How Does a Credit Score Work?

About Credit Scores

Credit scores reflect an individual's financial responsibility over a period of time and are used by financial institutions to determine creditworthiness, eligibility for loans, and the appropriate interest rate. The scale for credit score is 300 to 850, with higher credit scores indicating a superior credit history. Individuals with high scores will find lenders competing for their business with low interest rates and better terms. Low scoring borrowers will have to pay a much higher interest rate to convince a lender to put up money. Understanding how credit scores work can help an individual make financial decisions that will lower their costs of borrowing and present new opportunities.

Major Factor: Paying On Time

It wasn't until the age of the Internet that credit scores became easily obtainable and that national legislation was passed to protect consumers from bad information in credit scores. Today it's widely understood which factors contribute to an overall credit score. More than one third is determined simply by whether bills are consistently paid on time. Though a single missed payment won't destroy a person's credit, every late payment inflicts some damage because the most recent activity is weighted more highly than the past. Always paying bills on time will virtually guarantee a fairly high credit score and access to credit open.

Major Factor: Outstanding Debt

Another major factor considered in the credit score is the amount of debt already outstanding. Even the most responsible individual can only afford as much debt as he can service with his income. The more of that capacity is already filled by outstanding debt, the less attractive the borrower will be to potential creditors. This will lower the credit score. So, while having some debt allows regular payments to demonstrate financial responsibility, too much outstanding debt relative to income will be a weight dragging down a credit score. As a result, new loans will come with higher interest rates, higher collateral requirements, and additional documentation.

Other Considerations

The rest of a credit score is based on factors like the length of a borrower's credit history, the types of credit he has, and how much new credit he has recently applied for or obtained. The longer an individual has had credit in good standing, the more reliable he is deemed to be. Individuals with a mix of credit types, such as credit cards, mortgages and other loans, are also viewed to be more responsible and will have a slightly higher credit score. On the other hand, lots of new credit applications can mean financial distress and will automatically lower a credit score.

Credit Reports

The exact methodology for calculating credit scores can differ. The most common, particularly for mortgage applications, is the FICO score. Three companies in the U.S. are responsible for reporting credit scores, and often they provide different ratings, sometimes due to errors or differing access to information. Frequently obtaining a copy of all credit scores and the contents of the credit reports can help protect against such errors.

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How to Improve Your Beacon Score Fast

Credit scores are associated with your credit report and reflect how you have handled your financial responsibilities. The credit score used with an Equifax credit score is referred to as a Beacon score. Raising your Beacon credit score is a process that, generally, takes time. There is, however, one area you can improve and see an almost instant rise in your Beacon credit score.

Instructions

1

Review your Equifax credit report and locate your credit card accounts (see "References"). Circle the credit card limit and the balance on the credit card.

2

Multiple the credit card limit by .20. Make note of the resulting amount. This calculation gives you 20 percent of the credit card limit.

3

Call the credit card company to find out the day of the month your account is reported to Equifax.

4

Reduce the balance on all credit card accounts to under the 20 percent before the date listed in Step 3. The credit score is based, in part, on the credit utilization of a credit card. Having a balance under 20 percent will raise your credit score immediately once the new limit is reported to Equifax.

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Does Taking a Settlement on a Delinquent Bill Lower Your Credit Rating?

Debt settlement can help you finally pay down a debt you cannot afford, but the trade-off is you may do serious harm to your credit score. If you are already late on bills, however, this may be a small price to pay to get your finances under control. There are other alternatives to settlement that can get you back on track, such as counseling.

Identification

Taking a settlement on a delinquent bill damages your credit, but only those with very good scores see the most disastrous harm. A person with a score of 780, for example, should see a 105 to 125 point drop after their debt settlement, while a score of 680 has a 45 to 65 point drop, according to Bankrate.com.

Considerations

If you are already behind on your debt, your credit score is probably in a bad place. Most creditors won't consider a debt settlement until the debtor falls behind by more than six months. A 90-day late payment does 70 to 135 points of damage, so you likely do not have anything better than an average credit score at this point.

Benefits

As far as your credit score is concerned, it might be wiser to take the one-time hit of a debt settlement rather than years of missed payments. The credit rating agencies only note the debt settlement on your report for seven years. You can also become creditworthy several years before the settlement falls off your credit report. Even people with a bankruptcy sometimes return their score to the good-to-excellent range between two and four years after the filing.

Tip

Consider going to a trusted credit counselor, such as one approved by the U.S. Department of Justice, to help calculate a budget or possibly work with creditors on a new payment plan. Credit counseling does not affect your credit score and you might even be able to get credit while in the program. If you do accept debt settlement, realize it takes time to rebuild a score. Pay any existing account on time and continue to use credit---you must if you want to become creditworthy again. Secured cards are usually the only and easiest card to qualify for once you go through a major event like debt settlement. These are backed by a deposit, but usually become a normal credit card account with 12 to 24 months of consecutive on-time payments.

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What Determines FICO Scores?

Knowing your FICO score is essential to staying on top of your financial status, especially if you need to obtain credit. Lenders use your FICO score to decide whether you're worth the financial risk. In fact, 90 percent of banks use this score to determine whether you are eligible for credit, according to the Fair Isaac Corp. The lower your score, the less likely you will be able to obtain good rates -- or secure credit at all.

Requirements for Scores

Your FICO score is based on your credit history, so having one is necessary to determine the score. Scores can only be computed if you have at least one credit account that has been open for a minimum of six months and has been reported to a credit bureau within the past six months. While your score is only computed if you are alive, sharing a credit account with another person who dies remains part of your history and is still factored into your score.

FICO Components

The FICO score consists of five components: the amount you owe to lenders, your payment history, the length of your credit history, new credit accounts and the type of accounts in your history. Your payment history and the amount you owe are typically the top factors in determining your score. However, what components are most important in your specific credit history may vary, according to the Fair Isaac Corp. Making late payments, having a high debt-to-credit ratio or filing bankruptcy are just a few examples of factors that negatively impact your FICO.

Factors Not in Your FICO Score

Determining your FICO score requires an extensive amount of personal information, but there are several factors that are not involved in its computation. These include demographic factors such as your age, gender, race or ethnicity. Your salary and where you live are also excluded. Other information not considered include child support requirements, rental agreements and interest rates on current accounts. Some aspects of your financial history not included in your FICO, however, may still be used by some lenders, such as your work history.

Changing Your Score

Your FICO score is not easily changed, especially if you have an extensive credit history. Small actions may not affect your score as much as someone who is just starting their history. Keep in mind, however, that the kind of events or actions taken play more of a role in how much your FICO is affected. Having a delinquent account, for example, can have a major negative impact on your score. It will take time, but working with your creditors and resuming regular payments will help your score improve.

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How to Build a Credit Score With a Credit Card

Having a poor credit score canhave a negative effect on many aspects of your life. In addition to hindering you from getting a loan, a poor credit score can cause high car insurance premiums, prevent you from renting and even cost you a potential job. If you haven't built credit you will also find yourself in situations where a lack of credit can be detrimental to getting the things you need. There are ways to build your credit score by using a credit card.

Instructions

1

Check your credit score. Before you can build up your credit, you have to know what your credit is scored. By law, you are eligible for free yearly access to your credit report from the three major reporting agencies; Experian, TransUnion and Equifax. Per the Federal Trade Commission, under federal law, AnnualCreditReport.com is the only authorized source to get your free annual credit report.

Viewing your credit rating will allow you to clear up any inconsistencies or inaccuracies that could be causing a lower score and it will also help you in deciding the types of credit cards for which you are eligible.

2

Apply for a credit card to begin building a credit history. There are generally two basic types of credit cards: secured and unsecured. If you have no credit or if your credit is bad, getting an unsecured credit card from a major issuer will be difficult. Apply for credit cards from businesses such as gas stations or department stores.

Visit your bank or credit union to apply for a secured credit card. With a secured credit card, you place a certain amount of money in the bank which will reflect the limit of card. If you do not make a payment, the money in the bank is used to make up for the lack of payment. When used responsibly, a secured card may be able to be changed to an unsecured card.

3

Build a positive history of paying the full amount of your bill in a timely manner. As soon as you receive your bill, send in a payment, either by mail or online. Avoid making payments close to the due date to prevent the chance of delays caused by unforeseeable circumstances. Try to pay more than the minimum amount and get into the habit of paying off the entire amount of your bill at one time.

4

Display responsible spending habits. Use your card to make small purchases that you can quickly and easily pay off. Use no more than 30 percent of your credit card balance at any given time. Never spend up to or exceed your credit limit, which will reflect poorly on your credit rating.

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How Does a Repossession Affect Your Credit Score?

A lender repossesses a vehicle when the borrower defaults on her loan agreement. A car repossession will lower a credit score significantly. In addition to the repossession, late payments and missed payments will also have a negative impact on a credit score.

Types

Vehicle repossession can be voluntary or involuntary. Either type of repossession will lower a score. An involuntary repossession occurs when the lender takes back the vehicle without consent from the borrower. In a voluntary repossession, the borrower agrees to surrender the vehicle. Whether the repossession is voluntary or involuntary, both will appear as a repossession on the credit report for seven years from the date of delinquency.

Effects

In addition to the repossession and late payments noted on a credit report, a repossession can have other credit consequences. Lenders sell repossessed vehicles at auctions to recuperate as much money as they can. Unfortunately, auction cars typically sell low, leaving the lender will a remaining balance. That remainder is the responsibility of the borrower. The balance will be reported as a debt owed on the credit report.

Considerations

Creditors are allowed to sue borrowers for the remaining balance for a repossessed vehicle loan. A deficiency judgement can be filed against the borrower. It is important for the borrower to show up at his court hearing to defend his position and request the balance be lowered or eliminated. Before a car is repossessed, borrowers should negotiate with the lender to defer a payment or request an extension.

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Does Filing Bankruptcy Help a Credit Score

Your credit score is the snapshot that lenders will use to get a closer look at your financial picture. Having a bankruptcy on your credit report will create a blemish on that financial picture for the next 7 to 10 years. That's not to say every lender will refuse to extend credit to you. In fact, some lenders will seek out your business within months of a bankruptcy. This is because the lender knows that you cannot file bankruptcy again for the next five to six years, so he will extend credit to you. However, the interest rate will be sky-high, due to your newfound "un-creditworthiness." Also, paying high interest rates is not the only consequence you will suffer after filing bankruptcy; your credit score will also be affected.

Function

When you file bankruptcy, you are essentially telling your creditors that you have no financial recourse to pay them. Your credit score will immediately be reduced by at least 200 points. But in most cases, if you had to file bankruptcy, you were not paying your bills on time anyway, so chances are your credit had already been affected by defaults. However, if you did find a way to maintain a good credit score before filing bankruptcy you should expect a significant decline afterward. That being said, the bankruptcy and some of its penalties will remain on your credit report for at least the next 7 years, so be sure it is your only alternative before making this kind of financial decision.

Effects

A bad credit score can greatly affect your livelihood. Not only will it be difficult for you to obtain a credit card, you may also have trouble securing employment, an apartment, insurance, or even renting a car. However, at times, a bad credit score is unpreventable. You may have suddenly become sick, divorced or widowed, or lost your job. These are circumstances that were out of your control. But repairing your credit score is within your control.

Considerations

One way to improve your credit score after filing bankruptcy is by opening up a secured credit card. (Before doing so, you have to wait until the bankruptcy has been discharged.) A secured credit card works the same way that a regular credit card works, but the credit line is secured by a deposit that you supply. Your credit limit will usually be equal to the amount of your deposit.

Warning

There are plenty of banks and financial institutions that offer secured credit cards, but you need to choose wisely. You should first ensure that the card issuer will report credit activity to the three major credit reporting agencies (Equifax, Experian and Trans Union). In addition, you should choose a provider who will offer periodic credit increases after you have proven that you can be trusted with credit.

Prevention/Solution

Be sure to exercise financial responsibility. Once you have shown a few creditors that you are creditworthy, you will become inundated with credit card and other offers. Be strong enough to say no to most of the offers. Use your bankruptcy as a life lesson. Some people decide to file bankruptcy a second time because they have continued to make the same financial mistakes.

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How Long Does an Uncollectible Tax Lien Stay on Your Credit?

Convincing the Internal Revenue Service that it cannot collect on a bill is a huge victory, because the IRS can pursue a debt forever, but this victory may be short-lived as a tax lien can affect your credit for years. Thus you may need to pay off a tax lien to obtain credit even if the IRS stops pursuit of the debt. A new law in 2011 makes paying off tax liens even more enviable for consumers that in years past.

Uncollectible Tax Lien

Sometimes, the IRS declares a tax lien noncollectable when the agency believes paying the tax would constitute a hardship, such as when the taxpayer is disabled, or the statute of limitations passes on the debt. However, the status of "noncollectable" does not affect the federal credit history reporting time limit for a tax lien, according to Tucson, Arizona attorney Arthur Weiss.

Tax Lien and Credit Report

Paid tax liens only remain on your credit history for seven years after you pay off the bill. The Fair Credit Reporting Act lets the national credit bureaus report an unpaid tax lien forever, but one of the bureaus -- Experian -- only reports unpaid tax liens for 15 years. If you are a resident of California, an unpaid tax lien can only stay on a report for 10 years.

Tip

In February 2011, the IRS changed its policy on withdrawing tax liens. If the taxpayer pays off his unpaid taxes, the agency removes the tax lien from its records and the credit bureaus can no longer report it. The new rule also applies to tax liens imposed before the rule change. You want to remove a tax lien from your credit history, because a lien can take 200 points off of your FICO credit score, according to Smart Credit.

Prevention

Ideally you should pay off the entire tax bill, but the IRS sometimes accepts partial payment, or an "Offer in Compromise." If you need the tax lien removed immediately, you must offer the IRS a lump sum cash payment. Installment agreements may stop aggressive collection tactics, such as garnishing your bank account, but as long as you owe money to the IRS the lien stays on record.

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Can Settlements Affect Credit Even It Has Been Charged off?

If you are doing damage control after a creditor writes down your debt as noncollectable, you may know that settling a debt causes even more damage. A settled charge-off account probably does not do as much damage as you think. The settlement may even improve your credit rating if your only alternative is to ignore the debt.

Identification

Settling any account for less than the original balance usually negatively impacts a credit rating. John Ulzheimer of Smart Credit named settlements of the seven deadly sins in the FICO scoring system. If the lender charges off your debt and you still have a rating of at least 780, a settlement can do more than 125 points of damage and probably not less than 105, according to Ellen Cannon of Bankrate.

Considerations

A charge-off can take 100 or more points off of a credit rating and any other missed payments cause even more damage. Thus, by the time you start to negotiate a settlement, you likely have terrible credit. Because negative items do less damage when you have other negative items on your credit history, the settlement probably has a negligible effect, according to Maxine Sweet of Experian.

Lowering Debt Load

The balance on unpaid charge-off and collection accounts counts against you in the "amount owed" category part of the FICO credit scoring formula, which is worth 30 percent of your risk rating. If you have thousands of dollars in charged-off debt, eliminating it from your credit report can more than make up for the presence of a settled account in your credit history.

Tip

You should talk to your creditor before it charges off an account and ask for help, such as offering to set up an installment agreement. Settling a debt may benefit your financial life too because a lender can sue you for the debt and force payment by obtaining a garnishment order. Also, dealing with a delinquent debt looks better on your credit report than ignoring it, which may sway a creditor's decision to lend you credit in lieu of a poor credit rating.

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Credit Reporting Statute of Limitations for Bad Credit

Potential lenders, employers and insurance agencies use the information listed in a consumer's credit file to determine creditworthiness. The Federal Trade Commission regulates basic reporting guidelines for consumer credit reporting agencies, also known as credit bureaus. Bad credit items may only be reported for a specific length of time, according to the Fair Credit Reporting Act. Exceptions to the time frame can vary by state.

Definition

"Statute of limitations" is a legal term referencing the time frame during which prosecution or legal action may be taken as a result of criminal or civil action. Statutes of limitations vary by state and rarely play a role in the amount of time bad credit entries may remain on your credit report. The Fair Credit Reporting Act --- FCRA --- outlines federal guidelines that credit reporting agencies must follow.

Qualifiers

Certain items on a consumer's credit report qualify as bad credit. Judgments, foreclosures and bankruptcies are the three types of bad credit indicators listed in the public information section of the credit report. Other entries listed in the account section of a consumer's credit report include late payment items, delinquencies and charge-offs.

Time Frame

The Fair Credit Reporting Act dictates the time-frame restrictions for bad credit reporting. Bad credit items such as late payments, delinquencies and charge-offs must be removed after seven years. Judgments and foreclosures must also be removed after seven years unless state-specific limitations dictate otherwise. Bankruptcies must be removed after 10 years.

Exceptions

The Fair Credit Reporting Act allows for an exception to one type of bad credit reporting. Judgments may remain on a consumer's credit report for longer than seven years if the statute of limitations for judgments in the state where the judgment was filed exceeds seven years. For example, Minnesota's statute of limitations for judgments is 10 years; therefore consumers who have judgments issued against them in Minnesota may have the judgment listed on their credit report for up to 10 years.

Conclusion

Statute of limitations is separate from the time-frame for bad credit reporting, except in the case of judgments. A state may have a three-year statute of limitation for credit card defaults --- meaning that the creditor has up to three years to file suit against the consumer for defaulting on the account --- but the bad credit information may be listed on the consumer's credit report for up to seven years.

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What Is Your Credit Score Right After Bankruptcy?

Your credit score is your ticket to credit cards and loans. A high score gives you advantages like mortgages at competitive interest rates and desirable credit cards with reward points. Unfortunately you may overextend yourself financially and feel bankruptcy is the only way out. Bankruptcy hurts your credit score, although you can bring it back up over time.

Definition

Bankruptcy is a court action used by people who cannot pay off their debts. There are three main types of bankruptcy used by consumers, the Bankrate.com financial site explains. Chapter 7 absolves you of paying your debts if your income qualifies, while Chapter 11 and Chapter 13 both create a repayment plan. Chapter 11 is used more often by businesses because it is more complicated, and individuals usually opt for Chapter 13.

Effects

A bankruptcy will pull down your credit score, but the FICO credit reporting company explains the exact amount of impact is different for everyone. Those who had a high pre-bankruptcy score take the biggest hit, while people who already had a low score will only have a small drop. Your score will fall more steeply if you have a lot of accounts included in the bankruptcy. The Electronic Privacy Information Center estimates a typical drop of 160 to 220 points.

Time Frame

Bankruptcy can remain on your credit report for up to 10 years, depending on the type. Chapter 11 and 7 filings stay on your report for an entire decade, while completed Chapter 13 bankruptcies drop off in seven years. Creditors will see it for that entire length of time, so it can continue to affect you. However, FICO states that your most recent history carries more weight than old information. Your credit score will go up as time passes if you make prompt payments on post-bankruptcy accounts and use your credit lines carefully.

Prevention

You may be able to avoid bankruptcy by consolidating your bills through a home equity or debt consolidation loan or by working with a credit counseling agency. A loan lets you pay off your individual bills so you only have one monthly payment. Its interest rate may be lower than some of your accounts, which helps you pay your total debt more quickly. A credit counseling firm evaluates your situation and makes recommendations. It may help if you create a budget to handle the debt on your own or create a debt management plan in which you make your monthly payment to the agency, which then distributes the money to the creditors. Your credit counselor should be able to negotiate lower interest rates as part of the plan. These approaches should not hurt your credit score.

Solution

There are many ways to raise your credit score after bankruptcy. You can get a secured credit card even if you don't qualify for a regular account, Liz Pulliam Weston of MSN Money advises. You give the issuing bank a deposit of $200 or more and it gives you a credit card with a spending limit equal to the deposit. You cannot withdraw the money, and the bank has the right to seize it if you don't make your payments. You will build a positive payment history and raise your score if you handle the secured card responsibly, allowing you to expand to non-secured accounts and loans. Your score will go even higher if you get a mix of account types and handle them responsibly.

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Can You Get a Credit Score From Your Bank?

A little known fact outside the lending sector is that creditors may see a different credit score than the one you pull from a credit reporting agency. That's because lenders may use a different algorithm to determine a credit score. As a result, you might get turned down for a loan -- even when the credit bureaus rate you good risk -- for a low score the lender sees on its end but that is never revealed to you. Sometimes, a bank will gives the score it uses to you for free.

Identification

Banks are not in the business of selling credit scores, but some banks have deals with one or more of the major credit bureaus to provide free credit scores as a benefit of doing business with the bank. Most banks that offer free credit scores do not want that fact published. As of 2010, only Pennsylvania State Employees Credit Union allows the Fair Isaac Corp. (FICO) to identify it as a bank that gives away free scores via FICO's Score view program.

Other Way

Lenders run a hard inquiry into a consumer's credit history during the application process. Assuming the lender uses a credit scoring formula, the officer can show you the rating from the scoring formula on his computer screen. This is not always possible, such as when you do not go to a brick-and-mortar branch, or the lender might refuse to show it to you.

Legislative Changes in 2011

The 2011 Dodd-Frank Wall Street Reform and Consumer Protection Act requires banks to provide borrowers a free FICO credit score if they reject a consumer for a loan based on his credit report, according to Bankrate. As of March 2011 the regulations are pending and nobody knows exactly which types of lenders or other parties might have to provide credit scores.

Tip

Obtaining a free credit score from the bank after applying for a loan is a poor choice, because you want to make sure you have excellent credit before starting the application process. Also, even if the bank offers a free credit score, this may not help you ascertain your creditworthiness, because it might be an "educational" score. American Express, for example, offers a free Experian PLUS score to its customers, but AMEX does not use PLUS scores in its lending decisions, according to a report on Fox Business.

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How Long Does It Take for Debt Settlements to Reflect on Your Credit Score?

Settling a debt can help you save a significant amount of money, but at the same time, it can hurt your credit score severely. Your score may not be affected immediately after you settle the debt, however. The amount of time that it takes to reflect on your credit report can vary, depending on the creditor.

Debt Settlement

Debt settlement is a process in which you negotiate with one of your creditors to close an account. You pay a lump sum of money and the creditor then closes your account and stops any collection actions. The creditor accepts less than what you owe and the writes off the rest of the debt. At that point, the creditor may report the debt settlement to the credit bureaus and show that your account is closed.

Credit Report Update

When the debt settlement will appear on your credit report depends on the actions of the creditor and the credit bureau. Many large creditors update their accounts with the credit bureaus every month. Other creditors may update with the credit bureaus only once every 90 days. Credit bureaus generally update their accounts once every month, or in some cases, once every 90 days. It is at this point that the debt settlement information will appear on your report.

Credit Score Changes

Once your credit report is updated, your credit score also will be affected almost immediately. The debt settlement will show up in the notes section next to the account you settled. Your score, which is calculated with a specific formula, will fall by a certain amount. Once the information is added as one of the variables in your report, your score is updated.

Negotiating Payment History

In some cases, you may be able to avoid having your credit history damaged by a debt settlement. When you settle your debt, the creditor may be willing to report the settlement in a positive light on your credit report. For example, rather than reporting the account as "settled," the account can be reported as "paid." You must discuss this during the negotiation phase of the process if you want to avoid damage to your report.

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Can One Late Phone Bill Affect Credit?

Consumers often falsely assume that utilities, such as cellphones, affect their credit rating like any other account. A late phone bill probably does not affect your credit rating. However, some cellphone companies try to motivate customers to pay on time by reporting accounts to the credit bureaus to affect customer credit ratings.

Identification

A late cellphone bill can affect your credit rating. Although phone bills rarely appear on a credit report because of privacy laws and the cost to the cellphone company, some phone companies report bills when they can. In 2006, for instance, Verizon started reporting account histories to the credit bureaus, according to Tech Dirt. Late payments on your credit history can take more than 110 points off your credit score for a 30-day late payment, and more than 140 points for a 90-day late payment, according to Les Christie of CNN. Payment history counts for 35 percent of a FICO credit score.

Collection Account

Your phone bill can affect your credit rating even if your service provider does not report to the credit reporting bureaus when the company sends your account to a collection agency. Collection agencies almost always report their accounts to the credit bureaus, and a single one can do more than 100 points of damage. If the creditor sues you over a bill, the civil judgment further erodes your credit rating. Late payments or a collection account stay on your credit report for seven years.

Considerations

Although a cellphone company can terminate your contract and send the bill to a collection agency after a single missed payment, it probably won't do this. Instead, it may impose a penalty on the balance due. Most phone companies won't terminate a contract after one missed payment but may declare the account noncollectable after it becomes six to eight months delinquent. A collection account or charge-off does even more damage to a credit rating. Because you never know how a cellphone company may react to a late bill, especially when you chronically pay late, you should pay your bill on-time every month.

Tip

Your cellphone company probably lets you suspend service indefinitely. While the cellphone company probably charges you a maintenance during service suspension and reactivation charge when you want to use the line again, this usually amounts to less than half of the bill. Also, trim unnecessary expenses, such as fast food, from your budget if you cannot afford your cellphone bill. You should also consider terminating your contract if you frequently miss payments to avoid the company sending your account to collections or reporting missed payments. You can still own a phone by using a prepaid cellphone service. Early terminations usually carry a several hundred dollar penalty, so prepare to pay this off or face a delinquent account.

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How to Remove a Cell Phone Collection Account From a Credit Report

Removing a cell phone collection account from your credit report can be a difficult task. There are three credit reporting agencies that you need to get in contact with to remove your account: Equifax, Experian and TransUnion. Removing the account depends on how that cell phone account ended up in collection. If identity theft occurred, there are the steps you need to take for removal.

Instructions

1

Go to your local police station. A police officer will take down your information and have you fill out and sign a theft affadavit. This shows you are serious and the collection account is not yours because filing a false police report is against the law.

2

Contact each of the three credit reporting agencies. If you have not done so already, obtain a free copy of your credit report from each agency. Believe it or not, they do not have the same information regarding your credit information.

3

Fax or mail your theft affidavit to each agency with any other documentation you feel necessary to prove your innocence.

4

Follow up after the information has been sent to the credit agencies. Sometimes your information can get lost in the shuffle, unfortunately. You need to stay on top of them to remove that information because your credit score follows you throughout your entire life. If you want to buy a car or a house, or obtain a credit card with a decent rate, you will need a decent credit score to accomplish that.

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How to Fix Collections on a Credit Report

You can fix collection accounts by paying the debt. Collections are credit accounts closed by your creditor because you defaulted on the balance due on a credit card or loan. The creditor closed the account and assigned it to an in-house debt-collection team or sold it to a debt-collection agency. The current status of the account on your credit report is listed as "collection item." The Fair Credit Reporting Act allows it to be listed for seven years, and, as long as the information is correct, only the creditor or debt collector can have the negative entry removed.

Instructions

1

Contact the creditor or debt collector. If you don't have contact information pull a copy of your credit report and get a telephone number from the report. It will be listed with the collection-account entry. A free copy of your report is available from the website Annual Credit Report (see Resources). Nationwide credit bureaus operate the site to offer free credit reports as required by the Fair Credit Reporting Act. View and print your report by visiting the site and clicking on "Request A Report." The site will ask you some questions to verify your identity. Continue following the prompts to see your report, or follow instructions on the home page to order by telephone or mail.

2

Make an offer to pay the debt in full -- if the creditor or debt collector will agree to remove the collection-account entry from your credit report. The process is called "pay for delete," and the creditor or debt collector can legally instruct the credit bureaus to remove the negative information. However, the creditor or debt collector are under no obligation to do so. Generally, pay-for-delete agreements are difficult to come by because of ethical considerations.

3

Offer to settle the account for less than the full amount if pay-for-delete is not an option. Debt settlement is a common practice for resolving old debts, with creditors and debt collectors sometimes settling for half the balance or less. Start low by offering to settle the account for 20 percent of the balance, and be prepared to increase your offer to make a deal. Once you settle, your credit report will be updated to show that the account was "settled for less than the full balance." You will have fixed the account by paying it off, ending further collection activity and the threat of a lawsuit. However, the negative entry will remain on your report for seven years from the date of the settlement.

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Do Rental Car Credit Checks Affect My Report?

Your credit report shows your credit history since your first credit approval. It states the duration of your credit history and how many times you made late payments during the previous seven years. It also indicates the minimum monthly payment, credit limit and current balance for each account.

Credit Scoring

Credit scoring is based on several factors. A computer compares the amount you owe for each account with your available credit. It also bases your score on your total available credit, the duration of each account, late payments and the extent to which those payments were late.

Car Rentals

Car rental companies do not check your credit before you rent a car from them, if you use a major credit card. They pass your credit card through their card reader and verify that you have sufficient credit available to rent a car, and to put a credit hold on a deposit. This will not have any effect on your credit. If you use a debit card, they will usually check your credit and put a large hold on your account until you return the car. It can take up to 30 days for the rental agency to release a hold on your debit card. This can be a problem, if your checking account balance is low and you need to use your card to pay for your hotel or dinner.

Inquires

Your credit report does not show inquires from your existing creditors, but it will show inquires from a potential new creditor if you applied for credit with it. If a creditor reviews your credit to determine whether it will grant you credit, then ultimately grants you the credit, the inquiry will not affect your credit score. If it does not approve your credit request, it will appear on your credit report and have a small effect on your score. Multiple inquires from several lenders that do not approve your request show that you are shopping for credit, which will have a greater effect on your credit score.

Considerations

If possible, you should use a credit card to rent a car. Car rental agencies do not like to accept debit cards. Some locations will not accept them at all. If you do use one and the agency runs your credit, it may turn you down if your credit is poor, even though you have enough cash in your checking account to cover the rental fee and a large deposit. In some cases, the rental agency may also check your driving record, and it will turn you down if you have an excessive number of tickets or accidents.

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Does Credit Denial Affect a Credit Score?

You are never guaranteed credit approval, even through pre-approved credit card applications may come in the mail. Such offers simply mean you matching pre-screening criteria, but you can still be turned down if the creditor discovers negative information while processing your request. Credit denial does not generate an entry on your credit reports, but your credit application does show up. Applications affect your score regardless of whether you are approved or denied.

Inquiries

Credit applications generate inquiries to the credit bureaus. Equifax, Experian and TransUnion all maintain records of your current and previous accounts, payment records, credit limits, credit-related court proceedings and other pertinent data. Lenders review this information when evaluating your application, and their request to see it is also added to your file. Such entries are called inquiries and are seen by future lenders for up to two years, although the entries do indication whether the application was ultimately approved or rejected. If you got the new account, that shows up as its own entry on your reports.

Effects

Inquiries are negative items in terms of your credit score, whether or not your application was successful, especially if your score is already borderline. A single credit application reduces your score by a maximum of five points, which may not hurt you if your credit is otherwise excellent, but this drop can put you in sub-prime territory if you were already close. Additional applications bring your score down even more, particularly if you exceed six applications within a short time. This activity warns lenders that you are statistically eight times more likely to file bankruptcy, whether or not the applications were successful.

Considerations

Several credit applications generated within a two-week period while rate shopping do not count as multiple inquiries, according to MyFICO. For example, you might apply with several banks and finance companies while searching for the best car loan interest rate or might work with several firms while comparing mortgage terms. All related activity counts as a single inquiry when your score is determined. This policy is the same whether one of your applications is eventually approved or when all of the lenders deny your loan.

Soft Inquiries

Not all requests to see your credit reports result in a viewable entry. You may wish to get copies for yourself prior to applying for a loan or credit card to see if your records list anything that would cause a likely denial. You can buy your reports or get free copies once each 12 months from AnnualCreditReport.com, as allowed by federal law. This request is a "soft inquiry," meaning that lenders do not see it and it causes no credit score effect. The same is true of inquiries from companies seeking to send you promotional offers who view your information for pre-screening purposes.

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Bankruptcy & Credit Rating

Consumers are typically told to avoid bankruptcy --- it is the worst thing to appear on a credit report. However, the impact bankruptcy has on a credit profile typically depends on where you started off from and any other negative data in your credit history, such as late payments. In some cases, bankruptcy can help improve a credit score.

Identification

A bankruptcy hurts the most when you enter into your case with an excellent score --- higher than 760. In a 2010 study of its own data, the Fair Isaac Corporation discovered that a score of 780 could drop as low as 540 after bankruptcy, putting the consumer the worst category of borrowers. A consumer with a 680 would probably bump down to no less than 550 and possibly as far as 530.

Possible Improvement

Bankruptcy could slightly improve your credit score, according to SmartMoney. You can wipe out most unsecured debts in a Chapter 7 case, and even in Chapter 13 accounts will change to "included in Chapter 13" and eliminate any previous written down debt and missed payments. This usually only helps your score if it is already extremely low, such as in the 500s or low 600s.

Time Frame

The credit bureaus can only legally report a Chapter 13 bankruptcy for seven years and a Chapter 7 for 10. Before the bankruptcy even falls off your credit report, lenders might be more willing to take a chance on you than before you declared bankruptcy. This often happens, because post-bankruptcy finances are usually in much better shape, and you cannot declare bankruptcy again for several years. Thus, unsecured creditors do not need to fear the debtor discharging the debt in bankruptcy.

Tip

Once you complete your bankruptcy proceeding you should begin building credit right away, and you can probably almost completely recover in a few years. Start by taking out a secured card. The lender gives a line backed by whatever collateral you provide, so creditors rarely reject applications for this kind of account. You could cosign on a loan --- building credit for both of you --- if a person agrees to let you become a joint account holder.

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Importance of Establishing Good Credit in College

College graduates often think about buying a home after they leave college and begin to work full time. When you apply for a mortgage, a car loan, credit card or even for insurance, the company reviewing your application checks your credit report. Building a good credit score while in college enables you to borrow the money needed to buy a home or new car after you leave college.

Obtaining Credit

Traditionally, college students started to build credit by taking out student credit cards. However, federal laws that took effect in 2010, mean that people under the age of 21 can only obtain credit cards if they have sufficient income to cover the payments or if a parent or guardian agrees to co-sign on the application. Previously, students under the age of 21 could obtain cards without a co-signer or a verifiable income source.

Credit Reporting

When you obtain a credit card, the card issuer makes monthly reports to the major credit bureaus about your account activity. Your credit score consists of a credit rating by which credit bureaus grade your credit management. To receive the highest scores you must ensure you make your payments on time, and keep car balances low. If you use all of your available credit, credit bureaus assume you are having financial difficulties and your score suffers as a consequence of this.

Co-Signers

When you establish a credit account jointly with a co-signer, both of you are equally responsible for the debt. Therefore, even if you relied on your parent's income to obtain the card, card issuers score card activity in the same way as scores are formulated for people who obtained credit without needing a co-signer. Your average length of account history has a big impact on your score. Consequently, by establishing credit early you receive high scores for having long-held accounts by the time you leave college.

After College

You normally need a credit score of at least 620 to qualify for a home mortgage, but to get the best rates you usually need a score in excess of 660. Having no score and having a poor score amount to the same thing when you are applying for a mortgage. You cannot rely on a co-signer to help you obtain a mortgage because lenders require both co-signers to have acceptable credit scores. To set up cable television and other subscription services you normally need to have good credit. If you have no credit score when you leave college, you cannot set up some of the services and subscriptions that many people take for granted.

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How to Raise a FICO Score Quickly

A FICO score, also known as a credit score, is a three-digit number that rates individuals on their "creditworthiness," or the likelihood they will repay their debts. Lenders such as banks, credit card companies and mortgage companies use this score to decide whether to extend credit. This score, which ranges from 300 (very poor) to 850 (perfect), factors in items such as bill payment history, outstanding collection accounts, recent credit applications and total length of credit history. You can raise your FICO score in less than a year by following a few steps.

Instructions

1

Download a free credit report from AnnualCreditReport.com. Make sure to obtain a report from each of the three major credit bureaus, TransUnion, Equifax and Experian.

2

Go to the MyFICO website to obtain your FICO score. In 2010, obtaining a report cost $15.95, or you could obtain one for free along with a trial offer of Score Watch. If you don't cancel within 10 days, you will be billed $12.95 monthly.

3

Contact the three major credit bureaus to dispute inaccurate items on your credit report (if any). False collection accounts, charge-offs and judgments will significantly reduce your credit score.

4

Pay off late bills. According to MyFICO, late bills drag down your credit score significantly. Pay your latest bills first, as these will likely have the largest effect on your credit score.

5

Pay off collection accounts. These accounts, also known as "charged-off accounts" or "bad debt," show lenders you have forgotten your debt obligations in the past. While these items won't drop off your credit report after you pay, creditors will report the status of the accounts as "paid," raising your credit score slightly.

6

Pay down your revolving debt, such as credit cards and home equity loans. Carrying a high balance on your revolving lines of credit dings your FICO score. According to MyFICO, borrowers should keep their debts to 30 percent or less of their available credit.

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Does Transferring Balances Affect My Credit Score?

A balance transfer, sending a balance on one credit card to another account, could be the best thing for driving down your credit card debt balance, but it might cost you more in the long run by potentially lowering your credit score. The act of the transfer itself does absolutely no harm to a credit score, but it can affect your credit utilization ratio or make you miss payments.

Identification

The credit score algorithm used by the national credit reporting agencies does not acknowledge a balance transfer. However, the FICO score formula considers your overall credit utilization -- total credit card debt divided by your limit across all cards -- and the credit utilization on each card. If you transfer all your balances to one card, you might have a very high credit utilization ratio on that account. Maxing out a credit card might cost you up to 45 points on your credit score, according to Bankrate.

Opening a New Account

Many people transfer balances when they receive an offer for a new credit card offering to charge zero percent interest. The application for a new credit card initiates an inquiry into your credit report that costs a couple of points on your credit score. Opening a new account lowers your average account age, which accounts for 15 percent of your total credit score.

How It Might Help

If transferring balances to a credit card with a very low annual percent yield -- some cards charge nothing but the minimum for the first six to 18 months -- helps you to eliminate your credit card debt, it ultimately helps your credit score by bringing your credit utilization to zero. By paying off credit card bills, you also lower your total debt burden, which makes you more attractive to future lenders.

Considerations

The balance transfer might take a few weeks to process. In that time you must pay at least the minimum on the original account. If you miss a payment, the original account will show a 30-day late payment, or more if you miss payments for several months. A single 30-day late payment takes at least 60 points off the average credit score.

Tip

Call your credit card company to see if it will match the interest rate offered by another card. Lowering the interest rate on the current card saves you from a hard inquiry it takes to get a new credit card and lowers your score a few points. Also, factor in whether you can pay off the transferred balance. Zero-percent transfers may sound enticing, but it is better in the long run if you can get a credit card with a very low fixed rate -- somewhere below 10 percent -- when you have credit debt that might takes years to pay off.

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Legal Ways to Raise Your Credit Score

Your credit score is based upon information contained within your credit report. According to FICO, five specific criteria factor into your credit score. Once you learn what those factors are, you can focus on improving your credit in these specific areas and legally raise your credit score.

Payment History

Your payment history accounts for 35 percent of your FICO score. Late payments, repossession, judgments, bankruptcy and foreclosure will all lower your score. According to MyFico, making on-time payments each month on all of your credit accounts will help increase your score over time.

Debt Load

Another 30 percent of your FICO score measures how much debt you have. FICO calculates your credit utilization ratio, which is the difference between how much credit you have and how much of that credit is used. The more available credit you have, the higher the ratio and the higher your credit score. Your score also looks at how much installment debt you have. As you pay down your overall debt load, your score improves.

History Length

The length of your credit history is 15 percent of your FICO score. The longer your credit history, the higher your credit score. Also, closing an account affects your credit utilization ratio since you decrease the amount of available credit. If that account still has a balance, it may cause a drop in your score since you have less credit but still the same amount of debt.

New Credit

Ten percent of your FICO score is how much new credit you have on your credit report. Although FICO rewards new credit, if you open a lot of new credit accounts at one time, FICO considers that risky behavior and it could lower your score instead. Also, each new account you open decreases the overall length of your credit history, which may lower your score. According to MyFico, you should only open new accounts when needed.

Types of Credit

The final 10 percent of your score reflects the mix of credit found on your report. FICO likes to see a variety of credit, such as a mortgage, car loan, credit cards and lines of credit. However, you should not open additional credit lines just to have a better credit mix since this could do more harm than good to your credit score, according to MyFico.

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When Do Credit Bureaus Update?

Consumer information on credit reports is often misunderstood. Consumers each year are allowed to review a free copy of their report. Understanding the complicated numbers, trade lines and symbols on the reports can be challenging. Similarly, consumers should know when and how debts and accounts are listed on their reports. Understanding when credit bureaus update accounts can be helpful.

Time Frame

Credit bureaus are required to update information on a consumer's report as soon as they receive it. It is the responsibility of each individual creditor to send updated account information to the three credit bureaus in a timely fashion. In most cases, creditors send all updates to their accounts by the last day of the month.

Reasons

The federal FACT Act of 2003 mandates stricter reporting requirements for all three major credit bureaus--TransUnion, Experian and Equifax. In addition to other new laws regarding consumer access to credit reports, the FACT Act requires that the most updated information be posted to credit bureaus so consumers have an accurate and current picture of their financial health as soon as it's available.

Availability

Another provision in the FACT Act gives greater access to credit reports for consumers. The law mandates that each citizen can receive one free copy of his credit report each year. Consumers can check the most recent updates at the end of each month. Missing updates and reports on bureaus should be investigated at the creditor level, not the credit-bureau level.

Application

Consistent and immediate updates required by the FACT Act help increase consumer protection. Formerly, it was immensely difficult for consumers to verify accounts, check for fraudulent activity and dispute charges. Some consumers experienced severe economic hardships due to judgments and covert collection activity on their reports. With constant updates and freer access to reports, the FACT Act gives consumers a stronger grip on their finances.

Warning

With legislation granting greater access to credit bureaus, some companies have cashed in. Several online sites promise free looks at credit reports only to disguise fees and monthly charges in the application. A government-established site, AnnualCreditReport.com, provides completely free credit reports.

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What Is an Open Account on a Credit Report?

Credit reports offer a great deal of other information besides your credit score. Among the categories of information provided are "open accounts" and "closed accounts." An open account is an active loan of some sort that you are currently making payments on. A closed account is a loan that is no longer active --- i.e., it was paid off, settled or is in collections.

Typical Open Accounts

Many people have half a dozen or more open accounts on their credit report, including a mortgage, car loan, personal loan, credit cards, gas company cards, retailer cards and so forth. Note that credit cards are always open accounts even if your balance is zero. (You can, of course, close an open credit card account by contacting the provider.)

Closed Accounts

Closed accounts can be either paid-off personal loans, car loans, mortgages and the like or they can be accounts closed due to delinquency or at the consumer's request. Only accounts closed due to delinquency have a negative effect on your credit. For reporting purposes, credit bureaus generally divide both open and closed accounts into five categories: real estate, installment, revolving, collection and other.

Delinquent Accounts

Delinquent accounts on your credit report are accounts in which payment is currently past due. It is possible to have accounts that are just slightly late and thus delinquent, but have not yet reached the status of derogatory.

Derogatory Accounts

Derogatory accounts on your credit report are accounts that are having a negative impact on your credit score. While the credit bureaus do not release their specific policies, it is usually assumed an account more than 60 days late can become a derogatory account, and any two or more accounts 30 days late can also have a negative effect on your credit score.

Effect of Open vs. Closed Accounts

This is somewhat of a gray area, as the credit bureaus do not release exact information about how they calculate credit scores. The general rule is that it does not hurt your credit score to have numerous open accounts with no balances due, and it can even be a positive in terms of credit history length. But keep in mind that you are paying annual fees in most cases, so you probably want to close any open accounts that you are not currently using and that you have not significantly used in the past. There may be no benefit in keeping them open.

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Account Closings & Credit Scores

Closing credit accounts may make sense if you struggle with spending discipline, but closing an account that supports your credit history and debt utilization ratio can have a negative impact on your credit score. Consider the pros and cons of closing the account relative to your own financial habits before closing an account.

Credit Score Basics

Your FICO credit score is based on the Fair Isaac Corp. scoring model that serves as the basis for modified rating systems used by three major credit reporting bureaus -- Equifax, Experian and TransUnion. Each company issues a credit score based on your credit history and related scoring factors. Lenders then use your score when making decisions on new loan applications and establishment of rates and terms.

Credit History

The FICO scoring model uses a number of specific items, but they generally fall into five categories, according to the MyFICO website. Payment history and length of credit history combine for about 50 percent of your total score. If you have a strong history of on-time payments and a length credit history with a particular creditor or card account, closing that account removes that history from your score. It also prevents a potential lender from seeing that account history on your score report. Too many new accounts and fewer long-term accounts can also negatively impact your score.

Debt Utilization

An additional 30 percent of your FICO score calculation is derived from factors that MyFICO labels "amounts owed." This category compares your debt usage to available debt. Lenders want to know how much of your available debt is currently in use. If you have $20,000 in available credit and $5,000 is in use, your debt utilization ratio is 25 percent. A low debt utilization generally shows that you are not overwhelmed by current debt when you make a new loan application.

Your Decision

Again, you need to compare the credit score implications against your spending habits and goals when considering closing an account. If you have a credit card account with only six months of history, a low limit and limited use, the affect on your credit score is minimal. If you have a five-year history on a card with a high limit and significant usage over time, you might consult with your financial adviser before closing the account.

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How to Build Credit After a Foreclosure

Losing your home to foreclosure is devastating, and you can expect your credit score to decrease. It's difficult to obtain new lines of credit after a foreclosure. And even if you're approved for another home loan, the lender will likely charge a high rate, which amounts to a higher mortgage payment. However, the effects of a foreclosure don't last forever. There are ways to build credit after a foreclosure and re-establish a good credit rating.

Instructions

1

Request your credit score and credit report from Annualcreditreport.com. This will allow you to assess the damage to your credit rating.

2

Apply for a secured credit card. Secured credit cards require a security deposit, and they're designed to help people with bad credit and no credit history develop a good credit rating. Contact your bank or another credit card company and apply for a card.

3

Pay your creditors. Late and skipped payments reduce your credit score. To build credit after a foreclosure, resolve to pay your creditors on time. If possible, submit payments days or weeks before the due date, or sign up for automatic bill payment to ensure timely payments.

4

Maintain low balances. Maxing out credit accounts and carrying high balances reduces your credit score. If you want to rebuild credit after a foreclosure, pay off or lower your existing credit card balances. This adds points to your credit score.

5

Use a co-signer. Applying for a small bank loan or financing an automobile can help you build credit after a foreclosure. Ask someone with a good credit history to co-sign the loan. This increases your approval odds, and the lender may offer a lower interest rate.

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Does Owning a Home Improve a Credit Score?

Creditors look at a number of factors, including your credit score, when assessing your eligibility for a loan or line of credit. One way to improve your credit score is to purchase a home and make timely mortgage payments.

Benefits

If you own a home, potential creditors will view you as less of a risk. Home ownership is a sign of stability, and you often need a favorable credit score to obtain a mortgage loan.

Considerations

Factors that will influence your credit score include how long you have been in your home and how large your mortgage is in relation to your household income and other debts. Generally, the longer you have been in your home, the higher your credit score will be.

Warning

Just because you own a home, it doesn't guarantee that your credit score will be acceptable to other potential lenders. If you have a history of late mortgage payments or are in foreclosure, your credit score will suffer, making it more difficult for you to obtain additional credit.

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How Much Will Foreclosure Lower Your Credit Score?

One of the most damaging events that can effect a person's credit score is the foreclosure of a property in his name. Most mortgages take the form of secured loans, in which the property the loan was used to purchase act as collateral. If the borrower misses too many payments on the loan, the lender may choose to seize the house in an action known as foreclosure. This will harm a person's credit score greatly, although by how much depends on several factors.

Before Foreclosure

The damage done to a person's credit score will actually begin before a property is foreclosed upon. This is because foreclosure is caused by a failure to pay back a loan on time. When a payment is late, the creditor reports this missed payment to a credit reporting bureau, which docks the debtor a number of points. The exact number of points depends on the size of the debt and how late the payment is.

Points

When a home is foreclosed upon, the lender essentially writes off a portion of a very large debt. This write-off is listed on an individual's credit report as a foreclosure. The exact damage done to a person's score by this foreclosure will depend on a number of factors, including the rest of the individual's credit history and the size of the home loan. However, according to the reference website Mortgage Fit, most scores will drop about 250 points.

Time Frame

The 250-point drop in an individual's credit score will occur immediately after the foreclosure has been listed on the person's report. However, this drop will not be permanent. According to federal law, a foreclosure can only be listed on a credit report for a maximum of seven years, after which is must be taken off and can no longer affect the person's score. In addition, a person's score will improve the more time has elapsed since the foreclosure, so long as he takes out new credit and pays back his loans on time.

Deliquencies

In some states, when a property is foreclosed upon, the debtor is no longer required to pay the creditor any additional money. However, in other states, the debtor may be liable for any costs incurred by the lender in selling the house, as well as the difference in the amount owed on the loan and the amount fetched for the house at auction. This "delinquency" debt, if not paid, can harm the person's credit score even more.

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Does Breaking a Lease Hurt Your Credit Score?

Credit scores have a range of 300 up to 850. According to the Fair Isaac Co., which developed the scoring rubric, the higher your score, the better your credit. A higher score helps you qualify for lower interest rates, more favorable loan terms and certain jobs. Breaking a lease may impact your credit score now and for years to come.

Significance

Your payment history can have a huge affect on your credit. It accounts for 35 percent of your FICO score and is the largest component in the calculation of that score. Rental payments are not generally reported to credit bureaus. When you break a lease, however, the management company or landlord may report that account if you have an unpaid balance. Delinquent accounts on your credit report lower your credit score. How much the score drops varies depending upon the other items present on the report.

Consequences

A past-due debt on your credit report is considered a negative item. The Fair Credit Reporting Act gives credit bureaus the right to include negative items on your report for up to seven years. Future lenders that pull your report will see the derogatory account and it may impact the lenders decision to extend credit to you. If you later pay the lease debt, your report shows that the debt has been paid but payment does not remove the account from the report.

Considerations

Management companies and landlords aren't generally in the business of collecting past due bills. Often collection agencies are hired to pursue the debtor for payment. The reasons to avoid the account going into collection are many. Collection agencies can place a collection account on your credit report. This will further damage your credit and these accounts can also remain on your report for up to seven years. Payment of a collection account does not remove it from your report either.

Warning

A collection agency views your credit report to ascertain information about you that assists them in collecting the debt, including discovering any assets that you may own. The agency may decide to sue you in civil court and obtain a judgment. A judgment allows the agency to place a lien on your property, seize money in your account and garnish your wages, depending upon the laws in your state. A judgment is a public record and displays as such on your credit report. By law, it can also stay on the report for up to seven years and, according to FICO, public records have an adverse affect on your credit score.

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How to Remove Bad Credit History

Removing bad debt from your credit report can improve your credit score and make it easier for you to qualify for credit cards, auto loans and mortgages. Your options are limited, however. Some creditors might agree to delete bad credit information in exchange for you paying an old bill in full, a process called "pay for delete." Other than that, your options are to demand information be removed if it is inaccurate, or wait for it to become outdated. That usually takes seven years for most bad credit information and 10 years for bankruptcy.

Instructions

1

Get a free copy of your credit report from the Annual Credit Report website. The three nationwide credit bureaus operate the site to provide free credit reports as required by the Fair Credit Reporting Act. Follow the directions on the website to order by mail or telephone.

2

Review your report to find the bad credit history. Look for old debts you still owe, such as charge-offs and collection accounts. A charge-off is an account that was closed after you failed to make payments as agreed. A collection account is one that was charged-off and sold to a debt collector.

3

Contact the creditors or collectors of your bad debt. Offer to pay it in full in exchange for the bad credit history being removed from your report. They can direct the credit bureaus to remove the information after receiving your payment. However, pay-for-delete agreements are generally hard to come by because many creditors believe they compromise the reporting system.

4

Review your report to find bad credit history that is outdated. According to federal law, negative information that is outdated must be removed by the credit bureau once it has been notified. Charge-offs, collections and late payments all expire after seven years. Get the credit bureau's address off of its website, then write a letter challenging outdated information and insisting it be removed. Wait 30 days for a response. If one doesn't come, contact them again.

5

Search your report for any bad credit information that is incorrect. Again, have this information removed by sending a letter to the credit bureau. In your letter, state why the information is wrong.

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Secured Vs. Unsecured Debt for a FICO Score

Your FICO credit score is a three-digit number between 300 and 850 distributed by Fair Isaac Corp. It helps your creditors determine the risk involved in lending to you. Generally, the higher your credit score is, the better your chances are of obtaining credit at favorable interest rates. Several factors affect your credit score, including the amount of secured and unsecured debts you hold.

Secured vs. Unsecured

A secured debt is a loan or line of credit with an asset or cash available to the lender as collateral. Secured debts represent lower risk to the lender, as a default on a secured loan means repossession and sale of the collateral used to secure the debt. Examples of secured debt include most installment loans, auto loans, mortgages and secured credit cards. Unsecured debt, on the other hand, indicates trust on behalf of the lender that as the borrower, you will repay your debts. There is no asset or collateral used to secure the debt, but instead you receive a line of credit with a cap on the amount of money you may borrow, known as a credit limit.

FICO Score Calculation

While your credit report contains information about both your unsecured and secured debts, Fair Isaac Corp. places more emphasis on your payment history and the amount of debt you owe than the types of debts you owe. The amount you owe and your credit history make up 65 percent of your total credit score, where as the type of credit you have accounts for much less of the calculation at just 10 percent. According to MyFICO.com, you should maintain both secured and unsecured debts and avoid opening too many accounts.

Improving Your Score

To improve your credit score, pay down your credit cards, but do not close the accounts. Try to keep your balances below 35 percent of your available credit at all times. Your FICO score will suffer from an over-extended use of credit. Regarding your secured debts and installment loans, it makes less of an impact to your FICO score if pay them off early than it does if you simply make your payments on time. If you want to boost your score quickly, use extra money to pay down unsecured debts instead.

Considerations

While FICO scores remain the leading scoring model for lenders who want to analyze the risk associated with potential borrowers, there is a rising interest in other factors your FICO score doesn't measure. Several new scoring models are emerging that rate your credit history, as well as habits in your checking and savings account usage, employment history and property value. While FICO provides plenty of information about its FICO score calculation formula, many newer scoring models are more secretive.

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What Happens When You Deny Items on Your Credit Report?

TransUnion, Experian and Equifax are national credit bureaus that collect data on consumer credit accounts from banks, loan companies and similar firms. The three bureaus list and sell these data in credit reports, which lenders use to evaluate credit applications and the potential risk of opening new credit accounts. Although the credit bureaus initially compile credit reports without consumer input, consumers do have the right to challenge the items listed in their reports.

Reviewing Credit Reports

Federal law gives consumers the right to review each of their credit reports once a year at no cost. The Federal Trade Commission (FTC) explains that these free annual reports are available through AnnualCreditReport.com (see Resources), which allows online and telephone orders. Each bureau must provide its own annual report, because their information sometimes differs. Mistakes may appear on multiple reports, or just one.

Types of Errors

Dayana Yochim of the Motley Fool money management site warns that payment dates on credit reports are often wrong, which can make on-time transactions look delinquent, or late payments look worse than they really are. Also, banks sometimes report incorrect account balances and credit limits, which can harm your credit rating if the ratio between owed amounts and available credit reduces your score. Some items listed on a credit report may belong to a different person entirely.

Process

To deny credit report items, you must contact each credit bureau that is reporting incorrect information. The FTC recommends sending each bureau a registered letter that lists the disputed entries, and the reasons for your denial of those entries. You should attach copies of canceled checks, money order receipts, credit card and loan statements, and any other paperwork that supports your claim that the items in question are incorrect. The bureaus have postal addresses on their websites.

Results

The FTC explains that the credit bureaus must investigate denials within a reasonable time, which is usually 30 days. The bureaus generally send responses within 45 days, after trying to confirm the disputed data with the original creditor. If the creditor does not confirm the data within the legal time frame, the credit bureau will erase the disputed item from your credit report. When this happens, the bureau will send you an updated credit reports that includes the correction.

Considerations

Creditors sometimes disagree with consumer denials, and will verify the data with the credit bureau. The data will remain on the credit report if it is validated to the bureau's satisfaction. However, consumers can still make their denials an official part of their records by providing an explanatory statement of up to 100 words to TransUnion, Experian and Equifax. Each bureau must add the statement to the consumer's credit report, and provide it whenever lenders request a copy of the report.

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What Is the Fastest Way to Increase My Credit Score by 50 to 100 Points?

Any time you want to borrow money from a legitimate lender, the lender will check your credit score. A credit score is a three-digit number that credit bureaus use to summarize your credit history from the last seven years. If you're looking to take out a mortgage, an extra 50 to 100 points on your credit score can save you a fortune in interest payments. If you're careful, you can raise your score in one or two months.

Instructions

1

Request free copies of your credit report from Experian, Equifax and TransUnion, the three major credit bureaus (see Resource section).

2

Check the reports for errors. The quickest and easiest way to raise your credit score is to find mistakes. A small error can cost you hundreds of points. If you do find an error, contact the credit bureau as soon as possible. The bureau will investigate and get back to you within 30 days.

3

Pay off some of your debt. You can raise your credit score by decreasing your debt-to-credit ratio. Lenders are wary of borrowers who max out their lines of credit.

4

Continue making all your monthly payments on time. The easiest way to ruin your credit score is to skip a couple of payments. Late payments are almost as bad. Not only will they ruin your credit score, but you will have to pay a late fee.

5

Keep your oldest credit cards. It'll help you establish a long-term credit history.

6

Limit the number of new applications for credit. Every time you make a new application, the lender will run a credit check. Credit checks are recorded on your credit history. Several checks in a short time makes you look desperate for credit and will hurt your score.

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What Is the Quickest Way to Improve My Credit Score?

Improving your credit habits can improve your personal credit score. Good credit includes a Fair Isaac Corporation score 700 and higher. It can take weeks or months for credit scores to reflect changes, however. If looking for a fast way to improve your credit score in order to qualify for a credit card or loan, consider rapid re-scoring and improve your score in about 72 hours, says Bankrate's Pat Curry.

Get Your Credit Report

Order your personal credit report from Annual Credit Report. Improving your credit score fast entails knowing the contents of your credit report, and making necessary changes to the file to fix a low score. Factors that influence credit scoring include payment history, high debts and derogatory remarks such as bankruptcy, liens and collection accounts. Having this information on your report will reduce your score and make it harder to qualify for financing. Review your report carefully and look for errors or items that you can quickly improve.

Disputing Mistakes

Mistakes on your credit report can lower your personal credit score. Creditors may report erroneous information such as high account balances and late payments. Circle any discrepancies or errors on your credit report, and bring these to the attention of your creditors. Creditors have to look into any complaint, and update reports with accurate information.

Pay Down Debt

Look at your account balances on your credit report, and if you have the available funds, make a lump sum payment to pay off your credit cards or at least pay down the balance to below 30 percent of the credit limit. Paying down account balances is a fast way to add points to your credit score.

Contact Creditors

Once you've identified mistakes on your credit file or paid down your debt, contact prospective lenders to discuss rapid re-scoring. Lenders, in turn, contact a rapid re-scoring company, and this company works with your creditors to get your report quickly updated. Curry advises that the fee for immediate credit report updates is about $25 to $50. Updates generally occur within 72 hours or three days of a request. Removing serious errors or having your credit report reflect a much lower debt balance can quickly improve your credit score.

Other Methods to Improve Credit

Numerous other factors can play a role in improving credit score. For example, timely payments account for 35 percent of scoring, and paying bills on time every month can help you achieve a higher rating, says Myfico.com. What's more, diversifying credit and including various types of credit accounts help improve your score, as does limiting credit inquiries and only applying for credit when needed. MSN Money's Liz Weston recommends using credit cards regularly to keep accounts active. Creditors are more apt to update credit reports with positive information on active accounts.

Benefits of Rapid Re-Scoring

Rapid re-scoring is necessary when you need a quick credit score increase to qualify for some type of financing. For example, some mortgage lenders require a minimum credit score of 680 for a home loan approval, says BCS Alliance; and they may not approve your application until you've achieved this minimum requirement. Rapid re-scoring can give you the points you need within a few days.

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Does It Hurt Your Credit to Short Sell a House?

Short sales get you out of a bad situation by letting you sell your house for less than what you owe. Your mortgage is part of your credit bureau records, including your balance, entire payment history and ultimate pay-off. Short sales become part of your credit records and hurt your credit if you do not negotiate the way in which your mortgage holder reports the information to the credit bureaus.

Definition

A short sale is an agreement between you and your mortgage company to sell your home for less than the actual mortgage balance. Homeowners use this strategy to avoid foreclosure when they cannot afford their mortgage payments and their loan is "under water," meaning that the market value of the house is below the outstanding amount. Mortgage holders sometimes agree to a short sale in lieu of a foreclosure to spare themselves the expense of repossessing and selling the home.

Effects

Most people who go through a short sale already have damaged credit, since banks are often reluctant to agree to the transaction unless the loan is already delinquent. The late mortgage payments cause significant damage to a credit score, since timeliness of payments accounts for more than 1/3 of your credit score. The short sale shows up as a settled account rather than a paid-in-full loan because the mortgage holder forgives part of the outstanding amount in a short sale. Settlements hurt your credit score and look bad to creditors reviewing your credit reports, since they show you could not fulfill an outstanding financial obligation. The impact is nearly as bad as a foreclosure, according to Bankrate.com writer Leslie Geary.

Prevention

You can sometimes prevent the hurtful effects of a short sale on your credit by negotiating with your mortgage holder. The mortgage company decides how it will report the transaction to the Experian, TransUnion and Equifax credit bureaus. There is no negative impact if it reports your loan as paid in full rather than settled for less than the actual balance. Request favorable reporting as part of the short sale negotiations. The company is not obligated to honor this request, or even to approve your short sale, but you avoid a huge hit to your credit rating if you get this agreement.

Considerations

Damage to your credit from a short sale does not last forever. Geary advises that it has the greatest impact in the early months. You offset the bad effect every time you make an on-time payment on your remaining accounts. The short sale automatically disappears from your credit records in seven years, but its effect is usually minimal by that time if you reestablish your credit with other accounts.

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What Is a Really Good Credit Score?

According to the U.S. General Services Administration website, credit scores are calculated using a scoring range developed by the Fair Isaac Corporation in 1958. Credit scores are calculated in a range of 300 to 850.

Credit Scores

Credit scores are used to calculate the risk presented by an individual attempting to gain credit, such as a credit card or mortgage. A credit score is used by institutions such as banks and other lenders to gauge how likely an individual is to make payments on time.

Excellent Score

The Adjust Credit website reports an excellent credit score to be 800 or higher. Achieving an excellent credit score allows a consumer to benefit from the lowest possible interest rates and means it is extremely unlikely that an application for credit will be declined.

Very Good Score

Adjust Credit explains a very good credit score ranges from 700 to 799, which allows a consumer to gain access to both secured and unsecured lines of credit. About 27 percent of the U.S. population has credit scores in this range.

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How to Read a Credit Report Step-by-Step

The Fair Credit Reporting Act entitles you to three free credit reports every 12 months. You can order one report from each of the major credit bureaus: TransUnion, Equifax and Experian. The free reports are available from the Annual Credit Report website, which is managed by the credit bureaus and endorsed by the Federal Trade Commission. MSN Money reports that the credit reports may not all show the exact same information. For example, a creditor may report your payment history to just one credit bureau or to all three.

Instructions

1

Order your credit report from Annual Credit Report. The Federal Trade Commission reports that other sites may offer free reports, but they may also try to sell you a service. Annual Credit Report never charges a fee for the free reports you're entitled to by law.

2

Read the report, which will be divided into four sections: identifying information, credit history, public records and inquiries.

3

Check the identifying information for accuracy. The information listed here typically includes your name, current and previous addresses, your date of birth, driver's license number, your employer's name and your spouse's name. MSN Money reports that you shouldn't worry about minor errors such as misspellings in your name. However, you should contact the credit bureau if someone else's name and address is listed on your report. Report this type of error by writing a letter to the credit bureau at its address listed on the credit report.

4

Review the second section containing your credit history. Your individual credit accounts are listed and may be referred to as "trade lines." This section offers a variety of information, including the type of credit --- such as a credit card or mortgage --- the total amount of the loan, the highest credit limit you've had on the account, the monthly payment and the current status of the account. The credit report shows whether the account is open or closed or if it's been charged off and sent to a collection agency. There's also information describing how well you've paid the debt, including the number of times you've paid late.

5

Read the public records section for information on court-related actions reported about your credit, such as bankruptcies, judgments and tax liens.

6

Check the final section on inquiries for a list of creditors who have viewed your report. So-called "hard" inquiries are made by creditors who pulled your report after you applied for credit. "Soft" inquiries are made by current creditors who regularly monitor your credit or by other creditors gathering names and addresses for promotional mailings.

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