How Much Will Paying Collections on My Credit Report Raise My Credit Score?

The information creditors report about you to the credit bureaus determines your credit score. Responsible financial behavior benefits you by giving you a high credit score. Individuals with high credit scores qualify for the best interest rates. Trade lines on your credit report from collection agencies serve as evidence of unpaid debt and lower your credit score. Unfortunately, paying these debts only improves your credit under certain circumstances.

Collections

In most cases, paying off outstanding debt improves your credit score. Collection accounts are the exception to this rule. Credit scoring models view collections on your credit report negatively regardless of whether you did the responsible thing and paid the debt. The very fact that you neglected a debt long enough for your creditor to send it to a collection agency counts against you. Paying the account does not help your score.

Payment Benefits

Like any other creditor, collection agencies are bound by the Fair Credit Reporting Act to provide only accurate records to the credit bureaus. Thus, when you pay the debt in full the company must note that fact on your credit report. Even though the very fact that a collection trade line is present on your credit report hurts your score, lenders can see that you made an effort to pay off the debt and will take that into consideration when evaluating whether or not your damaged credit makes you a lending risk.

Deletion

The only way that paying a collection will improve your credit score is if the company contacts the credit bureau and deletes its trade line from your report after receiving your payment. Not all collection agencies are willing to remove their trade lines after receiving payment, but each company's policy on deletions differ so it never hurts to ask. If the company agrees to a deletion in exchange for your payment, ask for the agreement in writing before paying the debt. Once the collection disappears from your credit history, your credit score will improve.

Considerations

Collections on your credit report do the most damage when they are recent. Your credit score places less emphasis on older items because they do not reflect your current financial behavior as accurately as more recent entries. Paying an old collection does not update its status -- making it appear as recent activity on your credit report and lowering your credit score. Regardless of whether you pay the collection or leave it alone, federal law mandates that the credit bureaus delete the trade line after seven years. Once the collection disappears from your credit record, your credit score will improve.

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Good Credit Financial Solutions

Many people strive for a good credit score. However, building and maintaining a good credit rating requires constant work; a few bad decisions can cause a drop in your credit score. Solutions are available to help you acquire a better credit rating, and making good financial decisions is key to increasing your score.

Cash vs. Credit

The ability to just swipe a credit card allows you to buy anything when you're short on cash. But owing several thousands of dollars in credit or maxing out your credit cards will lower your credit rating. What's more, lenders take your debt balances into account when approving applications for mortgages and auto loans. Owing an excessive amount can result in a loan rejection or a higher interest rate. Using cash instead of credit is key to getting out from under debt. In addition, sending higher payments each month and negotiating better rates with your creditors helps pay down debt faster.

Timely Payments

Missing your monthly payments or constantly sending in late payments is a surefire way to bring down your credit score. Poor budgeting or money management may contribute to bad payment habits -- you can't pay with money you don't have. On the other hand, creating a personal budget and allotting a certain amount for recurring expenses, entertainment and recreation each month -- and staying within your budget -- can provide enough cash to pay your creditors on time. If you plan on buying a home or financing anything in the near future, now's the time to practice good credit habits to build your score.

Credit Applications

Preapproved credit card offers may fill your mailbox, and sales people may persuade you to complete an application for store credit to save on your purchases. Applying for credit may seem like harmless fun, but it's quite the contrary -- every time a creditor checks your credit report, you lose points off your credit score. Apply for credit only when you "need" to. And spread out credit applications to avoid damaging your score.

Credit Protection

Credit card fraud and identity theft can severely damage your credit rating. Therefore, the sooner you recognize problems with your credit, the sooner your can repair the damage and build your score. To protect your credit score and credit file, self monitor your file by ordering a copy of your credit report each year from Annual Credit Report, or sign up for a credit-report monitoring service.

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What Is an R9 Credit Rating?

Creditors use different reporting codes to report the status of a debt to the credit bureaus which then insert that code into your credit report. An R9 indicates that a debt has been charged off due to non-payment.

Significance

An R9 is considered to be a derogatory notation and will result in a lower credit score.

Time Frame

Most creditors will assign a delinquent account an R9 status and charge it off after 180 days pass without any payment being made on the debt. The account will continue to report as a charge-off for another seven years. After this time frame the R9 account will be removed from your credit file.

Considerations

Paying the defaulted debt after it has been charged off will not alter the debt's R9 status. A paid-off R9 account does, however, look better to future lenders than one that is left unpaid.

Effects

You can be sued for a debt that has been charged off. Should your creditor win the lawsuit, a judgment will then appear on your credit report. A judgment is also a derogatory entry and will damage your credit score further.

Options

If the charged-off debt does not belong to you, you have the legal right to dispute the appearance of the R9 account on your credit report with each credit bureau that is reporting it.

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How to Repair Your Ugly Credit

A high credit score helps make you eligible for mortgages and auto loans, and you'll qualify for better rates on credit cards. Being irresponsible with the credit you have can result in a poor credit score, but it is possible to fix an ugly credit history and receive a credit score in the 700s or higher.

Instructions

1

Lower your credit card balances. Debt balances account for 30 percent of your credit score, according to MyFico.com. Pay down or eliminate credit card debt to help boost your FICO score. Use extra money to pay down your debts, making higher payments each month until the balance disappears.

2

Avoid a bad payment history. A late or missed payment may not seem like a serious matter, but even one late or skipped payment drops your credit score. Diligently pay bills such as credit cards and auto loans before or on the due date to avoid additional charges and a bad credit rating.

3

Report mistakes to the credit bureaus. Ignoring or being unaware of credit report mistakes can lead to an unwanted surprise when you apply for credit. Once or twice a year, order your credit report from annualcreditreport.com and review the document for mistakes.

4

Decline credit card offers. Credit card companies constantly send preapproval offers in the mail, and retail stores routinely ask customers to complete a credit application. Excessive credit inquiries reduce your credit score. Only apply for credit when necessary.

5

Face old debts. Collections and judgments will not immediately disappear. Rather, they remain on your credit file for at least seven years. Get in contact with these old creditors and negotiate a complete payoff or debt settlement. Speak with an account supervisor and ask that the creditor delete the negative item from your credit report upon receipt of payment. If the company complies with your request, ask them to put the agreement in writing.

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Triple Credit Reporting

There are three credit bureaus in the U.S.: Experian, TransUnion and Equifax. These companies keep credit history records on millions of Americans. They compile reports lenders use to evaluate potential borrowers.

Triple Reporting

When a company decides to report on a customer's credit behavior, it can report to any or all of the three bureaus. Because of this, for a consumer to accurately monitor his credit report, he must obtain the credit report from all three credit bureaus.

Obtaining Credit Reports

Each of the three credit bureaus offers copies of a consumer's credit report for a fee. These are available for a one-time fee of $12 to $15 for each bureau.

Monitoring Services

There are also subscription services that allow access to all three bureau's credit reports. These usually cost around $30 a month. These subscriptions are usually offered at a cheap or free introductory rate, then automatically rebill at the normal rate after the trial is finished.

Free Credit Reports

Consumers can get a free credit report within 60 days if they were denied credit due to information on their credit report from one of the bureaus. Also, once a year consumers can get a copy of all three of their credit reports from AnnualCreditReport.com. AnnualCreditReport.com is the only authorized source for the free annual credit report by the Federal Trade Commission.

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Does Overdraft Protection Hurt Credit?

Overdraft protection is meant to cover the excess when you write a check for more than you have in your account, but overdraft protection can still damage your credit score. The effect of overdraft protection on your credit history depends on how you use it. A new overdraft account usually hurts your score, and you may not even need this service.

Identification

Most banks perform a hard credit check when you ask for overdraft protection. Hard credit checks take a few points off of your credit score. Also, banks often issue a credit card account as a line of credit as overdraft protection. This means that maxing out your overdraft limit can take even more points off of your credit score, because the FICO scoring system -- a risk model designed by the Fair Isaac Corporation and used by most lenders -- factors in the portion of your account limit you use.

Considerations

You must repay your overdraft protection account eventually. If you do not repay your overdraft line, the bank may send the account to a collection agency. Collection accounts do between 20 and 100 points of damage, according to David Ellis of CNN. Also, opening an overdraft account can affect the rest of your credit report. For instance, a new account lowers the average age of your existing accounts, which is worth 15 percent of your credit score.

Potential Damage

Even if overdraft protection does not affect your credit rating, it can still hurt your creditworthiness. Your current bank will look at your history when making future lending decisions. If you frequently go over your account balance, it may not offer new accounts or lines of credit.

Tip

In general, overdraft fees tend to be the most expensive way to cover negative account balances. Instead of overdraft protection, which costs about $40 per use, you can link checking and savings accounts together. Drawing money from linked accounts usually cost about $5 in 2011, according to the Federal Deposit Insurance Corporation. Ideally, you should review your account balance before each purchase either in lieu of overdraft protection or in conjunction with it.

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What Is Considered a Very Good FICA Score?

Having a solid credit history and therefore a good FICO credit score is often the key to getting a loan or home mortgage approved. Even when a lender approves you, you'll pay lower interest rates if you have a very good FICO score. There's no hard and fast rule that says a particular score is good (or bad), but there is a general consensus about what constitutes a good FICO score.

Identification

A FICO score is a number generated by processing the information on your credit history. The meaning of a FICO score is straightforward: it summarizes the risk lenders take if they extend someone credit. The name FICO refers to Fair, Isaac, & Co., the company that markets the scoring system. A FICO score can range from a low of 300 (bad) to 850 (a perfect score). All three major credit bureaus (Equifax, Experian and TransUnion) use the FICO scoring system.

Good Scores

The median FICO score in the United States is 723 (as of 2010) and is considered good. According to the Consumer Federation of America, "in the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health." Lenders reward consumers with really high scores (in the upper 700s) with the very best interest rates.

Lower Scores

When a FICO score falls below 700, lenders start to have greater concern about the risk that they won't get their money back. Scores ranging from 620 to 690 indicate greater risk and most lenders will charge higher interest rates to compensate. A FICO score below 620 is considered "subprime" (poor) and many lenders will decline to extend credit. Quite often someone with a subprime FICO score can only obtain financing at very high interest rates or by going through an agency like the Federal Housing Authority.

Features

The exact method used to compute a FICO score is kept secret by Fair, Isaac, & Co. However, the makeup of the score is public knowledge. Thirty-five percent is based on timely payment of bills and another 30 percent on a person's total debt compared to their income. Types of debt are weighted differently (a mortgage is viewed as being lower risk than a much lower amount of credit card debt, for example). The type of debt also counts another 10 percent, with excess unsecured debt being viewed as higher risk. Stability in a person's credit use is a factor. Ten percent is based on how often you apply for credit or close existing accounts. The last 15 percent is simply time: how long you have used credit responsibly.

Safeguard Your Credit

Once you've demonstrated you are a good enough credit risk to receive a very high FICO score, you want to protect it. Take advantage of your rights under the Fair Credit Reporting Act. You can request a free copy of your credit history each year from each major credit bureau. The FTC authorizes only one company (AnnualCreditReports.com) to provide these free reports. If you find incorrect information, you can file a dispute to have the information corrected or removed. All three credit bureaus have online tools to file a dispute. The FTC publishes consumer dispute guidelines online.

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Types of Credit Scores: Bankruptcy & Risk Scores

Your personal credit report consists of two parts: your credit history and your credit score. Your credit score tells lenders how likely you are to pay them back if they extend you credit. In addition to your credit score, many lenders use another, hidden score --- your bankruptcy risk score. This score tells lenders how likely you are to declare bankruptcy, which might cause them to have to write you off as a bad debt.

Bankruptcy Risk Score

Your bankruptcy risk score differs from your credit score. Lenders get this additional score when they run your credit report. Creditors use this score to determine their risk of loss if they extend credit to you. This score is based on your number of late payments and how you use credit. Unlike standard credit scores, bankruptcy risk scores go from low to high; the higher your score, the higher your risk.

Standard Credit Score

Your bankruptcy risk score complements your standard credit score. Standard credit scores range from 300 to 850; the higher your score is, the better your credit and the more likely lenders are to extend you additional credit. Credit-reporting bureaus use information in your credit report to generate your credit score. The number of accounts you have open and the number of delinquent accounts or accounts in collections listed on your report heavily influence your credit score. Your credit score tells lenders how likely you are to pay back a given loan.

Private Score

Your basic credit score is public. However, as of 2011 your bankruptcy score is private, available only to lenders. The credit bureaus keep your bankruptcy risk score private because lenders don't want debtors to determine the precise formula they use and devise means of artificially lowering their bankruptcy risk score. However, debtors can lower their bankruptcy risk scores by taking the same actions that strengthen their credit score: paying bills on time, carrying low balances on credit cards and opening a minimal number of accounts.

Protecting Your Score

To protect your credit and bankruptcy risk scores, pay bills on time. If you cannot pay a bill because of financial hardship, contact your creditor as soon as possible to make alternate payment arrangements. Payment history accounts for about 35 percent of your credit score. You should also use credit only when you need it. Having too many open accounts or owing a lot of debt relative to your income level negatively affects your credit score.

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How to Remove a Charged-Off Student Loan on a Credit Report

A charge off occurs when a creditor decides your account is too far in default without payment and closes your ability to get further credit from them. You are still responsible for paying the full amount. Since most student loans are a set amount, this does not hurt your ability to continue receiving credit from that lender, but it is often reported to a collections agency and can negatively affect your credit report and credit score. The best approach is to try to have it removed from your credit report as soon as possible.

Instructions

1

Determine the details of the charge off: the date, the current amount due, the number of days the loan is or was late, and any late fees accrued. Having all of the accurate information will help you make a successful claim. It will be easier to remove if the charge off was in error--for example if the account was not yours, someone else was making payments, or you made a payment but their accounts are in error.

2

List the reasons the student loan company should remove the charge off or recall it from a collections agency. Dealing directly with the student loan company is the best way to get it removed from your credit report. If you had a medical or other emergency, or financial hardship, include those details. If there are errors in their report, include as many details and as much proof as you can.

3

Call the student loan business office and go through your talking points. Remain calm and friendly even if it feels like a frustrating situation--people respond better to a friendly tone. If the person on the phone says they can't do anything, ask to speak to a supervisor. Make it clear that you're dedicated to making payments on the loan and that it's important for you to keep your accounts in good standing. They may ask for documentation about previous hardship or events.

4

Mail in any documents the student loan company requires, along with a typed letter with the reasons the charge off should be retracted from your credit report. Sign and date the letter before you send it.

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How to Get a New Credit History

Lenders use a system of credit scoring to evaluate your suitability for lines of credit. The better your credit history the higher your credit score. A good credit score gives confidence when applying for credit. Credit used wisely helps with financial freedom. It lets you purchase larger items and repay over a period of time.
Without a credit history it can be difficult to obtain credit. Getting a new credit history takes a little time, but with patience is not difficult to achieve.

Instructions

1

Pay your bills for electricity, water and telephone on time. Always pay your monthly cell phone bill on time. Utliity and cell phone companies report to credit reference agencies. Promptly paying your bills helps build a new credit history.

2

Get a pre-paid credit card if you have no credit history. Many cards are available. Check online to compare as charges can apply. Check out cards that will help build a new credit history. Use the card regularly and keep it topped up.

Arrange to have a co-signature on a credit card with someone who has a good credit history. These are available to help build a new credit history. It gives confidence to a lender. Should you fail to repay the money the co-signatory must pay.

3

Obtain a secured credit card. These are widely available. Check online for the best offers. You need to deposit money to the card. Then you can borrow between 50% and 100% of the amount deposited.

Store cards can be obtained easier than major credit cards. Interest rates are higher, but if you pay off the balance every month no interest is payable and your credit history will improve.

4

Get a checking or debit card account. Ensure that you do not overdraw without prior arrangement. Regularly using your debit card or checks will build your credit history.

Occasionally request a small overdraft from your bank. Overdrafts are usually short term loans. Paying back the overdraft on or before the date due will assist in raising your credit history.

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How to Improve an Isaac FICO Credit Score Rating

Improving your Fair Isaac FICO credit score can make you an attractive candidate when applying for credit cards, mortgages and vehicle loans. Lenders prefer applicants with a good personal credit file. Being responsible with credit demonstrates creditworthiness, and you'll likely acquire a better rate on different types of financing. But even if you've made credit mistakes and you currently have a low FICO score, there are techniques to help improve your score.

Instructions

1

Get rid of debt and keep balances to a minimum. Pay off credit cards or significantly reduce the balance to help bring up your Fair Isaac FICO score and maintain a good credit rating. Contact old creditors to eliminate delinquent accounts, and only use credit if you have money to pay off the charge once you receive the bill.

2

Improve your payment history to demonstrate creditworthiness. Fees incur with late payments, and lenders report to the bureaus when payments are at least 30 days behind. This can negatively impact your FICO score. Be timely and pay attention to your due dates to help your credit rating.

3

Get a credit card. Acquire a new credit card after a bankruptcy to reestablish your credit history and rebuild your FICO score. Talk to your bank about secured credit cards, which are easily available to people with bad credit. Anticipate a security deposit of about $500.

4

Order your credit reports annually. Check your own credit report at least once a year to look for mistakes that can reduce your FICO score, such as unknown accounts or identity theft. Write a letter to the bureaus to dispute such charges.

5

Reduce your number of credit inquiries. Repeatedly applying for new lines of credit may appear harmless, but each credit inquiry takes point off your FICO score.

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Can One Buy Car Insurance With a Poor Credit Rating?

There are primarily two factors that can seriously affect a person's ability to obtain car insurance. These two factors are driving history and credit report history. It can be difficult for an individual with poor credit to obtain car insurance, but it isn't impossible. Car insurance is a prerequisite for every driver, so a clear understanding of the correlation between insurance and credit scores is vital.

Car Insurance Premiums

The premium is often affected if a person has a bad credit score. According to Consumer Bad Credit Guide, insurance companies charge a higher premium for those individuals with bad credit because there's an increased chance the individual is likely to file a claim. Stability is also a factor that insurance companies take into account: Individuals with bad credit histories are perceived as less stable and more of a risk to insure.

Updating a Credit Report

An individual with poor credit ratings and history can obtain a free credit report thanks to the Fair Credit Reporting Act. A free report will give her a clear view of the negative items and derogatory marks affecting her credit report. Next, it's vital to remove any incorrect or out-of-date information from the credit report. This is usually done through a dispute process. Finally, she should clean up her score as much as possible. This can be done by paying old debts and current credit obligations on time.

Benefits of Credit Rating Improvement

According to U.S. Insurance Online, most insurance companies are willing to lower a person's car insurance premiums once his credit rating improves. Once the person improves his credit rating, he should contact his insurance agent to determine if he qualifies for a lower rate.

Considerations

Because there are numerous factors taken into consideration by insurance companies, individuals should make sure what factors determine their particular auto insurance rates. For example, some companies only consider major credit events such as bankruptcies and foreclosures when setting a premium. Understanding how the rate is determined can help a person find the best insurer for his needs.

Offsetting Costs

There are steps that a person can take to offset the costs that higher premiums add to her car insurance. Of course, improving her credit score should be a top consideration. She should also consider purchasing a cheaper car that costs less to insure. Comparing different companies can also help the customer make educated decisions and save money.

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How to Easily Track Your Monthly FICO Score

Your FICO score is a three-digit number that lets creditors know how likely you are to repay the credit they extend to you. When you are ready to purchase a car or a house, it is a good idea to check your FICO score. If your score is low and you are working to improve it, you should constantly monitor it so you will know what to expect when you visit the lender. Many companies online offer a way to easily track your monthly FICO score.

Instructions

1

Visit one of the three major credit bureaus such as Experian, Equifax or Transunion. You can also visit a credit monitoring service like My Fico.

2

Sign up for one of their credit monitoring packages. Choose a package that updates you about your FICO score each month. They will charge a monthly fee for such access, though some will give you a limited free trial.

3

Login to the company's website each month to monitor your FICO score.

4

Purchase your score every month if you don't want to sign up for a monthly service. Most of the sites that offer credit monitoring allow you to purchase your FICO score monthly.

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How to Obtain Your Equifax Credit Report

Equifax is one of three major consumer credit reporting agencies in the U.S. The other two are TransUnion and Experian. Of the three agencies, Equifax is the oldest and has been around since 1899. Equifax not only offers credit reports to consumers, but they also offer credit scores and identity theft protection services. While each credit reporting agency handles their reports a little differently, they all report the same basic categories. These categories include identifying information, trade lines, credit inquiries, public record and collection items.

Instructions

1

Go to the website Annual Credit Report. From this site, you are eligible to receive a free copy of your credit report from each of the three credit bureaus once every 12 months. If you already received your free report withing the past 12 months from Equifax off this site, then you can go directly to the official Equifax website and get another report for a fee.

2

Select your state from the drop-down list on the Annual Credit Report website and click "Request Report."

3

Fill out the application and choose Equifax when asked which credit bureau you want to get your report from. You can also select to receive free reports from the other two if you want. After completing the form, click to submit it. Your credit report will be given to you instantly online.

4

Apply for a credit report over the phone by calling 877-322-8228 if you are unable to do so online. If you request your report over the phone, it will be mailed within 15 days and you should expect to receive it within 2 to 3 weeks.

5

Apply for a credit report by mail if you are unable to do so online or over the phone. Go to the Annual Credit Report website and download the request form. Print a copy and fill it out. Then mail it to the address listed on the top of the form. After the form is received, your credit report will be mailed within 15 days and you should expect to receive it within 2 to 3 weeks.

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Define FICO Score

FICO scores are credit scores computed using a scoring algorithm developed by the Fair Isaac Corp. Fair Isaac licenses this algorithm to credit bureaus, such as Experian, Equifax and TransUnion, who use it to generate credit scores based on the information they have on your credit history. Having a good FICO score is very important when you apply for loans, because lenders use it to make determinations on whom to lend money to and how much interest to charge them.

Function

Any time you apply for, open, or use a credit account or trade line, your financial institution reports your activity to the credit bureaus. The credit bureaus then build a file based on the information reported to them about your use of debt and how well you pay your bills as agreed.

As more information is compiled about your use of credit, the credit bureau uses the FICO algorithm to calculate your credit score, which is then sold to lenders who want to know how you've managed your debt in the past.

However, not every financial institution reports to every credit bureau. Therefore, your credit score can vary slightly at different credit bureaus.

Features

Different aspects of your credit history are weighted differently when calculating your credit history. Your payment history, which includes your on-time payments as well as late payments and defaults, counts for 35 percent of your score. The amounts that you owe, which also considers the percentage of your available credit that you are using, accounts for 30 percent. The amount of time you've been using credit totals 15 percent; the longer the better. The types of credit you've used, such as credit cards, installment loans and mortgages, accounts for 10 percent. The final 10 percent is based on the number of inquiries on your credit report.

Score Range

FICO scores range from 300 to 850. The higher your FICO score, the more creditworthy a borrower you are perceived to be. According to Kiplinger, the median FICO score is 723. Only about 13 percent of people have credit scores over 800, and only about 14 percent have scores below 600.

Time Frame

The amount of time that information remains on your credit report varies based on the type of information. Most information, such as payment histories, defaults and foreclosures, remains on your credit report for seven years. Inquires remain for just two years. Chapter Seven bankruptcies remain for 10 years. However, newer information is weighed more heavily than older records.

Significance

Many lenders rely on your FICO credit score as a major part of your application for credit. According to BankRate.com, to qualify for the lowest interest rates on mortgages, you need a credit score of 760 or higher. If you have a credit score below 620, you will be classified as a subprime borrower, which leads to much higher interest rates--assuming you are approved for a loan at all.

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What Impacts Your Credit Score?

While a credit score doesn't define you as a person, it does give lenders an idea of how risky it is to offer you credit. If you establish and maintain a high credit score, you typically have access to more desirable loan offers, saving yourself money in the long run. To increase your chances of building a good credit score, acquaint yourself with the elements of your credit history that impact this three-digit number. Several credit scores exist, but most lenders use your FICO credit score to determine your creditworthiness.

Payment History

One thing that weighs most heavily on your credit score is your payment history. When tabulating your FICO score, 35 percent of the score is based upon how well you service your debts. If you are often late on payments, your score will be damaged. The impact of each late payment is not the same, however, because a number of other factors affect this score.

Current Balances

The amount of money you owe on your credit cards or on your mortgage and other loans also has an impact on your credit score. About 30 percent of your score is determined by your current balance. Your credit utilization ratio -- which measures the amount of debt you carry relative to your credit limit -- is part of this category. If you have a high credit utilization ratio -- in other words, if your balances are close to the credit limit -- it reflect negatively on you as a borrower and hurts your credit score.

History Length

The further back your credit history dates, the better your credit score. History length accounts for 15 percent of your credit score. The inclusion of this element is intended to reward those who have maintained a positive credit history over many years by recognizing their consistently strong payment record.

Amount of New Credit

Establishing new credit, while vital to building credit history, temporarily has a negative impact on your credit score. This element makes up 10 percent of your total credit score. If you go through a period in which you open many new credit cards or take out a number of loans, your credit score probably will drop, as this may be a sign you are overextended, which is worrisome for lenders.

Type of Credit

Not all types of credit are created equal. Having an excessive amount of revolving credit, such as credit cards, can negatively impact your credit score. Having a mix of revolving credit and installment loans (such as a mortgage or car loan) helps your credit score the most, because it shows lenders you can manage different types of credit. This element makes up 10 percent of your total credit score.

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Definition of Credit Rating Scores

Your credit rating score, or your FICO score, is a three-digit number that rates how responsible you are with credit. It is called a FICO score, because the scoring formula was created by a company called the Fair Isaac Corporation. Your FICO score uses a complex formula to analyze information contained in your credit reports kept by the three major credit bureaus: Equifax, Experian and TransUnion.

What is a Credit Rating Used For

Your credit score is used to determine your creditworthiness. Each time you apply for a loan---whether it is a new credit card, a mortgage loan or a car loan---the company will look at your credit rating. If your credit rating is too low, you may be denied credit. If you have a high credit rating, you will receive a higher credit line (be allowed to borrow more money) and/or have a lower interest rate (be charged less to borrow the money). Credit scores/ratings range from 300 to 800. According to Whats my Score, the majority of Americans have scores in the 600s or 700s.

How is My Credit Score Determined

35 percent of your credit rating is determined by your payment history and how responsible you have been about paying your credit. 30 percent of your credit rating is determined based on how much you owe, and how you have distributed that borrowing. 15 percent of your credit rating is based on the length of your credit history, and how long you have had credit. 10 percent of your credit rating is based on how much new credit you apply for. The final 10 percent of your score is based upon the different types of credit you use.

Credit Scores and Payment History

If you pay your pills late, your credit rating will be low. Your payment history makes up 35 percent of your credit score. Payments 30 days late, 60 days late or 90 days late are reported to the credit reporting agencies and used to determine your credit score. If you have a bankruptcy or have a home foreclosed on, this lowers your credit score and stays on your credit report for 10 years. If you have a short sale or settle a debt for less than what you owe, this also lowers your credit score (although not as much as a bankruptcy or foreclosure).

Borrowing Money and Credit Scores

You have to borrow money in order to have a credit score, because if you never borrow money, creditors have no way of knowing how responsible you will be at paying it back. However, creditors also do not want you to borrow too much money, because that increases the risk that you will not pay it back. Thus, 30 percent of your credit score is based on how you manage your debt. When you get a credit card or a loan, you are given a maximum line of credit, which is the maximum amount of money you can borrow. If you borrow too close to the maximum limits, your credit rating goes down because creditors believe you are borrowing too much. Your credit rating would be higher if you had two cards with $100 limit, and borrowed $50 on each card, than if you had one card with $100 limit and borrowed $100 on that card.

New Credit and My Credit Rating

Every time you open new credit, it adversely affects your credit rating. First, it lowers the average age of your credit cards, which makes up 15 percent of your credit rating. Second, the creditor who you are borrowing the money from usually pulls your credit report to look at your credit score. When this inquiry is made, it shows up on your credit report. Too many inquiries can lower your credit rating---this factor makes up 10 percent of your score.

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What You Need to Know About Credit Checks

Credit checks are usually a harmless and insignificant part of your credit history, but they can quickly become a problem for borrowers. This, however, depends on the type of checks that you consent to from a creditor or lender. Hard inquiries are the only ones that can cause damage, so you would do best to limit them as much as possible.

Types

The credit reporting bureaus recognize three types of credit checks: soft, hard and personal. Soft inquiries, such as those related to an employer or credit account you did not apply for, won't count against your score. Hard inquires can do up to five points of damage and result from applying for credit and other creditable accounts, such as an apartment and cell phone service. Personal checks count as a soft inquiry and coincide with you checking your own credit or a third-party monitoring service checking on your behalf.

Significance

A single hard inquiry barely makes a dent and should not alarm you. The real damage comes when you have six or more on your report. FICO data shows that a credit file with six or more inquiries has eight times the chance of declaring bankruptcy as a normal person. This phenomenon occurs because people in dire need of credit or those preparing for a financial disaster usually put in a rash of applications in short timespan.

Considerations

Hard inquiries can only stay on your file for two years, but how long they affect your score depends on the scoring system your lender uses. The FICO model counts hard inquiries for one year, but the VantageScore factors in inquiries for as long as the agencies report them. While negative items usually recede in impact as time passes, inquiries usually have a consistent effect on a score in any model.

Tip

Most creditors calculate your score using some version of the FICO formula. The latest version as of 2011 -- FICO 08 -- allows consumers to rate shop for 45 days. This means the scoring model counts all inquiries related to a certain type of loan as one, so you can get as many offers as you want without causing much harm to your score. This typically only applies to auto and student loans and mortgages -- not revolving accounts like credit cards. Find out which FICO version your lender uses to plan your rate shopping appropriately.

Disputing an Unauthorized Check

Only authorized checks may appear on your credit report for other lenders to see. If you see an unauthorized check, dispute it with the credit bureau and/or ask the lender to tell the agencies it was done in error.

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Does My Credit Score Matter When Someone Cosigns a Car Loan for Me?

Borrowers with bad credit score sometimes assume that having a cosigner for their auto loan automatically qualifies them for an account. However, even if your cosigner has great credit, the lender may not approve your loan application if your credit rating is too low. Thus, it is better in general for you to repair your credit history before looking for any type of credit.

Identification

Your score does matter, even when someone cosigns on a car loan with you. Creditors often give the most weight to the worst credit rating, especially if the person with bad credit is the primary applicant, because the lender usually must collect from the primary borrower first. Also, hunting down a cosigner and forcing him to pay the bill costs the company time and money if you default on payments.

Other Requirements

If you have the ability to pay the loan and the cosigner has an excellent rating and a low monthly debt-to-income ratio -- usually less than 36 percent with the potential monthly loan payments factored in -- you have a much better chance of obtaining the auto loan than applying as an individual. The lender also looks at you and your cosigner's employment history for the past year. In general, you both should have lived at your respective residences for the past six months and had the same job for the past year, according to CarsDirect.

Considerations

Review your financial situation and determine if you can afford an auto loan. If a lender requires a cosigner, this means you are a risk the dealer is not willing to accept. Talk to the cosigner about his responsibilities. He could damage his credit rating if you miss payments on the account, even if it is an accident, such as the bill going to a wrong address.

Auto Loan Without a Cosigner

You probably can overcome bad credit and obtain an auto loan without a cosigner. For instance, you can offer more than the standard 20 percent down payment to hedge against the loan exceeding the value of the car. You should also look for ways to increase your pay, such as by taking a part-time job. In the months leading up to your auto loan application, make paying all of your bills on time a priority and pay off as much of your credit card bill as possible.

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How Can I Build Credit If No One Wants to Give Me Credit?

If you have no credit, it can be difficult for you to obtain credit. The reason is that lenders would have no way to determine how well you pay your debts. If there is no history of accounts that you have paid, the lender will be wary about taking a risk on you.

The good news is that it is possible to build your credit. It is important to establish credit so that when you do need to borrow money, you will be able to.

Instructions

1

Apply for credit with a co-signer. Usually, a co-signer is a parent or guardian; however, it can be anyone who is willing to co-sign with you and whom the bank accepts. Whether you can obtain credit will be dependent on your co-signer's credit.

If you are granted credit, it is important that you pay your debts on time. If not, you are building bad credit. You also want to keep the balance at 30 percent or less of the account's credit limit.

2

Apply for a retail loan. If you need to purchase furniture or appliances, you might be able to get a retail loan for it, because qualifications tend to be less restrictive for these loans than for other loans. You will need to visit the retailer you want to purchase from and complete an application.

3

Apply for a secured credit card. A secured card is linked to a deposit you make on the account. Your credit limit will be equal to the amount of the deposit.

You should seek a secured credit card that has no application fee and a low annual fee, converts to an unsecured card after a year of consecutive on-time payments, and reports to all credit bureaus. If the secured credit card you obtain does not report to the credit bureaus, it will not help you build credit.

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How to Get an Apartment Judgment Off a Credit Report

Late credit and loan payments are not the only things that can negatively effect your credit report. If you don't pay your apartment rent, your landlord might be able to get a judgment against you in court. He can then report it to the credit bureaus, or they might find it while electronically harvesting court records. If you don't get the apartment judgment off your credit report, it can negatively impact your ability to get loans and credit cards and to get insurance or a job.

Instructions

1

Request a free copy of your credit report from each of the major credit bureaus. Transunion, Equifax and Experian are all required by law to give you one free copy each year. This will allow you to double-check whether the apartment judgment is actually showing up on your report.

2

Negotiate with your landlord. If you agree to pay the judgment, she may agree to request that the information be removed. Otherwise, she may give you a a "Release and Satisfaction of Judgment," which you can use to prove to the credit bureaus and future landlords, creditors and potential insurers or employers that you have paid the amount you owe.

3

If your landlord refuses to negotiate, go over your credit reports again, and look for any inaccuracies that might give you grounds to dispute the apartment judgment. Under the Federal Fair Credit Reporting Act, you have the right to file a dispute with each of the credit bureaus if you believe you have found incorrect information. They are responsible for verifying it, and if they cannot do so, they must remove it from your report.

4

Re-check your credit reports to see if they have responded to your dispute by removing the apartment judgment after their investigation. They will do this if the information does turn out to be incorrect or if your landlord doesn't respond to their requests for verification.

5

Add a consumer statement to your credit report if the credit bureaus refuse to remove the apartment judgment but you still feel that it's incorrect in some way. This statement will give your side, and it can be viewed by potential creditors, insurers, and employers.

6

Check the legal period that apartment judgments can remain on your credit report in your state. Usually the period runs between seven and ten years. At the end of that period, make sure that the judgment is removed from your credit report by notifying any of the bureaus to do not remove it automatically.

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How Long Does a Bankruptcy Stay on a Credit Record?

If you get too deeply in debt or face unforeseen circumstances that keep you from paying your bills, bankruptcy may seem like the only option. No matter which type of bankruptcy you file, it will have an effect on your credit score and remain on your report for many years. It's important to know just how long the bankruptcy will show up, how you can make sure that it has been removed after the appropriate period and what to do if it does not get removed automatically.

Chapter 7 Bankruptcy

Bankruptcy is a process through which a consumer who is financially overwhelmed asks for relief from the courts. In a Chapter 7 bankruptcy, if the consumer has any assets, they are liquidated and distributed to his creditors. Then his debts are discharged. If there are no assets, the creditors will not receive anything. However, if he has significant assets he wishes to protect, MSN Money financial columnist Liz Pulliam Weston suggests that a Chapter 7 bankruptcy may not be the right option.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, the consumer agrees to a manageable repayment plan that typically spans three to five years. It is considered to be a debt reorganization because it involves repayment rather than simply wiping out debts. This type of bankruptcy may allow the consumer to protect some of her assets and will typically appear on her credit report for a shorter period than a Chapter 7 filing.

Chapter 7 Reporting

A dismissed Chapter 7 bankruptcy will stay on the consumer's credit report for 10 years. After that, it should be removed automatically. According to MSN Money's Weston, even though the bankruptcy will show up for a decade, its effect on the consumer's credit score will diminish over time since recent information carries more weight.

Chapter 13 Reporting

A Chapter 13 bankruptcy can also remain on a consumer's credit report for 10 years. However, it is typically removed after seven. This can be negotiated as part of the settlement. Quicker removal makes it more attractive than a Chapter 7 bankruptcy, thus encouraging the consumer to create and follow a repayment plan rather than having the debts discharged. Like a Chapter 7 bankruptcy, a Chapter 13's effect on a consumer's credit diminishes over time.

Warning

Consumers who file bankruptcy should monitor their credit reports closely. Transunion, Experian and Equifax are all required to provide one free credit report each year upon request. A person who has gone through bankruptcy should make sure that discharged debts do not show up improperly. He should almost make sure that it is removed after the designated period. If any incorrect information shows up, he should file a dispute with the credit reporting agency.

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How Can I View My Credit Report After I Was Denied Credit?

Consumers are denied credit for a variety of reasons: too much credit, numerous late payments, judgments, job instability, lack of credit and errors on the credit report itself. If you have recently applied for credit and have been denied, federal law gives you the opportunity to obtain a free copy of your consumer credit report. Knowing what adverse information is in your credit report is the first step to improving your financial situation.

Who to Contact for a Free Credit Report

After you have applied for credit, you should receive a written statement advising you of the lender's decision. If you were denied credit, that statement should list the reasons why you were denied. It will also provide you with the name of the credit bureau that provided the information on which the lender's decision was based. You are entitled to receive a free copy from the credit bureau that supplied the information, not from all three credit bureaus.You should contact this particular credit bureau and explain to the bureau that you were denied credit from your potential lender and that you would like a free copy of your credit report. There is a 60-day time limit on obtaining this free credit report, so you should act quickly.

Here is the contact information for all three credit bureaus: For Experian, you must call 1-866-200-6020. TransUnion requires you to complete a form at its website (http://www.transunion.com/corporate/personal/creditTools/freeCreditReport.page). You can contact Equifax by phone, mail or through its website (https://aa.econsumer.equifax.com/aad/landing.ehtml). You can request your free report by mailing your request to Equifax Information Services, P.O. Box 740241, Atlanta, Georgia 30374; or by telephone at 800-685-1111.

How to View the Credit Report

In response to your request, the credit bureau will mail you a copy of your free credit report or you may be able to view the report instantly online. Once you have viewed your credit report, you will be able to see the adverse information that has kept you from obtaining credit. You can then begin improving your credit through steady on-time payments, payoffs and a reduction in your overall debt.

How to Dispute Information

If you find inaccurate information on your credit report, you can dispute the information with the credit bureaus.You should notify the credit bureau in writing that you have found inaccurate information. List the inaccurate information that the report contains and provide documentation to prove the information is inaccurate. This information can be sent in the form of a letter to the credit bureau or you can simply dispute items directly on the credit bureau's website. Once the credit reporting bureau has been notified of your dispute, it typically takes 30 to 45 days for it to investigate your claims with the creditors. If the investigation reveals the information is inaccurate, the credit bureau has to notify the other two credit bureaus to remove the inaccurate information from your credit report. The credit bureau will also supply you with a written report of its investigation.

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How Do Credit Bureaus Determine an Account Is Yours?

Reporting

Credit bureaus receive account information from a variety of sources. Creditors report your payment history and other details about your account. Courts report judgments and other information that may be related to specific accounts. These records are linked to your name, address, phone number, Social Security number, and other identifying information. This gives the credit bureau some assurance that the information actually relates to your accounts.

Providing Reports

By law, the three major credit bureaus are required to provide every consumer with a free copy of her credit report every year. This allows you to check their information for accuracy. You can look through all of the listed accounts and cross-check them with your actual accounts. If you find one that does not belong to you, you can file a dispute with the credit bureau.

Investigating

If you file a dispute on an account that is not yours, the credit bureaus are required to perform an investigation. All three of the major bureaus have dispute forms on their webites. Once you file a dispute, the bureaus have to contact the creditor and request proof that the account is yours and that the information is correct. If they cannot vertify the information, they must remove the account from your credit report. Disputes help them determine whether accounts are really yours or whether there could have been an error or a case of fraud or identity theft.

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Does Credit Counseling Affect Your Credit Score?

When consumers feel overwhelmed with mounting debt, high interest rates and stacks of unpaid bills, credit counseling can seem like an attractive option. But some actions to reduce debt can negatively affect your credit score. Find out whether credit counseling could potentially affect your credit score before meeting with financial advisors to avoid negative marks on your credit.

Credit Score

Lenders such as banks and credit card companies use credit scores to determine the potential risk involved with extending credit to a particular consumer. Landlords and potential employers may also access your credit history to better understand how you handle finances. Credit scores reflect the amount of debt you've accumulated and the types of credit accounts open (such as revolving credit, including credit cards and department store cards, or installment loans such as home mortgages and student loans). The formula also evaluates the length of your relationship with lenders, and how recently you've opened new accounts. Payment history is also a factor.

Credit Counseling

Credit counseling helps consumers organize financial information to get a clear picture of income, financial liabilities and debt, including balances owed, interest rates and repayment schedules. Counselors may help consumers formulate a plan to negotiate with lenders for benefits including reduced interest rates, lowered monthly payments or waived fees in the interest of paying down debt that may otherwise be left unpaid. Consumers may need to pay fees to participate in an agency's credit counseling program.

Advice vs. Action

Participating in credit counseling doesn't affect your credit score when you're seeking advice or assistance gathering together information about your various debts. However, credit counseling can negatively affect your credit score in that action steps recommended by credit counselors could hurt your credit, at least at first, if taken. For example, lenders may make a notation on your credit report that you're participating in a credit counseling program, signaling that you're having trouble paying bills. Debt may be partially settled, reducing the amount you'll need to repay but negatively impacting your credit. It may also be more difficult (or forbidden as part of credit counseling agreements) to seek new credit while in repayment programs. Over time, however, agreements resulting from credit counseling can lead to reduced debt loans and on-time payments, creating an overall positive effect on credit scores.

Risks

Seeking credit counseling signals to lenders that you're having trouble managing finances, particularly if some kind of specialized repayment plan, including lowered interest rates or reduced debts, is put in place. Missing payments on repayment plans can negatively impact credit, since it signals that consumers continue to remain a credit risk despite outside assistance. There's also the risk that consumers rely on credit counseling as a quick fix without addressing underlying issues related to spending habits, gambling or other factors contributing to large debt loads.

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How to Get My FICO Score for Free & Without a Credit Card

Using credit is the only way most Americans achieve their financial goals and dreams, so it's important to know what your score is and to constantly work on improving it. The Fair Credit Reporting Act allows consumers to get a free copy of their credit report from each of the three nationwide reporting bureaus, Equifax, Experian, and TransUnion, but it doesn't say anything about getting a free FICO score. For that, you'll at least need a debit card if you don't have a credit card handy.

Instructions

1

Visit a legitimate website that offers a free FICO score, like myfico.com, and sign up for its free trial offer. It will ask you for either a debit or credit card. Before the trial period is over, call to cancel the service, or cancel online. This is the only way to get a FICO score for free.

2

Obtain a free TransUnion credit score through Creditkarma.com. Its service is totally free, supported by advertising, so it doesn't require a credit card of any kind. It also will monitor the score for you for free.

3

Utilize a free 30-day trial offer from Equifax to get your credit score. In addition Equifax will give you tips for improving or maintaining your score as well as alerts and identity theft protection.

4

Go to annualcreditreport.com, the only website that offers a free credit report authorized by the federal government. Once a year you can order a free credit report from each of the three major bureaus. A credit report will include the names of all your creditors, account numbers, amounts in collections, number of credit inquiries, any delinquencies, and any amounts past due.

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Who Can View My Credit Report?

Your credit report contains sensitive data such as your employment and salary history, Social Security number, birth date and current and former employers. It even shows unlisted phone numbers and certain legal actions taken against you, according to Privacy Rights Clearinghouse. This information could be dangerous in the wrong hands, so you should be aware of who has the right to see it and how to limit access.

General Access

Your credit report can be viewed by many companies, agencies and people with whom you do business. It is provided to creditors, insurance firms, landlords, child support enforcement agencies and other government agencies, according to the Privacy Rights Clearinghouse. It can also be viewed by agencies with which you have applied for benefits or a license.

Your current and potential employers may obtain your credit report with your permission, and it can be accessed by companies you've hired to monitor your credit. The credit bureaus can also sell limited information from your reports to companies that pre-screen consumers for credit and insurance offers.

Personal Access

The Fair Credit Reporting Act, a federal law, gives you free annual access to your credit reports. You can request one copy every 12 months from TransUnion, Experian and Equifax. You must request them through the online form or telephone number on AnnualCreditReport.com, according to the Federal Trade Commission.

Other websites are privately run and require you to sign up for memberships or services to view your reports.

Considerations

Credit report views fall into two categories: hard or soft inquiries. Soft inquiries do not hurt your credit score, but excessive hard inquiries can bring it down, according to the Truthful Lending mortgage website.

A hard inquiry means someone has viewed your credit report to consider you for a loan or account. It shows your intent to borrow money.

A soft inquiry is a checkup by a current lender, a pre-screening by a company preparing solicitations, or your own annual credit review.

Effects

Hard credit inquiries can reduce your credit score because they indicate you want to get a mortgage, a credit card, a new car or some other type of loan. FICO states that one hard inquiry will reduce your score by five points or less, but several applications within a short period will pull it down more. Six or more hard inquiries make you statistically more likely to file for bankruptcy, according to FICO. This is especially true if your overall credit history is short. Soft inquiries are neutral and have no effect on your score.

Prevention

You can prevent some companies from viewing your credit score by opting out of pre-screened solicitations. The FTC advises using OptOutPrescreen (see Resources section), a website run by the credit bureaus to let consumers stop receiving pre-screened credit and insurance offers. Inquiries will stop within 60 days of signing up at the website or completing the process over the phone, according to the FTC.

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How Can a Collection Agency Affect a Credit Score?

A collection agency is a company that attempts to collect an unpaid debt. Collection accounts on a credit report are considered a negative item, and will have a negative effect on your credit score.

Effects

A collection agency will report the collection account to the credit bureau. According to the FICO scoring model, how well you pay your debts accounts for 35 percent of your credit score. The appearance of a collection account on your credit report will drop your score because it represents an unpaid debt. How much of a drop depends upon the other factors present within the report.

Significance

A lowered credit score can cause lenders to deny your loan application or give you a higher interest rate if approved. In addition, some employers check your credit prior to employment and a lower credit score could eliminate you from consideration for that position.

Misconceptions

Collection accounts remain on your credit report for seven years. Paying it off won't remove it; instead, your credit report will list the account with a status of paid and a balance of zero. In exchange for payment, you can ask the collection agency to delete it, but they are not required to do so.

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