract with the creditor and the divorce
decree has nothing to do with that," warns Maxine Sweet,
vice president of consumer education for Experian.
If you can't pay off all joint accounts immediately,
Sweet's advice is for both parties to take out personal
consolidation loans to pay off debts. "That totally
breaks your tie to your ex," she explains and erases
bad credit.
IF YOU HAVE NO CREDIT
If your credit history is a blank slate, getting
credit immediately may take time. On the plus side,
at least you're starting with a clean record
and can begin building a history tight away.
Open a credit account (department store cards
are generally easy to get) and keep it active
for six months and one day--the length of time
needed to generate a FICO score, of course,
you don't have to wait that long if you are
married and can become a joint cardholder on
your spouse's account. Such piggybacking
instantly taps into your spouse's entire
credit history--a smart move if it's a
stellar record.
As you build a history, keep in mind that revolving
credit--such as Visa and MasterCard--counts more
toward a score than installment loans such as mortgages,
which have a fixed monthly payment. "With a credit
card, you determine how much of your credit limit
you will charge and whether you will pay the minimum
or the amount in full," says Sweet. In short, it
provides a better snapshot of how you handle money.
If you have trouble getting a card, a secured card
may be an excellent choice. As its name suggests,
you secure your credit with your own savings.
For instance, if you stash $100 in savings with
the lending institution, you can borrow up to $100.
Tuck away $1,000 and the limit jumps that much.
One caution: Even though your balance is guaranteed
by the deposit, you will still be charged a fee if
you're late or skip a payment. Treat it like a
regular credit card; pay on time.
Once you've held a secured card for six months,
apply for a regular credit or department store card.
Whatever you do, don't apply for too many cards at
once. It just makes it harder to get a card at all.
"Whenever you apply for credit, you give the lender
permission to look at your report," explains Snyder.
"Each inquiry, each time someone looks at your report,
it lowers your score." That's because the more inquiries
your report shows, the more you've been applying for
credit. Watts says people who apply for credit frequently
are a statistically higher risk, so even just a simple
inquiry can be damaging. To keep inquiries from affecting
your score, open new credit accounts only when you really
need them. Try not to take advantage of some minor
incentive, such as a free toaster or getting a 10-percent
discount on any purchases you make that day. Focus on
your long-term goal and don't let those minor
distractions become obstacles to your goal.
Finally, keep your credit score high by paying on
time. "That is absolutely the most critical thing,"
says Sweet. As with school, tardy students rarely
make the grade. Paying on time takes away the option
to erase bad credit.
--A former editor at Money Magazine, Karen Cheney
writes frequently on family money issues from
her home in Pennsylvania.
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