How to Make a Budget & Fix Credit

A poor credit score can make it difficult to borrow money and may affect your ability to find a job in certain fields. Poor credit usually happens as a result of poor money management skills, which can cause you to fall behind on payments. A budget will help you gain control of your money and make it easier to repair your poor credit history.

Instructions

Make a Budget

1

List your monthly expenses. Look at receipts from the last three months to find the average amount you spend on a monthly basis to get a starting amount for your budget. Your expenses should include rent, utilities, car expenses, entertainment, food, clothing and savings.

2

Add up your expenses and subtract that number from your income. If the number is positive you are in a good position. If the number is negative you will need to cut your expenses until the number is zero or positive. A positive number will give you money to work toward fixing your credit.

3

Track your expenses through the month. Subtract money from each category as you spend it and stop spending the money as you run out of money in each category. You can transfer money from another category to cover expenses if you find that you have overspent on groceries and run out of food.

4

Adjust your budget after the first few months. It will take time to work out the right amount for each category and you may find that you always have money left over in one category, but consistently overspend in another. After a few months you can change the amounts so the budget works well.

Fix Credit

5

Create a debt payment plan to pay off your current debts. Using your most recent credit card bills, list your debts from the highest interest rate to the lowest interest rate and pay any extra money on the first debt in your list.

6

Get caught up on current accounts and stay current with those debts. Your most recent credit history will be the one that potential lenders and employers look at closely. Staying current on all of your payments will help build a favorable credit history.

7

Compile a list of your old debts, using the past-due statements for your accounts. You can also pull a copy of your credit report to make sure you have not forgotten any outstanding debts. Begin saving money to pay off the debts one at a time. You can settle an old debt by offering a lower amount to the creditor if you have missed payments for several years. However, paid in full looks better on your credit report than debt settled, and you can repair your score more quickly if you can simply pay off all of the debts. However, even settled debts are better than outstanding debts.

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How to Rebuild Credit to Buy a Home After Bankruptcy

Most people dream of owning a home. Unfortunately, a recent bankruptcy can put this dream on hold so you might have to rent a property until your credit improves. Still, it is possible to rebuild your credit after a bankruptcy. You'll need to recognize habits and mistakes that led to a bankruptcy and resolve to modify these habits. A bankruptcy falls off your credit report in ten years. Fortunately, you don't have to wait that long to purchase a home.

Instructions

1

Check your credit report. A bankruptcy stops harassing phone calls from creditors and you're no longer obligated to repay those debts. After the discharge, get a copy of your credit report from Annualcreditreport.com. Review the report thoroughly to check for accuracy and to ensure that your creditors were included in the bankruptcy.

2

Look into installment loans. Apply for a vehicle loan or student loan to begin restoring your credit rating. Anticipate a higher interest rate.

3

Discuss secured credit card options with your bank. Save money for a security deposit (about $500), and then apply for a secured or prepaid credit card with your local bank.

4

Keep your debts low. Pay off your balances every month to maintain a low debt-to-income ratio.

5

Avoid skipping payments. Sending late or missing payments causes further damage. Mail or submit online payments several days before the due date.

6

Ask creditors to report your good payment history. Some creditors don't regularly report to the credit bureaus. Contact your new lenders to see how often they report to the three major credit bureaus. Request regular updates to help improve your credit.

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How Best to Build Credit

Without credit, you will have a hard time renting an apartment, making a large purchase or borrowing money in an emergency. Even some potential employers will check your credit rating. To build a good credit score, you need to open and use credit cards and other credit products. You also need to manage those products responsibly.

Open Credit Accounts

You must have active accounts that report to the three major credit bureaus, Equifax, TransUnion and Experian, to build a credit history. Many financial companies offer traditional and secured credit cards. Traditional cards do not require payment up front, but can come with other fees and high interest. Secured credit cards require that you put money into an account before opening the credit card. Retail stores and gas stations also offer credit cards, but you must use them at the store. You can also take out a small personal loan or auto loan to help build credit.

Manage Credit Responsibly

Do not apply for several credit cards at once; doing so can lower your credit score. However, the credit bureaus consider applying for several loans during a short period of time as comparison shopping, and this should not lower your score. Once you open an account, pay the bill on time each month. A history of timely payments will quickly build a good credit score. Do not exceed your available credit limit on credit cards, as doing so will cost you a fee and hurt your credit rating.

Keep Debt Low

Try to pay off the entire balance on your credit card each month. If you cannot pay the entire balance, only carry a small amount of debt on the card. Never max out your credit cards. Using the entire available limit on your card will lower your credit score, and future lenders may see you as a high risk applicant. Carrying a large balance will also hurt you financially as the balance compounds more interest each month, making your purchases cost more in the long run.

Check Your Credit Report

Carrying and using credit cards puts you at risk for credit fraud. Thieves can access your credit card account number and make charges, or get ahold of your Social Security number and apply for new accounts. Creditors also make mistakes and occasionally report misinformation to the credit bureaus; the credit bureaus can also make mistakes themselves. You can counteract this by checking your credit report. Under law, each of the credit bureaus must give you a free report once a year. You can get copies of all three reports through the Annual Credit Report website.

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Credit Help Information

You may hesitate to apply for a home or auto loan due to a bad credit history. Past credit problems limit your finance options. But fortunately, there are solutions to credit problems, and there are ways you can raise a low score and qualify for the best finance rates.

Debt Balances

Carrying high balances and constantly opening new accounts can hurt your credit rating because the amount you owe accounts for 30 percent of your FICO credit score. Don't rely on credit cards to acquire possessions. Get into a habit of using cash, and start paying down balances to help solve credit problems and maintain a good rating.

Assess Damage

Get a copy or your credit report to assess the damage to your credit rating. Knowing the information on your report is the first step to repairing a bad credit history. Creditors and lenders frequently send information to the bureaus, and they may report information such as late payments, collections and judgments. Staying on top of your profile and knowing what areas to address can help solve credit issues and improve your bad score. AnnualCreditReport.com provides consumers with free copies of their reports each year.

Credit Rating and Payment History

There is a strong link between a good payment history and a good credit score. Paying your bills on time is essential to maintaining a high score. This is because your payment history makes up 35 percent of your FICO credit rating. Paying bills on time isn't easy for everyone. Some people are short on cash when bills are due, and poor organization can impact timely payments because some forget due dates. Establish a system to contribute to timely payments. Consider mailing payments as soon as the statement comes in the mail, or signing up for online account management and scheduling payments online.

Credit Inquiries

Recognize the potential danger of applying for numerous credit accounts within a short time. Credit applications or inquiries on your credit profile decrease your FICO credit rating. Solving credit issues can be a matter of declining offers for credit and only submitting applications for credit when necessary.

Past Due Accounts

Improving your payment history helps fix bad credit. However, if you have older accounts that are in collection status or judgments on your credit report, getting these items removed involves contacting old creditors to schedule a payment, and then asking your creditor to delete these derogatory remarks after they receive a payment. Paying an old debt doesn't automatically remove the information from your report. Creditors make the decision to keep or remove collection accounts and judgments from your report.

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What's a Good Credit Score?

When you apply for a loan or credit card, a lender will use your credit score to determine whether to approve a loan and at what interest rate. Credit scores generally range from 300 to 850, with anything below 620 considered a poor score. While each lender will determine what they consider to be a good credit score, typically anything over 700 is considered good.

How Your Score Is Calculated

Your score is calculated using information gleaned from your credit report including student loans, credit cards, auto loans, tax liens, inquiries, employment and bankruptcies.

Where to Find Your Score

You can contact any of the three financial institutions (Experian, TransUnion or Equifax) to learn your credit score.

How to Improve Your Score

The easiest way to improve your credit score is by paying all of your bills on time. You can also help boost your credit score by using a credit card regularly and paying the entire balance off each month.

Why Credit Scores Decrease

Late payments, default loans, unemployment, too much debt and/or too much credit can negatively affect your credit score.

Free Credit Report

A good credit score can nab you a significantly lower interest rate, saving you thousands. To ensure that your credit score is as high as it can be, stay on top of your credit report to ensure that the information is correct. Contact Experian, TransUnion or Equifax for your free annual credit report (the report is free; you have to pay to get your score).

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How to Repair a Poor Credit Rating

It takes a measure of responsibility to manage credit wisely and keep a high rating. However, situations such as lack of income or poor money management habits can cause your credit rating to drop, making it much harder to get approved for home loans, car loans and credit cards. Fortunately, a poor credit rating is fixable by changing your current habits and learning how to manage credit to boost your score.

Instructions

1

Make payments early. Late payments contribute to a low credit rating. Make bill payments on time every month to repair a bad relationship with your creditors, and to add points to your credit rating. Early payments and online payments can help alleviate lateness and extra fees.

2

Pay down debt. Carrying a high balance on credit accounts also hurts your rating, whereas keeping debts low can improve a bad rating. Create a strategy to pay off debt such as making higher payments, taking cash from savings or getting a second job.

3

Quit applying for new lines of credit. Every credit application you submit lowers your rating. Postpone all credit inquiries until you've improved your rating, and then only apply for credit when necessary.

4

Pay off collections and judgments. Setup small payments each month to pay off old debts, and then contact old creditors and ask them to remove judgments and collection accounts from your report.

5

Closely monitor your credit report at least once a year. Look for activity that can lower your credit rating such as unfamiliar accounts or inaccurate account information. Contact creditors to dispute errors.

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Where Can I Get Information on My Credit Score Without Using a Credit Card?

If you attempt to purchase your credit scores online, you will be asked to provide a credit card number. For individuals without access to a credit card, however, there are alternate ways of obtaining a credit score.

Facts

You can purchase your credit scores from the credit bureaus via mail with a check or money order. Each credit score may take several weeks to arrive.

Options

You can visit a local bank and explain that you are considering opening a new checking account. The bank will then conduct a credit check and inform you of your current credit score.

Misconceptions

Although every consumer has the legal right to a free credit report each year from each credit reporting agency, the free annual credit reports that consumers receive do not come with a free credit score.

Considerations

Your credit score varies depending on the information each of your creditors reports every month. Consider purchasing credit monitoring to have constant access to your credit score.

Warning

You may purchase your FICO scores from Equifax and TransUnion, but Experian does not sell FICO scores to consumers. It will, however, provide you with a consumer credit score. This score will differ from the FICO score lenders use.

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Does Your Credit Affect Employment?

Most people know that a low credit score can affect the ability to borrow. But it can also affect your employment prospects if you're in the market for a job. Most corporations and businesses use extensive background checks to select new hires; one of the useful tools is a credit report. A credit report can reveal much about character, level of responsibility and problems that may be a major distraction in your work.

Verification of ID and Previous Employers

Credit reports list not only your credit score. They may also list your previous employers. If you are being forthright on your application and list all of your past jobs, you have nothing to worry about and the report will confirm your truthfulness, which is a positive. If you are trying to hide a job for whatever reason, the prospective employer may see that as being deceptive, and they may not consider you further. Credit reports can also be used to verify your Social Security number to confirm your identity.

Judge of Character

Employers may want to look at how you manage your finances as a way to gauge your level of responsibility. If your proposed monthly salary won't cover your outstanding debts, they may question why you would accept it. Your personal debt may also place an extraordinary strain on your ability to concentrate or perform your job duties to the best of your abilities. An employer might consider employees who pay their bills late to have disregard for contractual obligations, which could possibly translate into a lack of regard for rules or obligations in the workplace.

Working With Money

If your job entails working with money, cash or valuables, your credit report may affect the hiring manager's decision. The rationale may be that employees who are late on their payments or overwhelmed with debt may be more likely to resort to desperate measures, such as committing fraud or stealing from the company, according to ABC News. The amount of debt you carry and the number of past-due account balances may shine light on your judgment, or reveal a high level of irresponsibility.

You Must Give Your Permission

Federal law requires that employees give their permission to employers before they conduct background checks or credit checks, so this screening is not a secret or something done behind your back. Read the fine print when you fill out your application. According to ABC News, only 20 percent of employees knew that employers could use their credit report as a screening tool. You are entitled by law to a copy of the background check.

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How to Send Multiple Disputes to Credit Bureaus to Erase Bad Credit

With loans becoming increasingly difficult to obtain, and credit card limits decreasing, consumers are becoming more concerned about what information is on their credit reports. Under the Fair Credit Reporting Act, the consumer reporting agency and the information provider--or the company or organization reporting the credit information--are responsible for correcting inaccurate or incomplete information listed on your report, according to the Federal Trade Commission. To dispute errors on your credit report and erase bad credit, you must contact the credit bureaus and reporting companies in writing, providing any information available to back up your complaint.

Instructions

1

Obtain a copy of your credit report. You can obtain a free copy from each of the three credit bureaus--Expedia, Experian, TransUnion--once per year at annualcreditreport.com.

2

Review your credit report and determine any incorrect information. Circle all of the inaccurate items, and make a copy to include with your letter to the credit reporting agency.

3

Compose a letter outlining items of dispute. nclude the name of each reporting company, account number and reasons why you believe the items are inaccurate. Enclose any supporting documents you have to back up your case.

4

Ask that the items be removed from your credit bureau record, and request a revised credit report with updated information.

5

Mail the documentation to the correct credit bureau, and include any requested information such as proof of identity. Send certified mail, with a return receipt request. The bureau has 30 days to investigate or remove an item of dispute.

6

Repeat this process, including all inaccurate records listed for each of the three credit bureau reports.

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How to Request a Fraud Alert With a Credit Reporting Agency

If you have ever been a victim of identify theft, you know the importance of keeping your information private. You have to be careful about where you enter your Social Security number, your credit card number, and even your birth information and address because thieves have found ways to take on your identity using these basic details. It is especially important in this Internet Age to protect your personal information. But even if you haven't been affected by identity theft, you should immediately request that a fraud alert be placed on your account with each of the major credit reporting agencies.

Instructions

1

Decide if you want to place a temporary alert (90 days to a year) or a long-term fraud alert that will last for up to seven years.

2

Call each credit reporting agency (the contact information for the three major agencies can be found under "Resources" below). Express your concerns about your identity being compromised, and also explain any specific cases where you believe that there has been past fraud on your credit report. Ask them to immediately place your account on fraud alert.

3

Visit each credit reporting agency online. Download the form to place a fraud alert, print it out, sign it, and send it in with a copy of your government issued identification (such as a driver's license, passport or military ID) and one copy of your most recent utility bill. This will help the agency verify your identity before placing the alert.

4

Write a letter directly to the credit reporting agency outlining your fraud alert request. Be sure to include your name, Social Security number, address, birth date, and most recent credit report number. You can either fax your letters or send them to each credit reporting agency via snail mail. You will most likely be asked to give a copy of your ID and a recent utility bill as well. Get a delivery confirmation to confirm that each agency received your request.

5

Whichever method you chose, follow up with the credit reporting agency within two weeks of sending your request to confirm that you are currently on fraud alert. Once you are on fraud alert, you will be called whenever someone attempts to get credit in your name.

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How to Speak to a Live Person at Experian

There sometimes are questions on a credit report that can only be resolved by speaking directly to a customer service agent. Figuring out the automated series of prompts can feel like a maze. With a few preparatory steps, and a road map as to what numbers to enter when prompted, the maze can become a straight line. With a few correct taps on your phone's touch pad, you can speak to an Experian customer service agent.

Instructions

1




You will need a current copy of your credit report.

Place a current copy of your credit report in front of you.

2




A customer service agent is a phone call away.

Dial customer service at 888-397-3742.

3




When prompted, enter the corresponding number.

Push 2 on your phone's touch pad at the first prompt. This is for "all other options." Push 2 again to bypass hearing the rules and regulations pertaining to fiscal reporting in your state.

4

Tap 6 on your phone's touch pad. This is the option for agent assistance.

5




Have your account number ready.

Push 0 and have your credit report ready. You will need to enter your account number at the next prompt.

6




After following the steps, you will be connected to a live agent.

Enter your account number when prompted. You are now in the queue to speak live to an agent.

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What Determines Your FICO Score?

A person's credit score is a measurement made by credit reporting bureaus to reflect a person's creditworthiness as compared to other people who have taken out credit. The system used by Fair Isaac Corporation (FICO), the inventors of the predominant credit scoring model, assigns a person a score between 300 and 850. Higher FICO scores are more favorable and may allow a person access to loans at a lower rates of interest. This score is informed by a number of different pieces of data.

Payment History

One of the main factors that influence a person's credit score is whether a person has paid his loans back on time in the past. The more loans that a person has taken out and defaulted on or paid late, the lower his score. In addition, if a person settles a debt for less than he originally agreed to pay, this will result in his score dropping. This factor makes up 35 percent of a person's score.

Amount Owed

About 30 percent of a person's score is made up of factors related to how much a person currently owes. The more a person owes to creditors, the lower his score will go. Credit reporting bureaus also modify a person's score according to his debt-to-credit ratio, also known as credit utilization ratio, which is the amount of debt a person carries relative to his credit limit. For example, if a person with a credit limit of $1,000 has $300 of unpaid debt on that account, he has a credit utilization ratio of 30 percent. The lower this ratio, meaning the more credit a person has available to him, the higher his credit score.

Length of Credit History

A person has 15 percent of his credit score determined by the length of his credit history. The longer a person has taken out credit, the longer his credit history and the better his FICO score. This history typically can be measured in two ways: the absolute length of his credit history (how many years he has been borrowing money) or the average length of his open credit accounts.

New Credit

Ten percent of a person's score is tied to a record of new credit. This includes new loans that a person has taken out as well as new lines of credit he opens. A person may also have his score affected by the number of credit inquiries he has also received. An inquiry occurs when a prospective lender pulls a person's credit report to assess his application for credit. This category also takes into account when a person re-establishes a positive credit history following past payment problems.

Types of Credit Used

The credit reporting bureau also bases 10 percent of a person's score on the types of credit he has taken out. Having a mix of types of credit will improve a person's credit score. For example, having both revolving credit (such as credit cards) and installment loans (such as a mortgage) tends to increase a FICO score.

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Are Unpaid Property Taxes on a Credit Report?

Unpaid property taxes reached high levels in 2009 --- for example, in Nashville, Tennessee, the figure came in at about 8 percent among all homeowners that year, according to "USA Today." You can't escape taxes owed to the government, and not paying them simply adds another headache: ruining your credit. If you can't pay your property taxes, you can get help from your creditor and the government, so don't ignore the problem.

Identification

Leave property taxes unpaid long enough and they'll appear on your credit report, but usually as a tax lien --- where the government lays claim to property in case you try to sell it --- or a collections account. Also, the amount of tax that you owe has no impact on your credit score. Just the fact that you have a tax lien is all that matters.

Effect of a Tax Lien

Tax liens have a different effect on each credit scoring system, but they're viewed as disastrous by nearly all creditors and credit agencies, because they reflect an inability to pay an obligation. On the FICO rating scale, a tax lien has a similar effect to a foreclosure, which hurts an excellent score by about 150 points.

Time Frame

You won't have to deal with an unpaid tax lien forever, but it may seem like it: An unpaid tax lien effects your score for 15 years, except in California, where it stays on your report for 10 years. The credit agencies report paid tax liens seven years from the date you pay them.

Tip

Not paying property taxes could lead to foreclosure. A foreclosure may not pay off the balance on your mortgage, so you could further damage your score if the mortgage provider sues you for the deficient balance. If you can't pay your taxes, ask your state's tax assessment office to delay your bill for a few months. Your lender may help you pay property taxes by setting up an account for you to contribute money throughout the year or offering you a small loan. The bank doesn't want to risk losing money on your home loan because of unpaid taxes.

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Identity Fraud Safety

Your identity is valuable, especially if you've worked hard to build up a good financial history. The Federal Trade Commission (FTC) warns that you could be one of the 9 million Americans who have their identities stolen every year. Criminals have many ways to do this, so you must always be on guard for identity fraud and work hard to keep your information safe.

Definition

Identity fraud occurs when people steal your personal information. They can pretend to be you and fill out credit applications in your name if they get your name, address, phone number, driver's license data and Social Security number. Other information can be even more damaging. For example, they may be able to access your bank accounts if they find out your mother's maiden name or your personal identification numbers and passwords.

Process

Criminals use many methods to commit identity fraud, the FTC explains. It can be as simple as looking over your shoulder when you're using an automatic teller machine or paying for something with a credit card or as sophisticated as remotely installing monitoring software on your computer to capture passwords, bank data and other sensitive information. Identity thieves also steal mail, raid trash cans, set up phony websites and call or send you official-looking emails fishing for information.

Effects

Identity fraud harms you in many ways. A criminal may be running up various bills in your name without your knowledge, the FTC warns. This trashes your credit reports because the thief does not pay the bills. The creditor will come after you, filing suit for repayment or selling the accounts to aggressive collection agencies.

The thief may also get false identification in your name and cause other legal problems for you. For example, he might get a driver's license and run up unpaid tickets that are linked to your identity. You could face arrest if you are stopped by a police officer.

Prevention

You can prevent identity fraud by keeping your personal information safe. Shield credit cards, ATM cards and your driver's license when using them in stores. Carry them securely in your purse or wallet so you can't easily lose them. Refuse to give any personal information to telephone callers, no matter what your caller ID says. Criminals can easily alter caller ID information to look like they are calling from your bank or a legitimate company. Don't give personal information in response to an email or make purchases or fill out forms on unfamiliar websites. Check your credit reports regularly for suspicious activity through Annualcreditreport.com. This free website is affiliated with the federal government and gives you access to one report from Experian, TransUnion and Equifax every year, the FTC explains.

Solution

Immediately file a police report and put fraud alerts on your credit reports if you are a victim of identity fraud. You only need to contact one credit bureau and it will alert the others, Experian advises. Contact banks and creditors that have issued fraudulent accounts in your name and give them a copy of the police report. File disputes against any incorrect information on your credit reports. The bureaus all provide online forms so you can do this easily. Save the police report in case you are contacted by a lawyer or collection agency in the future about one of the fraudulent accounts.

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Credit History & Delinquency

Using personal credit, such as a credit card, bank loan or student loan, can be a good way to make large purchases and invest in an education. However, failure to pay debt as they come due can result in account delinquency, which has a negative effect on the individual's credit score.

Definitions

Credit history refers to the information contained on a credit report from one of the major private credit reporting agencies. These companies gather information about an individual's past financial activity and provide it to banks and other lenders to establish the level of risk that the individual represents. A delinquency is any account for which the individual has failed to make payments on time according to the terms of the loan agreement.

Contents

Several different types of information make up a complete credit history report. According to the University of Maryland, payment history makes up 35 percent of a credit history report. Amounts owed figures for 30 percent of the total, while the length of credit history, new credit and types of credit used account for 15, 10 and 10 percent, respectively.

Delinquency

An instance of account delinquency falls into the payment history category of a credit history report. Even once the delinquent account has been paid off, the delinquency still remains on the credit history for seven years. This is substantially longer than the two-year time period that items such as information about inquiries remain on a credit report.

Effects

Having an instance of delinquency in your credit history may not be enough to prevent you from getting loans or receiving a credit card in the future. The payment history section contains specific information about the duration and severity of the delinquency. More extreme cases of delinquency, coupled with other credit problems like high levels of debt, may prevent the individual from financing a home or vehicle, receiving student loans, leasing an apartment or gaining access to a new credit card.

Prevention

Because the amount and duration of a credit delinquency appears on your credit history, try to resolve any delinquency issues as soon as possible. Better yet, contact your lender if you anticipate that you won't be able to make a required payment. Many lenders can offer a reduced payment plan or debt consolidation plan to prevent delinquency from happening in the first place.

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How to Delete Negative Credit

Deleting negative credit information from your credit report is easy--if the law is on your side. The Fair Credit Reporting Act, a federal law, gives you two ways to remove negative credit entries from your credit report. You can have negative information that is inaccurate removed within about 30 days. Or you can have outdated information removed in about the same time span. Despite what some credit repair agencies claim, there is no other honest way to remove negative information from your report.

Instructions

1

Get a free copy of your credit report from the website Annual Credit Report. The site was created by the nationwide credit bureaus--Equifax, TransUnion and Experian--to offer free credit reports as required by the Fair Credit Reporting Act. Visit the Annual Credit Report website to view and print your report or see instructions on the homepage for ordering by telephone or mail.

2

Find negative entries on your credit report that are inaccurate. Write a letter to the credit bureau pointing out the inaccuracies. State why the information is wrong. Include your name, address, telephone number and Social Security number in the letter. Mail the letter to the credit bureau at the address listed on the credit report. Wait 30 days for a response.

3

Find negative information on your report that is outdated. By law, negative information such as late payments, charge-offs and judgments can remain on your credit report for seven years. Bankruptcies can remain for 10 years. Check your credit report to determine when the information was first entered. If more than seven years have passed (10 for bankruptcies), write a letter to the credit bureau demanding that the information be removed because it is no longer valid. Wait 30 days for a response.

4

Return to Annual Credit Report to order free reports from the other two nationwide credit bureaus. Dispute negative or outdated information by sending letters to those agencies as well. You're entitled to up to three free credit reports every 12 months, including one from each of the credit bureaus.

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What Is Considered an Excellent Credit Rating?

An excellent credit rating is indicated by a credit score of 750 or higher. A person with a credit score that high has a solid, consistent payment history, because he has diligently focused on the conservative use of credit rather than the abuse of it, lives within his means and does not live on credit lines. Excellent credit takes planning and an understanding of how it works.

Identification

Credit scores are determined by several components. Minneapolis-based Fair Isaac developed the system, called a FICO score, and the three credit-reporting agencies--Equifax, TransUnion and Experian--all use it, so all three of your scores should be similar.
Payment history makes up 35 percent of the score. Making payments on time or early (or paying the balance off) has a positive impact on scores.
Outstanding credit balances make up 30 percent of the score. Credit card balances should be kept at or below 30 percent of the credit line or they will begin to have a negative effect.
Credit history makes up 15 percent of the scores. A seasoned borrower with a lengthy history of payments and paying in full is strong in this area.
Types of credit have a 10 percent impact on credit scores. A mix of types of accounts carries more weight than simply having credit cards. The combination of an auto loan, a mortgage and a credit card works better.
Inquiries are a 10 percent hit, especially if is there is a lot of recent activity.
The theory is, the higher the score, the less likely a person is to default.

Excellent Business Credit

Businesses are rated by a different type of system. For example, Dun and Bradstreet, one of several rating companies, does a more comprehensive analysis of a company than is done with an individual. Company payment history is calculated in their PAYDEX system, which predicts future default potential. A perfect PAYDEX score is 70, and is similar to a FICO score of 750.
The rating system looks at the age of the company along with its assets, number of employees, net worth, payment history, legal history and cash flow to determine company's financial strength. The credit rating will be a 1, 2 or 3., with the highest rating being 1.
Even if a company has an excellent credit rating, the owner's personal credit and assets may still be needed when requesting a business loan.

Less Is More

You don't need a lot of credit to have excellent credit, and a mix of accounts is better than merely carrying several credit cards. Three or four open, active, seasoned accounts that are managed well prove to a lender that you can live within your means.

Benefits

If you have an excellent credit rating, you can earn the lowest rates are available when you take out a loan. Other companies that might check your credit rating include insurance companies, which use credit reports during the approval process, and potential employers, who use credit reports in the hiring process.

Keeping Watch

Building a strong personal or business credit rating requires planning and strategy. Credit monitoring services can help you watch and maintain your ratings. These services also offer identity theft and fraud prevention.
These services often suggest that you "opt out" from the credit bureau's solicitation lists, because preapproved offers are one of many ways your identity can be stolen (see Resources section).

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How to Determine a Married Couple's Credit Score

Getting married and starting a life together is a fantastic adventure. But as with all adventures, it is best to go in well-prepared. Knowing your credit score and your spouse's credit score and how those scores will be viewed by potential lenders is crucial to financial success as a couple.

Instructions

1

Visit myfico.com to get credit reports from all three of the major credit bureaus. You will need to provide each spouse's Social Security number. As of November 2009, each report costs $15.95. You should have six reports total.

2

Look at your scores individually. They should be fairly similar. For simplification, it is easiest to average those scores. Add all three of them up and divide the resulting number by three. Count the resulting number as your credit score.

3

Repeat Step 2 with your spouse's credit reports.

4

Look at the lower average score. That score is what lenders will consider when you apply for a loan or mortgage as a couple.

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What is the Minimum FICO Score for FHA?

In the past, the Federal Housing Administration (FHA) did not require a FICO credit score to provide home mortgage insurance. As of 2008, that changed as a result of a series of revisions to FHA approval standards. According to the FHA, having a minimum FICO score for FHA loan guarantees will help home buyers who are credit-worthy, but would not have qualified under the old standards. This article explains what the FHA does and how the new minimum FICO score for FHA loans fits into their overall requirements.

Identification

The FHA is an agency of the Department of Housing and Urban Development (HUD), which provides home mortgage insurance to low- and middle-income borrowers with limited cash for down payments or have had problems with credit. As of 2008, the FHA adopted the use of the FICO score as part of the first update of their lending criteria in 30 years. This change was prompted by internal studies that surprised everyone by showing lower income borrowers had higher FICO scores on average than those with more income. The adoption of the FICO score is intended to offer these people more access to mortgage insurance since they have demonstrated responsible handling of credit.

History

The FHA got its start during the Depression. From 1934 to the 2000s, the agency has insured more than 35 million mortgages for single family homes. In the 1960s, it shifted to primarily insuring mortgages for homebuyers with limited income and resources and as of 2008, insured 4.8 million home mortgages. It is the only federal agency that is entirely self-supporting, and funds its entire budget from the insurance premiums paid by the homeowners it insures.

Features

Under its new criteria, the FHA will normally require a minimum FICO score of 580. This is in contrast to lenders such as Fannie Mae and Freddie Mac, which look for at least 620, but charge a higher interest rate if the FICO score is under 640. The FHA does have other requirements. It prefers that there be no foreclosure within the previous three years. It does place a strong emphasis on having demonstrated that any past credit problems are resolved. For example, the agency will consider someone who had to declare bankruptcy, provided the reasons were valid and the applicant has shown a good faith effort to reestablish credit (usually, but not always, this means two to four years of rebuilding credit). Late payments (more than 30 days) on rent or mortgage payments are not acceptable. Also, a person must have no more than one to two payments on revolving credit (like credit cards) and none more than 60 days past due within the past two years.

Function

The above standards should not discourage anyone. In order to get that 580 minimum credit score, you'll pretty much have to meet all the other requirements anyway. Here are the specific steps you can take to raise your credit score. First, pay bills on time. If you run into a jam, contact your lender and make arrangements. If you do and follow through, most won't report a late payment or two. Reduce your total debt, especially credit card and other unsecured debt and ask lenders to reduce your credit card limits. Those two things alone account for 65 percent to 75 percent of the FICO score. Don't apply for or close credit accounts more than two to three times a year (less if possible) and definitely don't apply unless you are certain you'll be approved.

Considerations

There are a few other "credit killers" to avoid: tax liens, any bill going to a collection agency or court, and defaulting on any debt, especially a student loan (that will never come off your credit history). Start planning for the long term. Even if you have really bad credit, you can build up to that 580 level in two to four years if you work at it. Finally, keep in mind that the FHA does require that you have a down payment (usually at least 3 percent of the purchase price of the home) so start saving regularly. For more information, you can call the FHA toll free at 1-800-225-5342.

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How to Get a FICO Score by Mail

The FICO score is the most widely used rating that lenders use to assess your suitability for credit. Checking your FICO score regularly is advised, especially when considering applying for credit. It will help you understand how the assessment process works and how you can improve your score. The FICO score is separate from your credit report although the information contained within your report is used to compile your score. The myFICO site only offers FICO products online but there are two ways to obtain your FICO score by mail. (FICO stands for Fair Isaac Corporation, which developed the FICO score.)

Instructions

1

Apply online at AnnualCreditReport. Applying for your credit report is required to obtain your FICO score by mail. The credit report is free once a year, but your FICO score must be purchased. Click on the link in the Resources section. This takes you to the correct page. Click on "Request your report by mail."

2

Download the request form and print it. Complete all the details accurately. Previous residence information is required if you have lived at your current residence less than three years. Click the box to request your FICO score and supply your payment details. Mail the form with any necessary supporting information to: Annual Credit Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Your credit report and FICO score usually arrives in two to three weeks.

3

A free FICO score can be obtained by mail only when applying for a home loan. When applying for the home loan, request your FICO score, because it will not be sent automatically. The FICO score will be mailed to you by the lender.

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Does Getting a Store Credit Card Lower Your Credit Score?

Store credit cards lower your credit score as soon as you apply for one, but they can probably raise your credit score in the long run. What you must watch out for are cards that charge exorbitant fees, especially if you have no other lines of credit. Also, consider that normal credit cards usually offer a better deal in general if you can get one.

Identification

Getting any type of credit card account hurts your score because it requires a hard inquiry into your credit, which dings your score up to five points. The FICO scoring model will hurt your score result even more when you already own seven or more revolving accounts, because good borrowers limit the number of credit cards they own.

Considerations

Most retail cards have a low limit -- sometimes only a few hundred dollars -- and most come with an annual fee. The fees on these cards can use up most of limit the first month and cause a high credit utilization on the account. Maxing out a credit card does up 45 points of damage, but coming close to a utilization of 100 percent can still do harm to your credit score, especially if this will be your only revolving account.

Major Issue Cards

The FICO model views retail accounts as less important than an account issued by a national credit card company or major lender, according to Fox Business. The Fair Isaac Corporation has millions of pieces of data on consumers and finds that major credit cards are slightly better at predicting a borrower's behavior. National credit cards usually have a limit of thousands of dollars, so the account holder has a larger control over how much debt he carries.

Tip

American Banker suggests using a retail card to help rebuild a credit history rather than for the promotion that usually comes with it. If you can qualify for a regular credit card, you will probably see a much lower interest rate, higher limit and build your credit score faster. A department store that offers promotions for signing up for their store card likely offers it on some other offer, such as signing up for an email newsletter.

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How to Quickly Improve Your Credit Score

Several factors play a role in bad credit. For instance, you may lose your job or experience other financial hardships, like health care bills, that make it difficult for you to keep up with payments. But fortunately, bad credit is fixable; and there are tricks to quickly improve a low score and receive the best rates on mortgages, auto loans and credit cards. Rather than accept bad credit as a way of life, take steps to improve your situation.

Instructions

1

Apply for a new line of credit. If a recent bankruptcy or foreclosure contributes to a low credit score, open a new line of credit to re-establish your credit history and quickly add points to your score. Contact your bank and inquire about a secured credit card.

2

Become a joint account holder. Ask your spouse, parent or a sibling to add your name to one of their credit accounts. You'll become a joint account holder and this credit account will appear on your credit report. To benefit from this arrangement, choose someone with a good credit history.

3

Reduce your debts. Paying off your credit accounts is another way to quickly add points to your FICO score. Use a lump sum of cash from a tax return or bonus to eliminate debt, or establish a debt elimination plan. Double or triple your monthly payments or ask a relative for a zero- or low-interest loan.

4

Pay your bills on time. To maintain a decent credit rating, pay your creditors on time. Missing or sending one late payment results in additional fees, and the creditor may increase your interest rate.

5

Dispute credit report errors. Errors on your credit report can lower your credit rating. Order your credit report at least once a year and check the report for errors and signs of identity theft. Report wrong information to the credit bureaus.

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What Is a Credit-Based Insurance Score?

When paying insurance premiums, you most likely know that they are influenced by the history of filing claims, the property insured and several other factors. Many homeowners do not know how much their credit history influences their insurance premiums. Insurance companies use a credit based insurance score to calculate policy premiums.

Insurance Score

An insurance score is a number that insurance companies use for each person who applies for a policy. While the insurance score is similar to a credit score, it is not calculated using the same formula, in most cases. Most insurance companies use a separate score developed by the Fair Isaacs Company. This insurance score is based on information from the policyholder's credit report, however the variables are weighted differently than in a credit score.

Impact on Rates

When insurance companies look at a credit-based insurance score, they use it to calculate your premium rates. The amount of money that an insured pays in premiums is significantly impacted by the score that he has. If an insured has a low insurance score, the insurance companies charge a higher amount on his premiums. If the insured has a high score, he can be charged a lower amount because this represents a lower risk to the insurance companies.

Correlation Between Credit and Insurance Risk

Insurance companies look at credit information in the form of an insurance score because they believe that there is a direct correlation between a credit history and the amount of claims that are filed. Many studies have shown that those with low credit scores tend to file more insurance claims than those who have high scores. This could be because those with low credit scores tend to have lower amounts of savings and income and would need insurance claims to pay for anything bad that happens.

Score Factors

An insurance score is comprised of several factors in a person's credit history. For example, 40 percent of a score depends on payment history. Late payments can significantly affect an insurance score. The types of credit and the amount of debt that an insured have also play a role in the score. An insurance score does not include any information about a person's age, salary, where he lives or his occupation.

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How to Raise My Credit Score Fast & Free

Your credit rating has a direct effect on your life and financial well being. A high credit score will help you get the best rates on mortgages, loans and credit cards, while a low credit score will lead to higher interest rates and fees. Several companies offer credit repairing service for a fee, but you can repair your credit yourself for free.

Instructions

1

Order a copy of your credit reports. You are entitled to one free copy of each credit report from the three major credit bureaus annually. You can order your free copies at AnnualCreditReport.com.

2

Evaluate each credit report and mark any errors you find.

3

Log on to the website of the credit bureau that reported the error and follow the links to start their online dispute process. Fill in each text box in the online dispute as accurately as possible. Review the dispute and click "OK" to submit. The credit bureau has 30 days to research your claim and correct inaccurate information.

4

Review your credit report and make a list of any creditors who have not reported information to the credit bureaus. Contact the creditor and ask them to report your history to the credit bureaus. A history of timely payments will improve your credit score.

5

Gather all of your current bills and make a note of the due dates. Pay at least the minimum amount due by the due date. Paying your bills on time will improve your credit score.

6

Determine any excess income you have by subtracting all of your monthly expenses from your total monthly income.

7

Apply your excess income towards the credit card with the highest overall balance. Include the extra payment with your minimum payment each month until you no longer carry a balance on the credit card.

8

Repeat step seven for every credit card you own with a balance.

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When Does Foreclosure Appear on Your Credit Report?

A foreclosure can put a substantial ding in your credit rating and typically stays on your report for seven years. The official date of foreclosure is generally recorded as the day of the foreclosure auction or sheriff's sale, and the completed foreclosure will appear on your credit report by the end of the next data-reporting cycle.

Process

Once you are 30 to 90 days late with your mortgage payments, the lender can initiate the foreclosure process, typically by sending you a Notice of Default. At this point, before formal foreclosure proceedings have begun, the delinquent payments and penalty fees will appear on your credit report. If your delinquency is not remedied, the lender will issue a Letter of Demand, insisting that you bring your loan current or face formal foreclosure action. If you still fail to pay the amount due, including all assessed late fees and collection costs, the lender will file a lien (legal claim) against your property, take possession of your home and sell it at auction to recover the money owed.

Impact

When a foreclosure does appear on your credit report, it generally lowers your credit score by roughly 35 percent during the first year. For example, if your credit score was previously 755, a foreclosure could drop it by approximately 264 points down to a score of 491. The higher your score was before losing your property, the more of an impact a foreclosure will have on your credit score; whereas, if your credit has been suffering anyway, the drop may not be as significant. Your score will be impacted more heavily in the two years following a foreclosure, with the effects lessening over time.

Data Reporting

According to Maxine Sweet of Experian, creditors typically update your account information with the credit bureaus every 30 days in accordance with the creditors' billing cycles. The completed foreclosure may appear on your credit report within a few days or it may take a month to show up, depending on where the lender is in the billing cycle at the time of the foreclosure sale. Keep in mind, though, your credit score has likely already been impacted a number of times throughout the foreclosure process. The issuance by the lender of the demand letter, filing of the lien, missed payments and fees are all negative events in your credit report that will drop your score.

Repairing Credit

From a legal standpoint, there is no way to remove a foreclosure from your credit report in less than seven years. Additionally, once the seven years have passed, you must send a written request to each of the major credit bureaus -- Experian, Equifax and TransUnion -- to have the foreclosure removed from your credit report. Unfortunately, there is no instant remedy for repairing a damaged credit report, but it is possible to make some significant headway within roughly two to three years. Stay current on your debts and loans with timely payments, order your free annual credit reports and have any errors corrected, and you will be well on your way to repairing the damage.

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Cleaning Up Bad Credit & Raising a Credit Score

Cleaning up negative entries on your credit reports is just the first step in raising your credit score. Getting rid of the negative entries should give you an immediate boost, but continued improvement will likely be tied to your ability to make timely payments on your existing accounts. Generally, a string of on-time payments over 12 to 24 months--on all of your accounts--is the best strategy for improving your credit score.

Instructions

1

Get a free copy of your credit report from the website Annual Credit Report. The three nationwide credit bureaus--TransUnion, Experian and Equifax--created the site to offer the free reports as required by federal law. Visit the homepage and click on "Request Report" to see and print your report, or call 877-322-8228 to order by phone.

2

Review your credit report for inaccurate information. Federal law requires the credit bureaus to remove any incorrect information within about 30 days after being notified by you. Your report may be showing an outstanding tax lien that has been paid, or may list an account that does not belong to you. An account that you know is current may be reporting as past due. Clean up your report by challenging the inaccuracies. Write a letter to the credit bureau pointing out the mistakes and mail it to the address on the credit report. Or dispute the information online by visiting the website for the credit bureau and clicking on the "Disputes," or similar, menu tab. You must enter a reference number from your credit report to enter disputes online.

3

Identify accurate information on your report that is negative. Look for accounts that are reporting as past due, or have been listed as charged-off or as collection items. These are very bad entries on your report, and you should clean them up as you attempt to raise your credit score. Charge-offs are accounts that were closed by your creditor because you stopped making the required payments. Collection accounts are charged-off accounts that were sold to debt collection companies. Make payments to bring all your delinquent accounts current, and then contact creditors or debt collection companies to resolve the charge-offs and collection accounts. Ask the creditors or debt collectors to delete the negative entries from all three of your credit reports in exchange for a full payment--a process called pay for delete. The creditors aren't obligated to grant your request, but some might. You could also ask to settle the accounts for less than the full amount due, which is called debt settlement. The New York Times reported in 1999 that some credit card companies were willing to settle accounts for as little as 20 percent of the balance. If you really want to negotiate, try for both pay for delete and debt settlement. That would resolve the old accounts, save you money and remove the negative entries from your credit reports. Continue rebuilding your credit score by making timely payments on all your accounts.

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How to Analyze Credit Reports

You have three credit reports compiled by the three major credit reporting companies: Experian, TransUnion and Equifax. These reports help companies decide whether or not you are a good credit risk and a candidate for a credit card or mortgage. Analyze your credit reports at least yearly to check for any errors. If you find an error, you have the legal right to dispute it with the company. Send a letter to the company explaining the error and back up your claim with photocopied documents, as recommended by the Federal Trade Commission.

Instructions

1

Examine the first column under "Credit History." This lists the names of the companies with whom you have an open account or a past, closed account. For example, it may list a store credit card, a major credit card and a loan. The column directly to the right lists your account number with that company.

2

Analyze the letters in the third column. You may see a "J," an "I" or possibly an "A." These indicate that the account is a joint account, held by only one individual or held by an authorized user, respectively. A "T" means a terminated, or closed account, whereas a "C" indicates that you are the co-signer to an account.

3

Scan the next three columns for each of your accounts. They indicate the date on which you opened the account, the number of months for which information is available to the credit reporting agency and the date of the last activity in the account. The date of activity may indicate a payment or any other change to the account, such as an increased line of credit. This column will not disclose the specific type of activity.

4

Examine the seventh column, after the date of activity column. This one is labeled "High Credit," and it discloses either the maximum line of credit you have with the account, or the maximum amount of money you have charged. The eighth column indicates the terms of the account. If it is a loan, for example, this number indicates the number of payments on the account.

5

Compare your balance on the account to the ninth column, labeled "Balance." If the numbers do not match up, this does not automatically mean the credit report contains an error. The balance in the ninth column only displays the balance at the time the credit reporting agency received the information. You may have made additional payments since then. The next column, labeled "Past Due," may also have an error because of time lag. This will only indicate an amount past due at the time the information was reported. The date of the last information update is in the last column for each account.

6

Interpret the letters in the second-to-last column, labeled "Status." An "O" indicates an open account in which the balance must be paid each month, whereas an "I" indicates an account with fixed payments and an "R" means revolving, or the payment amount can vary. These letters may have a number after them. A "1" is desirable, as it indicates you have made payments as agreed upon. A number between two to five means that you are past due. A "7" indicates that you are following a payment plan, whereas an "8" indicates a repossession and a "9" means the account is charged off because of bad debt. A "0" means the account is not rated yet.

7

Analyze any additional information on your credit reports. The credit report will also tell you if you are delinquent in any accounts, the number of times you paid late, any accounts turned over to a collection agency and public courthouse records, such as a property lien or bankruptcy. It also lists any known previous addresses and places of employment, as well as a list of people or businesses that have requested your credit report for the past two years.

8

Compare all of this information on your three credit reports. Note any discrepancies. Compare this information to your open accounts, debts and credit lines to determine if there are any errors.

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How Can I Check to See If My Fraud Alert Is Still Active?

Individuals who have been victimized by identity theft need to protect their credit information. If you have been victimized, you can place two different kinds of fraud alert on your credit reports. You need only contact one credit bureau. That company is required to contact the other two credit bureaus to place fraud alerts on the credit reports they maintain on you.

Instructions

1

Contact the credit bureaus. Call Equifax at 800-525-6285 (equifax.com), Experian at 888-397-3742 (experian.com) and TransUnion at 800-680-7289 (transunion.com). An initial fraud alert is active for 90 days. This alert requires each credit bureau to contact you before a credit history in your name is provided to an identity thief. Request the initial 90-day alert when your wallet or purse have been stolen or lost, or if you have been victimized by a phishing scam.

2

Request an extended fraud alert, which is good for seven years, once you know you have been victimized by identity theft. To change the initial fraud alert to an extended alert, provide the credit bureau with an identity theft report.

3

Include a copy of a police report and proof of your identity at the time you request an extended fraud alert.

4

Keep copies of your police report and identity theft report in your records. If you need to request another extension when the seven-year mark for your extended fraud alert gets near, having this documentation handy will be a help.

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Forms & Processes for Disputing Credit Reports

If your credit report contains errors, dispute them to have them fixed and prevent them from artificially dragging down your credit score. When you find an error, you need to dispute it with each credit bureau that displays the error on its credit report for you. Each credit bureau has a slightly different process for disputes.

Order Credit Report

All three credit bureaus require that you have the file number of your credit report if you would like to file a dispute. To get a free copy of your credit report, order it online through the Annual Credit Report website. If you have already ordered your free report for this year, you can purchase a copy of your report by visiting the credit bureau's website. After you receive your report, read it carefully and note each incorrect or missing item that you would like to dispute.

TransUnion

Dispute errors on your TransUnion credit report online, by phone or by mail. To dispute online, enter the information on the dispute form at the TransUnion website. To dispute by phone, call 800-916-8800. To dispute by mail, download the form from the website, print it, fill it out and mail to the address listed on the form. Regardless of the method, you will need to provide the file number on your TransUnion credit report and your personal identifying information. For each of the inaccurate items, you need to list the company name and account number found on your credit report and your reason for disputing the information.

Experian

If your Experian credit report contains errors, you need to fill out a dispute through the credit bureau's website. In order to submit a dispute, your Experian credit report must have been obtained within the past 90 days. Enter the credit report number along with all of the other requested information in the online form. After you submit your dispute, you can check its status online and will receive an email when the dispute is resolved.

Equifax

Initiate a dispute for your Equifax credit report online, by phone or by mail. Find the phone number for disputing information listed on the bottom of your credit report from Equifax. If you would like to dispute by mail, download and print the form from the Equifax website and fill it out. You will need the confirmation number from your credit report to submit a dispute through any of the three methods.

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How to Repair My Credit Report on My Own

Your credit report contains detailed information about your past borrowing habits and your current debt levels. Lenders can legally deny your applications for new credit because of negative information listed on your credit report. While you cannot undo the past, you can take steps to improve your credit score. It may take months or years for you to see a significant increase in your credit score; but the sooner you start to address your credit issues, the sooner you can enjoy the benefits of having a good credit report.

Instructions

1

Order a free copy of your credit report from each of the national credit reporting bureaus: Equifax, Experian and TransUnion. The three firms gather the same kinds of information; but the three reports are not necessarily the same, as some creditors only report to one of the bureaus. You can obtain all three free reports from annualcreditreport.com, the only credit reporting website that the federal government endorses.

2

Review your credit reports and ensure that no inaccuracies are listed, such as debts showing as never having been paid which you have in fact settled. Contact the bureaus with such supporting documentation as receipts or payoff letters, to prove that you have paid off any debts that are incorrectly listed as still active.

3

Contact creditors and service providers to pay off your delinquent or "charged-off" debts. When a firm charges off a debt, it simply lists it as a bad debt, as opposed to an income-generating asset. You must pay off charged-off debts, as well as debts that are still listed as active.

4

Pay down the balances on your credit cards and other types of revolving debt, like home equity lines of credit. High balances on revolving debt have a negative impact on your credit score, so try not to utilize more than 30 percent of your available credit lines.

5

Pay all of your bills on time, including credit related debt, medical bills and service contracts. Medical firms and service providers can report unpaid bills to your credit bureau, so be sure that no late payments appear on your credit report. If you maintain good payment habits, your credit score will begin to rise.

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How Credit Scores Are Done

Having a good credit scores helps a person out when it comes to getting a good rate on a home loan or buying a car with available low financing. Various components of a person's credit history make up the credit score, including any past late payments and whether or not someone applies for new credit cards.

Algorithms

Credit scoring provide a means for lending institutions to judge an individual's ability and likelihood to repay a loan, as well as the additional interest. Complex algorithmic formulas decide a person's credit score. Each of the three credit bureaus uses its own formula to determine a credit score, causing some degree of difference in the scores. In addition, credit bureaus rely upon the VantageScore, a formula devised by all three of the credit bureaus.

Importance

An individual's credit score carries a great deal of impact on many areas, ranging from the amount of interest the individual pays on a mortgage loan to whether or not businesses will lend him money. In some instances, the difference in credit scores results in interest rates that differ by as much as 4 percentage points, with higher credit scores paying a lower interest rate. Before engaging in any kind of financial borrowing, a person should always check out his credit score to get an idea as to how lenders view him.

Composition

Credit bureaus use five different areas to determine credit scores. The largest percentage comes from a person's payment history. Payment history includes the dates of all payments made on various accounts, as well as late payments and any pending debt collections. Payment history accounts for 35% of a credit score. The next largest factor in a credit scores comes from the amount of money owed. The amount of money owed gets weighted against someone's available credit. The more available credit in someone's account, the better the credit score. The amount of money owed accounts for 30% of available credit. Credit history accounts for 15% of a person's credit score. Credit history includes both when the person first opened credit accounts and how often the accounts are used. After that, 10% of the credit score examines the kind of credit accounts someone possesses, such as installment credit and revolving credit. The final 10% of a credit score comes from any attempts to open new accounts or procure more credit. Inquiries for purposes of obtaining more credit also compose this final percentage.

Changing Score

Credit scores constantly change, depending on the activity. When someone pays down credit card debt, for example, this changes the percentage of available credit. Paying down credit card debt raises a person's credit score more quickly than repairing credit history, since the credit history contains delinquencies in the past.

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Can Overdrafting Hurt Your Credit Score?

Account overdraft occurs when you spend more money than is present in your account. Overdrafting has many negative effects on your finances. In addition to extended overdraft fees, overdrafting your checking or savings account could impact your credit score.

Effects

Overdrafting your bank account puts your account into delinquent status. If you do not have the overdraft reversed or pay off the negative balance, your account will be closed, charged off and sent to collections. In addition, many banks will report you to ChexSystems, a company that keeps a database of charged-off accounts.

Considerations

Although overdrafting your account does not directly affect your credit score, if not quickly resolved, it can damage your credit history. If your account was charged off due to overdraft, it will show up on your credit report as a collection account. Collection accounts lower your credit rating significantly, according to MSN.

Time Frame

Banks will typically send you an overdraft notice within seven days of your account going into the negative. Typically, if you do not bring your account to a positive balance, your bank will close the account 30 days after the overdraft.

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How to Increase Your Credit Score By As Many As 40 Points

While the Fair Isaac Corporation, or FICO, will not reveal exactly how it calculates credit scores, particular factors in your credit history contribute to your score. Taking certain actions can raise your score 40 points or more and help qualify you for prime interest rates. The actual number of points your credit score will rise with each strategy varies. Some approaches may give your score an immediate boost, whereas others will raise your score by 40 points over time.

Instructions

1

Work on repairing your credit. Order a free copy of your credit reports (see Resources) and then scrutinize each report line by line. Find out why you have a low credit score. Check for misspellings and any information that is incorrect or outdated. By law, a credit bureau must remove negative items listed on your credit report after seven years. Look for any unexplained items or accounts you don't recognize. Since not reporting errors can hurt your credit score, dispute any errors you find in writing so that you can have them removed. This will help raise your score and get you closer to that 40 point increase.

2

Raise your credit score quickly through rapid rescoring. You can gain up to 40 points by requesting a rescore after having negative items removed from your credit report. Consider rapid rescoring after paying down a huge balance.

3

Manage your credit sensibly. Give your credit score an even higher boost by paying your bills on time and limiting the amount of debt you incur. The positive actions you take today to improve your credit can have a greater impact on your credit score than the negative items noted on your credit report in the past. Increase your credit score by at least 40 points over a four- to six-month period by charging small purchases and then paying the entire balance each month. The points may tally up faster if you make it a habit to pay the bills early.

4

Pay more than the minimum payments each month on credit card accounts. If you don't, you could be paying only on interest. In that case, the principal balance will actually increase instead of you paying it down. Making credit card payments on time for six straight months can help give your credit score as much as a 40-point hike. Pay as much extra as you can afford. Those 40 points could make a difference when it comes to getting a low interest rate mortgage loan approved.

5

Decrease the amount of debt you owe. Craig Watts, public relations manager at Fair Isaac, warns that having high credit card or other revolving credit balances will hurt your credit score. It's not an absolute guarantee, but if other factors on your credit report look good, your credit score can potentially increase between 20 and 40 points each time you pay down a high balance credit card.

6

Apply for a secured credit card from a major bank. Try this strategy if you have no credit history or a bad credit history. Paying the balance in full when the bill comes due could raise your score by as many as 40 points each month.

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Are Medical Bills Allowed to Be Reported on Your Credit Report?

At any given time, 77 million Americans have problems trying to pay back medical debt, despite most of them owning a health insurance plan, according to New York City-based nonprofit The Commonwealth Fund. Medical bills can tax a person's finances and wreck his credit score. Paying your medical debt as scheduled, however, won't win you any points.

Identification

As of 2010, the major credit reporting agencies cannot report medical history on a consumer's credit report, because of privacy concerns. The only time a creditor or credit reporting company can list medical bills on a report is when they go unpaid. Hospitals can send any unpaid medical bill to a debt collector, which then goes on a report as an outstanding debt.

Effects

When an unpaid medical bill goes to collections, it stays on a report for seven years unless the consumer can prove that the account is listed in error. Lenders consider collections accounts a very serious offense and having one damages a score by about 100 points. The actual damage caused by a collections account increases when a person has good or better credit.

Prevention

TransUnion, one of the major credit rating companies, suggests a reserve of funds to get you through a few months on unemployment or when insurance does not completely cover a bill. Alternatively, consider a high-limit credit card only to be used for medical emergencies. Put money into a "flexible spending account" if your employer offers it; this allows you to pay for medical bills with pre-tax dollars. If the insurance company slows payment on a bill, you might want to pay it off and then deal with the insurer.

Tip

Consumers can add an explanation for a collections account on their credit report. Although an addendum does not affect a credit score, lenders and employers often consider the explanation when reviewing an application. Lenders often ignore unpaid medical debt in collections, because it is so common. Paying a medical bill won't remove it from a report, but it does look better than leaving it open.

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