How Should I Pay Off Negative Items on My Credit Report?

Negative items on your credit report vary. From tax liens to defaulted credit cards and collection accounts, all negative items on your credit report damage your credit rating. While paying off your bad debts does not cause the credit bureaus to remove them from your credit record, paid debts look better to prospective creditors than obligations you ignore. Paying off negative items properly benefits your credit score more than simply paying off each account off at random.

Original Creditors First

If your credit report contains negative entries from original creditors, such as a bank or credit card company, pay off the original creditor before you move on to other debts. If you leave the account unpaid for a long enough period of time -- usually six months, but this time period varies by lender -- the lender charges off the debt. Collection agencies purchase charged off accounts. Once a debt collector owns your debt, it will add a subsequent negative notation on your credit file. You can avoid further damage by paying off debts before your creditors send them to collections.

Pay in Full

For an individual trying to pay off old delinquencies, the prospect of a settlement can be tempting. Unless you're dealing with a collection agency, however, don't risk it. While making payments on your delinquent debt does not make it appear more recent in the eyes of the credit scoring formulas, paying only a portion of what you owe leaves a notation on your credit report that the debt was "settled." This updates the negative item in your credit history and lowers your score. If possible, always pay in full.

Negotiate Credit Reporting

Any creditor that can report accounts to the credit bureaus can also amend the information it reports. If you cannot pay your debt in full, try to negotiate the way your creditor reports the account to the credit bureaus.

While not all creditors will do so, some will amend certain aspects of their credit reports in exchange for payment. For example, a credit card company removing a missed payment notation improves your credit rating. Collection agency reports are always detrimental to your scores. If you can convince a collection agency to remove its account from your credit file upon receiving payment, however, your credit score will improve.

How to Pay

Even if you intend to pay off debts you owe, doing so is sometimes difficult -- especially for those living on a fixed income. Each creditor has the right to dictate how it will accept payment, but many would rather grant you a payment plan than not receive payment at all -- saving you from having to save up for a lump-sum payment.

Credit counseling organizations can also help you get out of debt by teaching you more successful debt management techniques and helping your organize a working budget that allows you to meet your daily needs and also pay off your debts over time.

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What Is the Fastest Way to Raise Your FICO Score?

A borrower's credit report is updated once every 30 days with information sent to it by your creditors, however, the credit score is updated each time it is pulled. To quickly increase your credit score, a borrower must comb through his credit report and look for ways to improve his overall credit health. While it can be done, it takes work, follow-through and maybe even an outlay of funds.

Instructions

1

Check your credit report through a free online service, such as AnnualCreditReport.com. You will be required to enter your full legal name, date of birth, Social Security number, address and credit card information to verify your identity. Your credit report will be free once a year, however, to find out your credit score you will have to pay a fee.

2

Check your report for any errors. Report any errors to the credit bureau immediately through the website. The credit bureau has 30 days to respond to your inquiry via email.

3

Note any negative items on your credit report, such as bankruptcies, judgments, collections and liens. If capable, pay any negative items in full. Keep all receipts from these transactions to prove payment if needed to update your credit report.

4

Note your credit utilization. Keep all credit balances less than 30 percent of their limit on credit cards or lines of credit to have the least impact on your score. Paying down these items to this level will quickly raise your credit score.

5

Make sure all payments on all loans are up to date. The best thing you can do to maintain a high credit score is to pay all debts on time.

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Will Transferring Credit Card Debt Affect My Credit Score?

Lenders look at your credit score when determining whether to offer you a loan and how much interest to charge you. If you plan to apply for a loan in the near future, you need to know how transferring credit card debt could affect your prospects.

Significance

Your debt levels account for 30 percent of your credit score, according to the Fair Isaac Corporation. To benefit your credit score, you should keep your debt levels below 30 percent of your available credit on each card, according to Bankrate.com.

Benefits

If you transfer debt evenly across several cards, you could improve you credit score, according to Bankrate.com. For example, if you spread your debt out so each card only had 20 percent of its credit line being used, your credit score would improve.

Warning

If you transfer all of your debt to one card, that card will have a much higher debt-to-available-credit ratio, which will hurt your credit score. Worse, if you close cards you have transferred the balances from, you will have a higher overall debt-to-credit ratio.

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How to Fix Credit Report Errors Online

When you request your free annual credit report, if you find errors, it is important that you contact the credit reporting agency to dispute the errors. Each agency has its own process for filing a dispute that will prompt an investigation into the information provided on your credit report.

Instructions

Fix a Credit Report Error

1

Identify the credit reporting agency that is reporting the error. The three credit reporting agencies, Equifax, Experian and TransUnion, may all have different information on the credit report for their individual agency. Contact the agency that is reporting the error. Check the other agencies' credit reports to ensure that the same error is not repeated on their reports.

2

Visit the agency's website online (see Resources) and follow the procedures online to dispute the item on your credit report. If you do not have a recent credit report, you may need to request a newer credit report before following through with the dispute. It is easier to file the dispute if you have the 10-digit number that should appear at the top of your credit report. This number identifies your credit report so the error can be found and fixed if necessary.

3

Provide the necessary information to the credit reporting agency including your full name, social security number, date of birth and addresses. Provide the agency with the information that appears on the credit report that you are disputing. After providing all information, an investigation will be initiated.

4

Follow up with the agency to ensure that the erroneous information has been fixed. This may take several weeks to occur. If the dispute is filed online, you will have to follow up with the dispute online. If you want to receive written conformation, follow the instructions on the website to file your dispute by mail.

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How to Correct a Foreclosure on Your Credit

A foreclosure has a significant negative impact on a credit score. In some cases, errors can make the situation look even worse. There could be an error in the amount that was reported owed, the date of foreclosure, or how the mortgage was reported to the credit bureau. A mistake on the credit report can show the home was foreclosed when a deed in lieu of foreclosure was completed instead. Even mortgage issues are bound to lower your credit score -- so it's important to take the time to correct false information.

Instructions

1

Obtain your credit report. Under the Fair Credit and Reporting Act, consumers are entitled to a free credit report from all three bureaus. Visit AnnualCreditReport.com to request your copy.

2

Examine all three reports to check for discrepancies. Foreclosures are under the "Public Records" or "Public Information" section of your credit report. View the amount owed and the date of foreclosure. Compare the information on each report pertaining to the foreclosure.

3

Contact the lender to address any concerns and clarify information. If you're unsure about the information reported, call your lender to discuss the foreclosure. Address the issue, and request a correction, if you notice an error.

4

Gather copies of your documentation. Provide proof of the foreclosure error, such as your original mortgage paperwork, letters from your lender, borrower's note, or the lender's waiver of a deficiency judgment.

5

Initiate a dispute with each credit bureau reporting the error. You can file a dispute online, or over the phone, but the FTC recommends mailing a dispute letter to the bureau along with your documentation. The credit bureau will investigate your claim by contacting the lender. Your lender will need to provide their evidence that proves the foreclosure information reported was correct. If the lender doesn't respond within 30 days, or fails to correct the error, it must be removed.

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How to Get a Free Credit Score Without a Credit Card

If you've ever tried to get your credit score for free, you know that there's no such thing as a truly free credit score. You're forced to enter your credit card information and sign up for a free trial of a service, just so you can forget to cancel and get charged for a service you don't want. Though you can get a free credit report easily with no credit card, only one website, Credit Karma, allows you to retrieve your credit score without providing any payment information.

Instructions

1

Log onto Credit Karma at creditkarma.com and click the "Get Started Now" button on the main page. Fill out the registration form, which requires you to enter your name and create a user name. You'll also have to verify your email address and enter your Social Security number.

2

Enter your user name and password to sign into Credit Karma. Click on the "Score Center" tab just below the Credit Karma logo, then click on Update Score. You may be prompted to authorize Credit Karma to pull your credit file from TransUnion before you see your score.

3

Take note of your credit score, which will appear on the next screen. Click on the links above your score history if you'd like to see your auto insurance credit score or your VantageScore, which is a different type of credit score than the traditional FICO score.

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Does Getting Rejected for a Mortgage Affect My Credit?

If a lender rejects your application for a mortgage, the most that can happen is a hit to your ego. Your credit may see a drop of a few points, but this happens whether or not the lender accepts your application. Also, the way the FICO credit scoring system handles inquiries allows you to keep applying for the next few weeks without any further consequence to your credit rating.

Identification

A rejection of a mortgage application does not affect your credit score any more than an approval. The credit reporting bureaus ding your credit score because you applied for credit in the first place. A single inquiry does no more than five points of damage, so the application probably won't affect your ability to get a mortgage or impact the interest rate, unless you are very close to cutoff points. Inquiries can do significant damage when you apply for several different types of credit within a year.

Considerations

Rejection for any type of credit should concern you. The lender must give you a reason why it rejected your application when it takes an "adverse action" because of your credit history within 30 days of the application submission date. However, the lender may have had another reason for rejecting the application. For example, the lender, may believe that the loan you requested was too much compared with the market value of the home or that your income cannot support a mortgage.

Rate-Shopping

The most used credit scoring formula in the U.S., the FICO system, allows you a certain amount of time to shop for a mortgage with all applications counting as a single inquiry. This time frame depends on the version of the FICO formula employed by your lender. The latest FICO -- as of July 2011 -- is FICO 08 and gives you 45 days to put in as many mortgage applications as possible. Early versions only allow you 14 days, according to the Fair Isaac Corporation.

Tip

The mortgage company must provide you a free credit report if it rejects your application for a mortgage based on something in your credit report, and you ask for a copy of your report within 60 days of receive a letter of adverse action, according to the Federal Trade Commission. Look for errors and negative items on your credit report, such as late payments and delinquent accounts. Dispute errors with the credit bureaus and prepare evidence to back up your claim. Ideally, you should do this before you apply for the mortgage, because it may take several months or years to rebuild a poor credit history.

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How to Tell If There Are Mistakes to Your Credit Report That Drop Your Credit Score

Your credit score is based entirely on the information that appears on your credit report. If data is missing from your credit report or if your report contains incorrect negative information, your credit score could be artificially deflated. You should check your credit report periodically for mistakes, and look over it in detail about six months before applying for a mortgage to ensure that you get the best chance of approval with a low interest rate.

Instructions

1

Navigate to the Annual Credit Report website (see Resources). This government-authorized site is set up to give you access to one free credit report per year from each of the three national credit bureaus.

2

Enter your personal information to view your credit reports from Experian, Equifax and TransUnion. Because the credit bureaus manage your reports separately, you will need to search all of them for mistakes.

3

Look at the personal information section of each credit report and check that your Social Security number is correct and that your name and address are listed. It is okay to have past addresses and alternate forms or spellings of your name on the report.

4

Scan the accounts listed on your credit report and confirm whether each one belongs to you. Also, mentally go through all of your open accounts and check that each one appears on your credit report. Missing accounts and extra accounts are both serious problems.

5

Look over the details of each account to ensure that they are accurate. Check the date on which the account was opened, the amount you currently owe, the credit limit if it is a credit card and the payment history.

6

Confirm that any collection accounts listed belong to you and are accurate. These accounts severely damage your credit, so having one listed that is not yours is a serious mistake. You should also ensure that the account status, whether open or paid, is correct.

7

Read the list of creditors listed in the hard inquiries section. Ensure that each of these inquiries was in response to your application for credit. An inquiry you do not recognize could indicate that someone is trying to apply for credit in your name. Do not worry about soft inquiries, which do not affect your score and are likely from pre-approved credit card offers

8

Confirm that any public records listed are accurate. Court judgments, bankruptcy and and wage garnishments all hurt your score.

9

Look at the date posted with all negative information on your credit report. Anything older than seven yearsshould not appear on your credit report. The one exception is bankruptcy, which can remain on your report for 10 years.

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How to Dispute Delinquencies With Credit Agencies & Creditors

The Fair Credit Reporting Act gives you the right to challenge any information on your credit report, including delinquencies. Under the law, the credit bureaus have 30 days to investigate your claim and then must notify you of the findings. The information remains if the credit bureau was able to confirm its accuracy by contacting the creditor. However, the information must be removed -- even if accurate -- if the creditor fails to respond within the 30 days. The information will also be removed if the creditor informs the credit bureau that it is inaccurate.

Instructions

1

Obtain current copies of your credit reports from the three national credit reporting bureaus -- TransUnion, Experian and Equifax. Federal law entitles you to one free copy of your reports, every 12 months, from each of the credit bureaus. Get your free reports at the website Annual Credit Report. Go to the homepage, click on "Request Report" and follow the prompts to see your reports. You will be required to enter identifying information such as your Social Security number and driver's license before viewing the reports. Print the reports or save them to your computer.

2

Find the delinquent accounts by reviewing your credit reports.

3

Write your dispute letters for the credit bureaus. The same wording can be included in each letter. Remember to include your name, address, telephone number and Social Security number. In the letter, state that you wish to dispute certain delinquencies on your report. List the creditor's name and the account number, along with a reason for your dispute. You can dispute delinquencies by stating that you never paid the bill late or that the account belongs to someone else and should not be listed on your credit report. Include any documentation that supports your case, such as recent billing statements showing your account as current. Mail the letter and documentation to the credit bureau's address on the credit report. Wait for a response.

4

Enter a dispute online. Use your Internet browser to navigate to the websites for TransUnion, Equifax or Experian. Find the customer service or personal services menu tab. Click on that to find a link for the disputes menu. Click on disputes and follow the prompts to log into the system. You will need the reference number from the credit reports your retrieved from Annual Credit Report, along with identifying information such as your Social Security number and driver's license. Once you are logged on you will see all of your accounts online with options to dispute each account and provide a reason. End the session by clicking on the exit or logout tabs. A response will be sent to you by email after about 30 days.

5

Call or write your creditors. You can also dispute a delinquency by working directly with the creditor. Send the same letter you drafted for the credit bureaus, or simply call the number on the back of your card. Contacting the creditor directly may lead to a faster answer.

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The Advantages of Obtaining Credit Early

Obtaining credit early helps you build a strong credit history and develop a good credit score before you get into major purchases such as homes, cars and businesses. Payment history and length of credit make up half of your FICO credit score, which is the basis of credit scores reported by the three major credit bureaus: Equifax, Experian and TransUnion.

Credit-Score Benefits

Getting a credit account early and making on-time payments on any balances helps you score big points on payment history and length of credit. Having a high credit score helps you get access to loans and receive more favorable rates and terms. Saving even a fraction of a percent on your interest rate for a home loan can save tens of thousands of dollars in interest over the life of a 30-year loan.

The Challenge

Lucy Lazarony noted in her February 2010 Bankrate.com article "Under 21? Credit Cards Hard To Get" that the Credit CARD Act of 2009 made it illegal for a credit-card provider to approve credit for someone under 21 years of age without an adult or guardian cosigner or proof of income needed to responsibly repay balances. Thus, a parent must usually cosign, to give his child a chance to establish credit early. This poses risks, though, as cosignors are equally responsible for the debts on the card.

Credit Lessons

Despite the risks, another advantage of getting credit early is learning its risks and responsibilities early on. One benefit of cards cosigned for is that the card provider cannot raise the card's limit without both cosignors authorizing it. This means your child cannot get a limit increase without your permission. You can set a relatively low limit and make your son or daughter responsible for on-time payments on the card. If he does not show responsibility, take the card and block further use. However, recognize the opportunity to teach your child the merits of managing credit responsibly.

Responsibility

Many adults struggle with spending discipline when credit cards are readily accessible in their purses or wallets. If a teen or young adult develops the discipline to have a card in his possession but recognizes the importance of budgeting and good spending habits, he may carry that discipline into adulthood. Disciplined credit habits are among the more important financial management skills someone can have as they take on more financial assets and obligations.

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Will Signing Up for Credit Monitoring Hurt My Credit?

The average identity thief uses stolen information for 14 months before the victim realizes his data has been compromised. Credit monitoring services offer to let you check your credit whenever you like, which could prevent identity theft, but some may worry that all those inquiries could affect credit scores. Signing up for this service, however, can do nothing but help your score.

Identification

Signing up for a credit monitoring service will not hurt your score, according to Experian, one of the three major credit bureaus in the U.S. You could look at your score every day and not affect your score one bit. Inquiries through a credit monitoring service are "soft" pulls, which means they are disregarded by the credit scoring formula because "soft" pulls are not applications for credit.

Benefits

A credit monitoring service could help you guard against identity theft or unusual changes in your credit report, such as extremely high balances or a surge in new accounts, according to "The Wall Street Journal." You also could use a credit monitoring service to keep track of your score before applying for a large loan, such as a mortgage. Saving a few dollars per month as a result of a higher credit score could mean hundreds of dollars of savings over the life of a typical 30-year mortgage.

Considerations

Although consumers may check their credit reports for free once a year, you may want to check your score once a month. The credit rating agencies update your report about once a month, so receiving a single report and waiting a year to check again could end up severely damaging your score. If, for example, an identity thief uses all the available credit in the card in your name, delinquent payments on the card could go unnoticed for months. As a result, you could be rejected for loans during this time and not know why.

Is Credit Monitoring Necessary?

Credit monitoring services cost at least $180 per year, although some banks offer this service for free. If you want to look at your credit score frequently, a monitoring service could prove more cost-effective than purchasing single reports. Consumers worried only about identity theft, however, can place a freeze on their credit report--preventing lenders from looking at it--for no more than $30 in their lifetime or arrange a security alert that shows up on the report for free. Monitoring services often come with identity theft insurance.

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Can a Sub-Prime Merchandise Card Raise My Credit Score?

You've set a goal to raise your credit score. That's the easy part. Now, you must begin the process of changing your spending habits. And, as counter-intuitive as it may sound, apply for credit. A traditional credit card will deny you if you already have bad credit. However, a sub-prime merchandise card offers the best and quickest way to rebuild your credit.

Sub-Prime Merchandise Cards

A sub-prime merchandise card acts like a line of credit that allows you to purchase items with a specific vendor through its catalog or online mall. Unlike a traditional credit card, you are not subject to a credit check or require a co-signer. After an approved credit limit, you make purchases on merchandise through the issuing company's website or catalog. Purchases require that you make an initial deposit on merchandise with the balance financed on the card.

Advantages

The vendor reports your good payment history to the credit rating agencies, which builds up your credit score. Your total credit limit improves with the additional credit you have on the sub-prime merchandise card, as new credit accounts for 10 percent of your credit score. Carrying a small balance on your sub-prime merchandise card relative to your credit limit improves your debt-to-income ratio.

Disadvantages

A sub-prime merchandise card locks you into a merchant agreement, which you may not want. The merchant agrees to extend you credit to capture new sales in exchange for reporting your good payment history to the credit rating agencies. However, as sub-prime customer, you are on a short leash. The merchant will have little tolerance for missed or late payments. In addition, you wind up paying more for ordinary purchases.

Payment History

Once you get your sub-prime merchandise card, set aside money in your budget to pay off your balance quickly. Fair Isaac Corp., which created the widely used FICO credit score, says payment history comprises 35 percent of your score and amounts owed account for 30 percent of your credit score.

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Does Moving a Lot Affect Your Credit Rating?

Credit scores are an important part of today's financial situation, and yet it can be difficult to get information on credit ratings, such as what actions affect your score positively and negatively. Moving frequently, due to job opportunities, marriage, school or other factors, can be a stressful event, not merely because of the hassle of packing but also from worry that multiple address changes will lower your score. Understanding the basics of the credit score system and clearing up some misunderstandings will help you as you prepare to move.

Significance

A credit rating is a three digit number that is used by lenders, credit card companies and other interested parties as an indicator of your creditworthiness. Also known as a FICO score, consumers should strive to achieve a number of at least 622, according to Beth Givens of the Privacy Rights Clearinghouse. Lower numbers than this can result in higher interest charges on credit cards and make it difficult to receive loans and mortgages.

Features

Credit ratings or scores are affected by many factors. Some of these factors include whether you pay your bills on time or not, whether your accounts accrue interest and other finance charges, how much of your credit line you are utilizing and how many credit cards, loans and other debt you are carrying. These factors are calculated and used to determine your overall credit risk, which is expressed by your credit score.

Inquiries

Inquiries by banks and other financial institutions are also used in calculating your score. Rental agencies may also request a copy of your credit score when evaluating your application. According to myFico, "Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports." As a result, applying for many credit cards or several mortgages over the course of just a few years could have an impact on your credit rating, as it raises your credit risk.

Misconceptions

Misconceptions about credit rating scores abound. One of the most common is that cancelling unused credit card accounts will improve the score. Unfortunately, this may often lower a credit rating, especially if the cards were old accounts and infrequently utilized with little to no balance carrying over each month. An old account may not be useful for your day to day purchasing, but the age of the account shows a history of using credit, which can be beneficial to your score. In addition, several unused cards can keep your ratio of debt to available credit lower, and lowering your credit risk.

Address Changes

Address changes are less damaging to your credit rating than other financial actions, such as late payments. Changing addresses should not affect your credit rating in normal situations, provided that you are informing your creditors of your new residence. Failure to send change-of-address notifications could cause forwarded bills to arrive late, incurring fees and finance charges that can negatively affect your score. If you are changing residences frequently, also think carefully before applying for new credit cards (such as department store and other retail credit cards) in each new location, as this can lower your overall score.

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How to Rent a Good and Safe Apartment With Bad Credit

During an economic crisis many people find themselves without jobs. Even many with jobs have difficulty paying bills on time. Some homeowners have lost homes to foreclosure. All of these factors negatively affect credit scores. The loss of employment and home may create situations in which individuals with bad credit must rent an apartment.

Instructions

Renting With Bad Credit

1

Pay a higher deposit. Some apartment managers and owners of clean, safe apartment complexes understand that bad credit does not always mean "rental risk." Exceptions are made when there is no bankruptcy on the applicant's rental application. Often there is a range of deposit amounts based on credit scores with the largest amount equaling possibly two times monthly rental amount. Be prepared to pay cash up front.

2

Show a clean criminal background. A clean criminal background goes a long way with many rental companies who are looking to keep their complex safe. "No Evictions, No Convictions" is a common mantra among apartment managers when they are asked what is the minimum rental requirement. They look for felony convictions, previous evictions and evidence that you owe money to past landlords.

3

Sign a longer lease. Often bad credit, where there is no bankruptcy involved, can be balanced by a longer lease. Longer leases can help rebuild credit and sometimes generate a discount on rent. If you are working and willing to sign a longer lease, managers often see you as attempting to "fix" your financial situation.

4

Present strong references. Sometimes a good name and cash in hand may be all you have left. Both can go a long way when trying to rent a good and safe apartment. Making rental managers aware of your credit standing is a sign of good faith. It also allows them to focus more on your background check, which will include personal references. If your past rental references are stellar and you have people willing to stand up for your character you may be approved to rent an apartment.

5

Get a co-signer. Usually if you can get someone who is in a better credit and financial situation to co-sign on an apartment lease with you, the landlord may feel comfortable renting a nice apartment to you. Having the legal recourse to bill your co-signer in the instance of your failure to pay rent may be the only circumstance under which a landlord will lease an apartment to you.

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Auto Repossession Impact on Credit

Your FICO credit score ranges from 300 to 850 and, according to the MyFico website, the higher the score, the better your credit. Credit accounts, such as an auto loan, appear on your credit report. If you have a car loan, it's helpful to learn what impact a repossession will have on your credit.

What is Repossession?

A repossession occurs when a lender takes possession of a car from the owner after the owner fails to make car payments as agreed. The terms of the loan agreement grant the lender the right to do so without further notice. The lender will send a tow truck to retrieve the car. This is known as an involuntary repossession. If the consumer turns the car in willingly, this is known as a voluntary repossession.

How Does it Affect Your Credit Score?

Lenders report your payment history to the credit bureaus. Your credit report reflects how you have handled your debt obligations. According to MyFico, 35 percent of your score measures how well you pay your bills. One 30-day late payment can drop your FICO score by as much as 110 points, according to Bankrate.com. The later the payment, the worse the damage. A repossession means you neglected to make payments on a car loan. This will cause your score to fall. How low your score falls is determined by the other credit items contained in your report.

Be Aware

According to the Federal Trade Commission, once a lender repossesses your car, the lender will then sell the car to recover some of the debt owed. That, however, does not terminate your obligation for the debt. The lender can collect from you the deficiency amount. Deficiency is the difference between the amount you owe the lender versus the amount of money the lender was able to sell the car for. You are legally responsible for this bill.

Serious Considerations

Your credit report will reflect the negative payment history from the loan made with the original creditor. Some lenders, however, will hire a collection agency to collect the deficiency amount or will sell the deficiency debt to the agency outright. This agency will place a collection account on your report, which further lowers your credit score. Also, the lender or the agency can sue you for the deficiency amount. A judgment against you will also appear on your credit report as a public record and, consequently, will drop your score even further. Plus, it may give the judgment owner the right to garnish your wages or seize the funds in your bank accounts.

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How to Report a Stolen Driver's License to Credit Companies

A stolen drivers license is more than just a headache; if it falls into the wrong hands, you face the possibility of identity theft. Its important to contact the authorities immediately after you realize your license was stolen and file a police report. In addition, you should contact the three credit reporting agencies (TransUnion, Experian and Equifax) to notify them of your loss.

Instructions

1

Call the credit reporting agencies via their toll-free numbers. Speak to the customer service representatives and advise them about your stolen drivers license. Ask that they place a fraud alert or freeze on your reports. This alert will keep the thief from opening an account with your stolen drivers license number because it notifies the account issuer that the information was stolen.

2

Advise the customer service representatives that you will send a copy of the police report and a copy of your new license to them. This will give the agencies your new drivers license number so they can change it on your credit report.

3

Send the photocopies of the police report and new drivers license to each of the credit reporting agencies via certified mail, return-receipt requested. This will give you proof that your letters were delivered to the credit reporting agencies. Also, be sure to include a letter that explains why you are sending them this information and ask them to confirm receipt of the letter within a reasonable time period (for example, one month).

4

Follow-up. If you dont hear from the credit reporting agencies after a reasonable amount of time, contact them to confirm receipt. Send another certified letter with the same information. Continue this until you receive confirmation that your new information was received and changed on your credit report.

5

Continue to monitor your credit reports for fraudulent accounts. You never know; something might slip through the cracks and the thief could find a way to open an account in your name. Early detection is the key to preventing further stress and headaches due to identity theft.

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How Is a Credit Score Calculated?

A credit score is calculated by using a complex mathematical formula and analysis system. Credit scores are computed by some financial institutions and lenders, but mostly by private companies called credit bureaus, or credit agencies. These agencies collect and record information about how you've handled credit in the past, things like how many credit cards you have, how much money you owe and whether you make timely payments. This information is fed into a mathematical formula that assigns different levels of importance to each piece of data to determine your credit score.

The FICO Formula

The formula used by most companies to compute credit scores is called the FICO formula. FICO refers to the Fair Isaac Corporation, the company that developed the scoring system back in 1956. Any credit score computed using the FICO system is called a FICO score. The FICO formula evaluates data from five major categories to determine your credit score.

The Categories

Each category evaluated by the FICO formula makes up a percentage of your total FICO score. The formula evaluates many factors in each category to determine whether you are a good credit risk. Below is a list of the five categories along with the percentage that each contributes to your overall score:
Payment history---35 percent
How much total debt you have---30 percent
Length of credit history---15 percent
New credit---10 percent
Types of credit you are using---10 percent

The FICO formula does not consider your age, race, gender, marital status, salary or occupation when computing your credit score. However, individual lenders may consider these factors.

What the Numbers Mean

Credit scores computed using the FICO system range from 300 to 850, the higher the score the better. According to MyFICO.com, a division of Fair Isaac, most people have a score in the 600s or 700s. The average FICO score for people in the United States is 723. Credit scores above 750 are considered excellent by most lenders, around 700 is good and close to 650 is fair. A score below 600 is considered poor.

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How to Interpret Credit Reports

It's a good idea to order your credit report at least once a year. This helps you manage your credit and find out if any errors have occurred. In order for you to completely understand your credit report you must be able to interpret the information. There are three major credit reporting agencies that provide the same information, but that information could be in a different format. All three credit reporting agencies may not have the same data on file for you.

Instructions

1

Order your free annual credit report from all three credit reporting agencies (See Resources below). This will give you a chance to see how each credit reporting agency reports your information. Review the information on your report to make sure everything is accurate. Take a look at your personal information such as name, address, Social Security number, date of birth and employment.

2

Review the trade lines on your credit report. A trade line is all of the information that a creditor will report to a credit reporting agency regarding your debt or credit account. Trade lines consist of the creditor's name, balance owed, high credit, credit limit, date last paid, credit rating, account type and responsibility.

3

Compare each item on all three reports. The balance owed should be the balance on your account when the creditor reported it to the agencies. Your high credit is the highest amount of credit that a creditor extended to you. Note that this can be different from your credit limit. For example, say you had a credit card with a credit limit of $6,000, you charged $6,000 of merchandise, and then you paid your balance down to $4,000. If the creditor lowers your credit limit to $4,000, someone can still look at the high credit amount and know that the highest amount of credit you were given was $6,000. They can only assume that your credit limit was lowered. The date last paid will usually be the month and year, such as 9/2009.

4

Review your credit rating. Some credit bureaus will show a credit rating such as R1 or I1. The "R" stands for revolving account, such as a credit card or a line of credit. The "1" is the best credit rating you can receive. This rating means you pay on time, as agreed, less than 30 days late. If you receive an R2 it means you pay 30 days late but less than 60 days past due. An R3 means your revolving account is past due more than 60 days late but less than 90 days past due. An R4 means your payment is greater than 90 days late but it has not exceeded 120 days past due yet. An R5 means your account is past due 120 days but it has not been charged off yet. When you see an R7 it means that you have made arrangements with a debt settlement company. They have negotiated repayment arrangements with your creditors. An R9 means a creditor has written your account off of their receivable listing and reported your account as a loss. This means your account is reported as a bad debt on the creditor's accounting statements. When an account reaches this stage, it is usually forwarded to a collection agency.

5

Become familiar with the different designations. One credit bureau may show your credit rating as an R1 and another may show it as, "AA," which means "paid as agreed." An R9, which is a charged off account, may show up on another credit report as, "charged off as bad debt," but they mean the same thing. If the account shows as an I9 instead of R9, the "I" stands for installment, which is a loan such as an automobile loan.

6

The bottom of your credit report will have the different inquiries. An inquiry means someone pulled or ordered your credit report. The name and address of all creditors ordering your credit report will show up as an inquiry.

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How to Raise Credit Scores Instantlly

After every billing statement, the credit card companies send a report to the credit bureaus detailing information about you. This information can be good---you paid your bills, you have low debt and you are not late. Or this information can be bad---you are late, you have a lot of debt and you don't pay fees. This can be dangerous for your credit score. To raise your credit score quickly, you need to apply a series of steps that make you look more appealing as a borrower.

Instructions

1

Request a copy of your credit report from the three different bureaus. Before you can try and raise the score, you need to have a copy of it in hand.

2

Pay down your credit cards first. Mortgages and loans are typical for people and therefore, creditors understand that you're probably going to have one. But, a high balance on a credit card is not normal. Therefore, pay those down first. Getting a credit card under 30 percent of the limit will boost your score.

3

Use your credit card up to the 30 percent marker. It is acceptable to go up to 50 percent, but spending only 30 percent is best. However, it is important to use the card. This way, you are still showing creditors that you are a good customer.

4

Call up creditors and dispute anything that looks wrong on the credit report. If a late fee is there that shouldn't be, get rid of it. If the limit they have listed is lower than what it actually is, get rid of it. The higher the limit, the higher 30 percent is.

5

Use an old credit card every once in a while. Sometimes people think that by getting rid of a credit card, they're building up their credit. This simply isn't the case. The credit score takes age of the card into consideration. The older the card, the stronger it is for your credit. So, use an old card every once in a while even if it is a higher interest one. This way, you are building good credit.

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Explaining a Credit Score

In addition to considering your employment and income, creditors use a credit score to decide whether or not they will issue credit to you. Your credit score is based on information that credit bureaus collect from credit applications, creditors and public records. Before applying for credit for important purchases, such as a mortgage or car loan, you should be aware of your score.

Function

A credit score, created by Fair Isaac and Company, is a three-digit number that a credit bureau gives a lender to determine a consumer's creditworthiness. Creditors use credit scores to determine interest rates and payments for credit applicants.

Types

Beacon, Empirica and Experian/Fair Isaac Risk Model are the names of the credit scores issued by Equifax, Experian and TransUnion, respectively.

Features

The components of your credit score, include amounts owed, credit history length, credit type, inquiries and payment history.

Considerations

Credit scores fluctuate depending on when a creditor reports information, and credit scores vary among the credit bureaus.

Warning

Many creditors, such as mortgage lenders, for example, use their own internal credit scores in addition to those issued by the credit bureaus for credit approval.

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How Often Does Credit and Credit Score Get Updated?

Credit reporting bureaus continually update credit reports as they receive information from lenders. Your credit score may change with these updates as lenders add new information to your report but also as old information drops off your report. How updates affect your credit score can depend on your overall credit history.

New Information

Credit scores are also called FICO scores, a reference to the Fair Isaac Corp., which developed the software and formulas that the three major credit bureaus use to calculate scores. According to Fair Isaac, most lenders report information to credit bureaus once a month. However, each of the three bureaus--TransUnion, Experian and Equifax--collects its information in a different way, so lenders may report different data to different bureaus at different times.

Old Information

Be aware that your credit score can update and change not only because new information has been added to your report but also because old information has come off it. For example, the credit bureaus generally remove an "inactive" credit account--that is, a paid-off, closed or canceled account--from your report after 10 years, or earlier if the lender decides to stop reporting the account to the bureau. If that account showed a good payment history, then removing it can hurt your score. Conversely, some negative information, such as late payments, collections and foreclosures, drops off after seven years, which can boost your score.

Changes

Although credit-report information is constantly being updated, Fair Isaac says the typical credit score doesn't experience much change over time. People with good credit tend to maintain good credit; people struggling with bad credit tend to continue to struggle. Also, the effect of any credit action on a score will depend on your credit history. If you have a long record of making payments on time, a late payment may not affect your score as much as it would for someone who is chronically late. Within any three-month span, Fair Isaac says, only about 25 percent of people will see a change of 20 points or more in their score, which could be anywhere from 300 to 850.

Lag Time

There's going to be a lag between the time you take a credit action and the time that action shows up on your report. You could pay off your credit card balance, for example, but it may take as long as a month for your credit report to reflect that fact, depending on when the issuer sends its monthly update to the credit bureaus. If you skip a required payment, such as on a credit card or a mortgage, the lender typically won't report it until the payment in 30 days late. And depending on when that 30-day mark lands, it could take another month beyond that time for the missed payment to affect your score.

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Does Loan Deferment Affect Credit?

It can be stressful to take on large loans to pay for things such as a college education or a house, but it's important to always make your payments on time for the loans you have under your name. Failure to make loan payments on time can affect your future access to credit, which may close significant doors for you later on in life. If you are unable to keep up with your monthly loan payments, you could choose to defer your loan. Before making that decision, however, there are a number of things to consider.

What It Is

Loan deferment is the act of postponing loan payments. People usually turn to loan deferments if they are unable to continue making minimum monthly payments due to economic hardship or emergencies that may include loss of a job, death of an income-earning spouse, a large reduction in salary or an expensive medical emergency. Deferring a loan can result in extra interest paid, making your loan more expensive to pay back in the long run.

Process

To defer your loans you need to contact your lender and ask about their deferment guidelines. Policies vary between lenders and it's important to have a solid grasp about special fees, deferment periods and higher interest rates that come with deferring your loan. If you decide to proceed with the deferment, your lender will most likely send you paperwork that you must fill out, sign and send back to make the deferment official. In general, your lender will then receive and process your paperwork, and confirm your deferment is active via a phone call, email or letter.

Impact on Credit

Loan deferment does not affect your overall credit score, since you are considered "in regular status" while in deferment. Types of repayment plans, including deferment programs, are not reported to credit bureaus and thus do not affect your credit. What will affect your credit is making late payments on your loan or missing payments altogether. This delinquent information will get reported to a credit bureau and will subsequently impact your credit score.

Eligibility

To be eligible for loan deferment, in general you may be asked to prove economic hardship and must also be actively looking for full-time employment of at least 30 hours a week. This employment can be in any field and at any salary level. Also, some lenders may require that you register with a local employment agency who can aid you in finding a job. Lenders may not allow you to defer once you've already defaulted on your loan and missed payments, so it's important to apply for a deferment while you are still in good standing with your loan company.

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What Is an Okay Credit Score?

Credit scores run the range from 300 to 900. The higher the score, the more a potential lender is willing to provide credit at a favorable interest rate. Credit scores reflect a complex interplay of payment histories, credit utilization, court judgments and credit inquiries. Although each lender sets its own interest tiers, in general, certain score ranges earn credit for different lending purposes.

FICO Scores

Although some lenders use a proprietary scoring model, most large lenders use FICO scores. Named after Fair Isaac Corporation and used by the three major credit bureaus, FICO scores factor a person's payment history, outstanding debt, length of time possessing credit, new applications for credit and types of credit on record.

According to Experian, the national score at the time of publication is 692.

Subprime Scores

Lenders generally consider credit scores below 620 as subprime. This means that the lender classifies the borrower as a likely default risk, so the cost of credit -- in terms of interest rates and credit availability -- increases. In the past, 680 was considered a boundary line between good and bad credit, although with the tightening of creditworthiness scores after the 2008 financial crisis, even people with scores of 680 are finding it more difficult to obtain credit on favorable terms.

Student Loans

People with low credit scores may find it difficult to obtain student loans. According to FinAid, applicants with scores in the 630 to 650 range or lower may not be able to obtain student loans without cosigners

Scoring Impacts

Lenders use a credit score as part of a mathematical model to determine whether to extend credit to an applicant, and to decide what interest rate to charge. Some businesses also run credit scores on applicants for sensitive management positions or for government jobs that require access to classified information. Some landlords also consider a credit report, sometimes including a score, when determining whether to allow a person to sign a lease.

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How Long Does Derogatory Data Affect a Credit Score?

Credit scores can be affected by any number of items, both positive and negative. Some of these can only remain on a credit score for a limited amount of time, while others have no time limit.

Credit Report Basics

Consumer credit reports are maintained by the three credit reporting agencies: TransUnion, Equifax and Experian. Each company maintains its own records, and each report may contain different information than the others.

Judgments

If a creditor sues a consumer and wins a judgment in court, that judgment can stay on the debtor's credit report for up to seven years. However, if the state's statute of limitation on judgments is longer than seven years, the judgment can stay on the report for as long as state law provides.

Bankruptcy

Bankruptcy items can remain on your credit report for up to seven years. The bankruptcy itself can remain for seven years for a Chapter 10 or 13, and 10 years for a Chapter 7, 11 or 12.

Job Applications

If you've applied for a job with an annual salary over $20,000, the inquiry can remain on your credit report indefinitely. You can ask the employer to have it removed.

Mistakes

Any errors or mistaken entries can be removed by a consumer who provides proof of the mistake and demands the credit bureau to remove the item. Items that remain on the credit report longer than their allowed time can similarly be removed.

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Will Removing Derogatory Items From a Credit Report Improve My Credit?

Every consumer has credit records that lenders review before agreeing to new loans and accounts. Good credit records give consumers easy access to credit. Credit reports that contain "derogatory items" (i.e., evidence of financial mismanagement) cause problems. In some cases, it's possible to remove these derogatory items, so that they no longer influence credit decisions.

Credit Scores

Experian, Equifax and TransUnion are the three nationwide credit bureaus that compile consumer credit records. These records list accounts, payment histories, court judgments on financial matters, and related information. Credit score firms like FICO use these reports to generate a three-digit score that reflects a consumer's creditworthiness. Accounts that consumers use and pay responsibly look good on credit records and raise the score. Derogatory items lower the score, and may cause lenders to deny applications or charge higher interest rates.

Derogatory Items

Derogatory items on credit reports indicate financial mismanagement. They include delinquent or missed loan and credit card payments, accounts that are over the credit limit, charged-off balances, accounts in collections, house foreclosures, repossession of cars or other vehicles, and Chapter 7 or Chapter 13 bankruptcies. All of these things can damage a person's credit, according to FICO, but unpaid accounts and court actions are the worst.

Time Frame

Most derogatory items appear on credit reports for a limited time. Bankruptcies show up for ten years; most court actions, foreclosures, repossessions, late payments and unpaid accounts remain for seven years, after which their influence on the credit rating ends. Certain debts, like unpaid tax liens and student loans, stay on credit records and hurt the consumer's credit score indefinitely, although old items get less weight than current ones.

Removing Derogatory Items

Removing derogatory items improves your credit, because the items are no longer visible to lenders or included in your credit score. It's not legal to remove accurate negative entries, but it's possible to remove items that contain any sort of error. An inaccurate spelling, date or amount in an otherwise legitimate entry is disputable, and a consumer dispute requires the credit bureaus to conduct an investigation that may result in removal of the item. In some cases, lenders do not respond to such investigations, which also results in removal of the item. Annualcreditreport.com is a government website that provides free credit reports annually. By requesting a credit report from this site, you can find and dispute mistakes through each credit bureau.

Warning

The Federal Trade Commission notes that some "credit repair" firms claim to be able to remove all derogatory items from credit reports --- even if they are accurate --- or to create a new credit record for their clients. In reality, the credit bureaus can legally ignore groundless disputes, and it is illegal to create a new credit file using an Employer Identification Number. Using these tactics can get the consumer into serious trouble.

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Why a 50-Point Difference in My Credit Scores?

Consumer reporting agencies collect information about your credit history and use the information to create credit reports and scores. The three major consumer reporting agencies in the United States -- Equifax, TransUnion and Experian -- are known as credit bureaus. Because of differences in how these agencies collect information and calculate scores, it is possible to have a credit score from one bureau differ by 50 points or more from the score calculated by another bureau.

Scoring Models

Each credit bureau uses a different scoring model to calculate credit scores. This means your Equifax score could be 700 when your Experian score is only 650. Pat Curry of Bankrate explains that Equifax uses the BEACON scoring model, TransUnion uses the EMPIRICA score, and Experian uses the Experian/Fair Isaac Risk Model. The scores calculated using these models will likely differ from your FICO score, which is what most lenders use to determine creditworthiness. The Fair Isaac Corporation calculates a FICO credit score by using information about your payment history, how much money you owe lenders, how much new credit you have applied for or received, the types of credit you use and the length of your credit history.

Reported Data

Lenders do not have to report your credit activity to all the credit bureaus, so the information used to calculate each of your scores may differ from one bureau to the next. If you have a bank loan in good standing, but the bank only reports to Experian, your Experian score could be 50 points higher than your TransUnion and Equifax scores. If you miss a credit card payment, but your credit card company only reports to Equifax, your Equifax score could be 50 points lower than your other scores.

Errors

Credit bureaus do not verify the accuracy of information reported by creditors, so any incorrect negative information on your reports could reduce your score by 50 points or more. In the United States, consumers are entitled to one free credit report per year from each of the three major credit bureaus by going through AnnualCreditReport.com. When you receive your reports, check for errors that might be affecting your score. One example of a credit report error is if a creditor reports your loan payment as late when it was paid on time. If you discover errors, you have the right to dispute the information by sending a dispute letter to the credit bureau.

Significance

Lenders check your credit score to determine your eligibility for car loans, mortgages, credit cards, personal loans and other credit accounts. Someone with a low credit score is a greater risk to a lender than someone with a high credit score. As a result, lenders charge higher interest rates and fees to those with low credit scores. Lenders also can deny credit applications based on low scores. Just one late payment can lower one of your scores enough to result in thousands of dollars in fees and additional interest.

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Do Credit Cards Work in Building Up a Credit History for Kids?

A child might have better credit than an adult with a job and several credit cards. Although children normally cannot get credit, if a child does acquire a line of credit, the credit bureaus put payment history on the minor's profile. Parents might want to get a credit card for a kid, because building credit early reaps benefits for the child later in life.

Identification

Credit cards help build credit history for a kid, according to Maxine Sweet of Experian. This typically occurs when a parent adds the kid as a cosigner on a credit card or authorized user. In both scenarios, the lender reports good payment history on the parent's and kid's credit file with the national credit bureaus.

Getting Credit Score for a Kid

Obtaining a credit score for minor requires more effort than for an adult: The Annual Credit Report website does not accept requests for people under the age of 18, according to The Consumerist. Thus, the parent must order the report by writing the credit agencies or phoning in a request. The major bureaus only release a minor's report to a parent or legal guardian to prevent children from opening fraudulent accounts.

Benefits

Kids who build their credit at a young age have a headstart on everyone else when it comes to obtaining credit on their own in the future. When the child graduates college, for instance, he may have a high enough score to qualify for a mortgage at a low rate. This could reverberate throughout the rest of his life. Raising a score by 30 points, for example, saves about $105 on finance charges, according to the Consumer Federation of America. Thus, understanding credit early could save the child thousands over his lifetime.

Disadvantage

The 2009 Credit Card Act makes it difficult for a person under 21 to acquire her own credit card unless she has a job that can support the credit limit. Since parents probably have to give their kids a credit card to build credit for the minor, you risk the child maxing out the credit limit and damaging both of your scores. If you decide to help your child build credit, clearly spell out to the child how much or when she can use the account.

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How to Fix Low Credit

Low credit looks bad when you apply for financing. Fix low credit and qualify for better loan rates. In some cases, a better credit score opens the door to certain occupations and decreased insurance premiums. There's no easy way to raise a bad credit score, and you shouldn't expect overnight success. This task requires patience and better financial habits.

Instructions

1

Reduce credit applications. Avoid a credit score drop by declining in-store applications for credit and by limiting your number of loan applications. Credit inquiries count against you on credit reports.

2

Repay old accounts. Set up a payment arrangement with creditors and work to pay off default accounts.

3

Keep tabs on your credit report. Periodically order your credit report and review it to catch problems such as reporting errors. Dispute mistakes by sending a letter to the credit bureaus. Obtain reports from AnnualCreditReport.com.

4

Establish wiser payment habits. On-time payments play a major role in credit scoring. Avoid late payments by sending funds several days before the due date--aim for a week before the due date.

5

Lower your debts. Even if you can't pay off your credit cards completely, aim to significantly reduce the balances to help fix a low credit score. Maxed-out accounts also take points off your credit rating.

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How to Repair a Mark Against Your Credit

If you have failed to fulfill the terms of your loan or credit agreement and the creditor reports that to the credit bureaus, you cannot do anything to remove a legitimate ding on your credit report, other than wait the seven years until the information is removed. However, creditors and credit bureaus do make mistakes in credit reporting, so if you find an error, you should take steps to have it removed. Even a seemingly small error, such as an underreported credit limit or a late payment or two, can lower your credit score.

Instructions

1

Gather any proof that you have to support your claim that the mark against your credit is an error, and make copies. Never send the originals when contesting the error, because if they become lost, your case is destroyed.

2

Write a letter to the credit bureau explaining what the error is, why you believe it to be incorrect, and how it should be fixed on your credit report. Enclose copies of any documents that support your argument.

3

Write another letter to the creditor that reported the mark against your credit explaining what the error is, why you believe it to be incorrect, and how it should be fixed on your credit report. You should enclose copies of any documents that support your argument. Even if the creditor disagrees with your claim, it must include a note saying you contest the negative information, if it reports it in the future.

4

Record the dates that you mail your letters and wait a month or two to hear back from the credit bureau. Credit bureaus are legally required to investigate your claim within 30 days (unless they deem it frivolous) and to inform you of their findings. If the credit bureau finds your claim to be true, you will receive a new credit report with the corrected information.

5

Request that if a change has been made, the credit bureau send an updated copy to any financial institutions that have pulled your credit report in the last six months, and to any employers that requested your credit report within the past two years. Credit bureaus are required by law to send the reports for free.

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How Does Loan Reassignment Affect Your Credit?

Loan reassignment refers to the process of one loan holder selling your loan to another company. This is quite common with mortgages; they are often reassigned to another company that buys them in anticipation of reaping the profits from the interest you are paying. This can happen with other types of loans as well. This can hurt your credit score, even if you never make a late payment or have any other problems with paying the loan.

What You Should Know About Your Credit Score

Most people think their credit scores primarily come from an assessment of whether they pay their bills on time. This accounts for only 35 percent of your score. Other factors include: the amount you owe and how much of your available credit you are using, at 30 percent; the mix of credit, meaning credit cards and installment loans, at 10 percent; the number of new credit applications, at 10 percent; and the length of your credit history, at 15 percent. The last category, length of your credit history, is the one that can be affected by loan reassignment.

What Happens if the New Company Treats Your Reassigned Loan Like a New Loan

When you receive notice that a new company has taken over your loan --- that is, it has been reassigned --- check to see if it has assigned you a new account number. Your credit score can be adversely affected because a shorter credit history with a company lowers your credit score with the credit rating agencies.

A Mix of Credit will Help Protect Your Credit Score

According to Bankrate, credit reporting agencies look to see if you have a variety of loans. If you have revolving credit, such as credit cards, and installment credit, such as mortgages and car loans, your score goes up. The thinking is that this mix shows you can handle money. Your reassigned loan falls in the installment category, so you won't experience a major drop in your credit score if you have credit cards and other installment credit.

Some Remedies for Repairing Your Credit Score After Reassignment

It is unlikely that you can ask the new company to list your account as older than the date it bought your loan, but you can call the credit reporting agencies and point out that the loan existed long before it was reassigned. Additionally, if you make your payments on time, avoid applying for any new credit for a year, and reduce the amount of available credit you are using by paying down credit card amounts that are close to your credit limit, you can repair any damage done to your credit rating by a reassigned loan.

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Does Losing Your Job Affect Your Credit?

Losing your job may cause stress about how you will pay bills, but it does not directly affect your credit score. However, like nearly anything in the credit scoring industry, losing a job could have ripple effects that drag down your credit score. By contacting lenders early, you can avoid most of these negatives listings in your credit report

Identification

The credit reporting agencies -- Equifax, Experian and TransUnion -- do not consider employment status or salary when they calculate your score, according to John Ulzheimer of MintLife. Including salary and other employment-related data stopped during the 1980s, because of the difficulty in verifying this information.

Potential Effects

Lenders consider more than a just a FICO credit score when deciding whether to extend credit. Losing a job could indicate an unstable life or an inability to service a debt. Also, monthly debt-to-income ratio is valued in the credit industry. Unless you have additional income, your debt-to-income ratio after a job loss may rise beyond the acceptable level -- most lenders want a ratio of 36 percent or less, according to Experian -- and lenders probably will reject your application.

Considerations

Living without an income could damage your score if it results in you being unable to meet your monthly debt obligations. Items such as missed payments or defaulting on an account can destroy your credit score for years to come. If you apply for several loans to make up for an income shortfall, the credit score model deducts a few points from your score for each inquiry and more for adding overall debt to your profile.

Tip

Call your lender as soon as you believe you might become delinquent on your debt payments. Most lenders will try to help you, such as offering to defer payments a few months, if it means the lender can avoid you declaring bankruptcy. In a worst-case scenario, you typically can negotiate to pay a part of the balance and settle the account. Debt settlement, however, is a major negative item on a credit report, but it might be better than bankruptcy.

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Beacon Score Vs. FICO Score

The credit ratings known as Beacon and FICO are different names for the same thing. FICO, which is an acronym for Fair Isaac Corporation, is sometimes referred to as a Beacon credit score but the name is outmoded. One of the largest credit-scoring companies, Equifax, marketed the service under the name BEACON, thus the confusion. Your FICO score is your Beacon score. It's just not much referred to as a Beacon score anymore.

Never Enough Acronyms

Much like all the bank takeovers and name changes, FICO is now known as NextGen. It's no different than the Beacon or FICO scores. It's mostly a matter of marketing.

What Makes a Credit Score

A credit score gets into algorithms, which most don't know or understand unless you were paying close attention in high school math class. To put it simply: An algorithm takes a bunch of data and puts it into a formula to determine a result. In credit determination, the algorithms take into consideration numerous factors to determine a "score."

Your Algorithm

These are the approximate values that are plugged into the equation to determine your NextGen, FICO or Beacon score. Call it what you will. They carry the same meaning regardless of what they are called. When your categories of examination are looked at in the, let's call it FICO, you must have at least one account (credit or otherwise) that has been open for at least six months. On top of that, the account can't be dormant for six or more months. That's the basics that banks and credit card companies want to see when applying for a loan or credit card. If you're applying for a mortgage or other large loan, banks want to see more active lines of credit--usually at least three--that have been active in the previous year.

A Breakdown of the Numbers

These numbers are not exact but reliable industry estimates of how FICO, Beacon or NextGen (whatever you want to call them) uses them. Roughly, 35 percent of your score is based on late payments, bankruptcies, collections and judgments against you. An additional 30 percent is based on current debts, and 15 percent is based on how long you have established accounts. An additional 10 percent examines the type of credit cards or loans you have, and the remaining 10 percent looks at applications for new credit cards or inquiries potential creditors made. How those numbers fit into the equation is a mystery to most, but those are the major factors and their relative importance that determine your credit score.

What It All Means

In addition to NextGen, FICO and Beacon, two other credit-rating organizations exist that banks, potential business partners and employers look to when determining your credit worthiness. They are TransUnion and Experian. What the companies call their version of credit scores may be different, but all are evaluating the likelihood that you will make your payments. It's all about the risk. They are evaluating for others who are deciding whether to offer you credit. Numbers aside, your credit score compares the likelihood of you paying back your loans or debts. The bottom line is that the higher the score, the lower the risk and the more likely you will be approved for a credit card or loan.

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What Is a Credit Amnesty?

Credit amnesty has several potential meanings, depending on the context. It may refer to a person's credit score, which lenders and some service providers use to determine credit worthiness. It may also refer to a student's academic credit history. In all cases, it means forgiveness of an individual's poor recorded history.

Credit Scores

Credit report agencies maintain and update your credit details so prospective lenders and service providers can check whether you are likely to pay them. When you make your loan and bill payments on time, credit report agencies increase your credit score. When you fail miss your payments, your credit score drops. With a high credit score, you find it easy to get a loan and certain services at low prices. With a low credit score, lenders and service providers may reject your application or charge high fees for their services.

Government Amnesty

A credit amnesty from a government involves a great shift in the credit scoring system. In such a plan, the credit rating agencies reset people's credit scores. This allows individuals with bad credit to restore their credit scores and regain their abilities to obtain loans and services at low prices. Proponents of a government credit amnesty argue that helping individuals out of credit history problems would help stimulate the economy.

Lender Amnesty

Companies that offer financing for customers who buy their products sometimes run promotional credit amnesty programs. Under this program, customers with bad credit can obtain financing from the company. However, these customers may have to meet some eligibility criteria, such as having made prompt payments on a previous loan for a certain period of time. Even under such a program, these customers may still have to pay higher interest fees compared to customers with good credit.

Academic Credit Amnesty

Also known as academic amnesty, credit amnesty in the academic sense refers to the restoration of a student's academic record. The student usually has to consult an adviser at the education institution before being granted a credit amnesty. He also has to meet some requirements, such as having had a break in attendance for a minimum amount of time and having completed certain courses. The education institution may limit the number of credit amnesties a particular student can get.

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What Are the Three Major Credit Bureaus?

TransUnion, Experian and Equifax are the three major credit reporting bureaus in the United States. These agencies each gather a detailed credit history to determine a consumers' risk for loans and financing by using FICO (Fair Isaac Corporation) scoring systems. It is possible for an account history to be captured by one bureau and not others, resulting in different credit reports and credit scores for consumers from each. According to My FICO, there is no such thing as one credit score.

TransUnion

TransUnion began in 1968 as parent company to a rail-car leasing operation and established its credit reporting business with the purchase of Credit Bureau of Cook County in 1969. The company gained full coverage of the United States, collecting market-active consumer information, in 1988. In 2002, TransUnion acquired TrueCredit.com and began offering report monitoring, and fraud and identity theft services directly to consumers. TransUnion currently manages the credit histories of millions of consumers in 24 countries besides the United States.

Experian

Experian began its United States credit reporting in 1996 when the British conglomerate GUS acquired TRW--which was the largest credit reporting operation in the United States at that time. Experian collects data from lenders, telecommunications and motor vehicle departments for consumer credit reports, and also offers monitoring and fraud protection services. Experian operates in more than 65 countries.

Equifax

Equifax is the oldest credit bureau operating in the United States, having started in 1899. Equifax manages the credit histories of businesses and consumers and offers monitoring and fraud-protection services. Equifax also offers a security freeze on reports which prevents inquiries from being made for a period of time.

Differences/Similarities

Transunion, Equifax and Experian have more similarities than differences. Inconsistencies among credit reports generated by each have more to do with the information supplied by credit lenders than the credit bureaus reporting it. Some department store credit lenders, and credit card companies, may only report your account to one credit bureau and not others, for example. For this reason, it is important to pull your credit report from all three bureaus, preferably at the same time, for the most accurate picture of your credit history.

Credit Scores

Your credit score is a number calculated from your credit report using a standardized formula. Mortgage companies will generally pull all three of your credit scores to determine your eligibility for a loan. Some auto companies may only pull one; which one depends on the lender. Lenders may also pull all three scores and use the score that falls in the middle to determine your risk.

It is imperative to pull your credit report and credit score from reputable sources. The Annual Credit Report web site, jointly run by TransUnion, Equifax and Experian, offers one free credit report from each bureau once a year (see Resource). Your credit score can be also be obtained from each for a fee.

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How Much Will a Late Payment Drop My FICO Score?

Because of the method used to calculate FICO scores, a late payment affects each person based on his individual credit profile. Contributing to 35 percent of the calculation, however, payment history is the most important factor.

Factors

Even if two people have the same score, a late payment can affect them differently because of their credit profiles. Factors that contribute to the calculation include credit history, number of credit accounts, previous late payments and credit line usage.

Misconceptions

Many people wrongly assume that a late payment affects everyone's credit score in the same way. The higher your credit score, the more potential it has to drop. In an example given by FICO, a late payment for a person with a 780 score could drop the score 90 to 100 points, while a late payment for someone with a 680 score could drop the score 60 to 80 points.

Effects of Time

The negative impact of a late payment diminishes with time. If the late payment is just an isolated incident, you will begin to see marked improvement in your FICO score after just six months. After seven years, the late payment will no longer affect your score.

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