Understanding Credit Reports

Your credit score is critical when considering life's big and small purchases, affecting everything from your ability to get a new credit card to your suitability for home ownership. Given that your credit history is so influential, it's important that you request your own credit reports and understand what they mean. Keeping tabs on your credit score annually lets you know where you stand financially and can help you protect yourself against fraud.

Know What Affects Your Score

According to the college financial planning website, Adventures in Education, your credit report reflects your bill-paying practices -- that is whether you pay on time -- what kind of accounts you have, how many accounts you have and your debt levels. Credit reports also show public record information, such as if you've ever filed for bankruptcy, been criminally charged or had bills go past due. In general, people with, high debt levels, many creditors and poor payment histories have lower credit scores. Those who pay on time, carry little debt and have long-standing bank accounts have shinier credit ratings.

Check With All Three Agencies

There are three credit reporting agencies in the United States: Experian, TransUnion and Equifax. You can get a free report from each of the three agencies once every year, according to the Federal Trade Commission. Make sure that you review all three reports. On Bankrate.com, Howard Dvorkin, president of Consolidated Credit Counseling Services, says that looking at just one of these three reports is useless. Since the three agencies could receive different information about you, you should look at the report provided by each. Adventures in Education reiterates this advice, noting that your cell phone company, your credit card provider and your bank could all report to a different credit bureau.

Credit Report Basics

Your report should contain your name, social security number, date of birth, addresses and the name of your current employer. You should also see public record information, a report of the different accounts you have, including opening and closing dates, balances and limits. Your report also includes a record of who's looked at your credit history, as well as consumer statements. Consumer statements explain why certain entries appear in your credit history. For example, perhaps you refused to pay for a product that wasn't what you ordered. Even if this shows up as a negative entry on your credit report, a consumer statement offers a way to explain what happened to people accessing your history. To add a consumer statement, or to correct information on your credit reports, contact each of the issuing agencies.

Understanding Your Number

According to financial institution Sallie Mae, credit scores fall anywhere from 300 to 850, and a high score is what you want to see on your reports. Your credit rating is also called your FICO score, in reference to the Fair Isaac Corporation that invented the system. Sallie Mae reports that 35 percent of your score is determined by your payment history. Your total balances and available credit dictate 30 percent of your score. If you're using almost all of the credit available to you, lenders see you as higher risk. The length of your credit history controls 15 percent of your score. Sallie Mae says, an account must be open for nine to 12 months to prove sound borrowing and payment behavior. The number and type of accounts you have make up 10 percent of your score. Having too many sources of credit marks you as high risk, but having a variety of different account types proves that you understand responsible credit use. Finally, 10 percent of your score is determined by new credit applications. Many applications in a one-year period sets off alarm bells for lenders, especially if a history of late payments makes it look like you're using credit to steer clear of bankruptcy.

Hard and Soft Inquiries

Inquiries into your credit history are labeled "hard" and "soft," according to Sallie Mae. Hard inquires are made by prospective lenders when you apply for credit -- remember that too many hard inquiries, that is, loan applications, within a short time frame can hurt your credit score. Soft inquiries are ones that you make when checking your credit score, or when credit card companies briefly review your information to send you pre-approved card applications. The number of soft inquiries doesn't affect your credit, since soft checks aren't associated with you making new applications for more credit.

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What Is the Point of Removing Negative Debt From a Credit Report?

Even if you never use credit or plan to, negative items can tarnish your image in front of other parties that you might care about --- maybe even an employer. You could come to a point in your life where you want to build credit or obtain a loan for an emergency, but find that a single negative credit item stands in your way. Disputing such an item probably won't take more than a few hours, and you can do it online for free.

More Than Just for Loans

Anybody with a pertinent interest in your financial background can pull your credit report and potentially use it against you or as a reason to view you in a better light. Employers, for example, may use a credit report to help make a hiring decision. If you have a bankruptcy erroneously reported on your file, the employer could see this as a major character flaw, especially if the job requires handling money.

Will You Want Credit in the Future?

Negative items can stay on your credit report for seven years, or 10 in the case of a Chapter 7 bankruptcy. An unpaid tax lien, meanwhile, will never go away. You might not care about getting a loan now, but you could want one --- such as a mortgage or car loan --- in the future. Most homeowners purchase a home with a mortgage, because stocks and other investments tend to offer a better return than the cost of a mortgage. You might also want a credit card for emergencies.

Effort

Common errors, such as a collection account that clearly does not belong to you, take about four hours to correct, according to Bankrate.com. A few hours of your time can drastically improve your credit score enough to bump you into a higher credit score tier and lower an interest rate, potentially saving thousands on a loan. You can also avoid the hassle of a credit report dispute entirely by hiring a credit repair company or lawyer to handle the paperwork.

Tips

You should start on any credit dispute immediately, but only dispute items you believe are legitimate errors, otherwise the credit bureaus may ignore your claim as frivolous. Between the time it takes the credit bureaus to investigate a case and potential lags in updates to a credit score, it might take 90 days more to remove a negative item. You could use a rapid rescoring company to remove a legitimate negative item in a few days, but only a lender has access to this service. Also, a rapid rescoring service probably won't investigate a claim, so you would still need the original creditor to admit to a mistake.

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When Do Creditors Report to Credit Bureaus?

Creditors normally report information to the major credit bureaus at least once every month. Your credit score can change on the basis of new information received by the credit reporting agencies. When you pay your bills on time, your credit score increases, but if you use all of your available credit, make late payments or become delinquent on loans, then your score decreases.

Credit Reporting

To file credit reports, your creditors must have established credit reporting accounts with Equifax, Experian and TransUnion. Most major lenders make monthly reports to all three agencies, but some creditors only establish a reporting relationship with one agency. Some lenders, particularly lenders that write loans for people with very poor credit, do not report to credit agencies at all. If you take out a loan to build or re-establish your credit, make sure that your lender actually reports your payment activity, otherwise you do not gain from establishing the loan.

Payments

When you take out an installment loan, a credit card or a revolving line of credit, you are billed on a monthly basis. Your payment history accounts for about 35 percent of your overall credit score, so when you fail to make your monthly payments on time it can damage your score. However, credit bureaus only penalize you for payments that are more than 30 days past due. If you miss your due date by less than 30 days, your lender can assess a penalty fee but it does not impact your credit score.

Credit Events

In addition to reporting monthly payment activity, lenders also notify the credit bureaus of other credit events such as short sales, foreclosures and charged-off debts. These events remain on your credit file for up to seven years and negatively impact your score. Additionally, if you fall behind on a monthly payment, after reporting your payment as 30 days past due your lender updates the credit bureaus if you have failed to make the payment after 60, 90 and 120 days.

Other Considerations

When you open a new credit card or take out a new loan, it may not appear on your credit report for a few months because the lender typically does not report it until up to 30 days after your first payment. Therefore, if you are applying for a mortgage or car loan you must tell your lender about any new credit accounts you recently opened, because these accounts may not show up on your credit report but your lender needs to know about all of your existing debt in order to determine how much you can borrow with a mortgage or car loan.

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How to Resolve Credit Rating Issues

Credit rating issues can prevent you from acquiring an affordable mortgage, credit card, personal loan, rental apartment, a good job, a cell phone plan and many other things. Luckily, a poor credit rating does not have to be a boulder that you drag around behind you for the rest of your life. There are several steps you can take to resolve many common credit rating issues and build up your credit score again.

Instructions

1

Order your credit reports from the three major credit reporting bureaus (TransUnion, Equifax and Experian). Information can be different across all three reports. You can get a free credit report once a year through the resource link below. Print out a copy of each credit report for your records.

2

Examine your credit reports for any errors. Common errors include accounts that don't belong to you, mistaken dates for payments, an incorrect birth date, incorrect late payment reports and more. File a dispute to each credit reporting bureau that you have detected an error with. They are required by the Fair Credit Reporting Act to respond to any disputes within 30 days. Be prepared to send copies of documentation supporting your dispute when requested.

3

Attempt to have any late payment reports deleted from your credit report. This has a higher chance of success the sooner that you contact your creditor about it. Contact the creditor that filed a late payment report about your account and request a "pay for delete." If this is your first late payment, they will be more willing to grant you leniency. Request that they send any agreement to you regarding your credit report in writing.

4

Attempt to settle any delinquent accounts that may have been sold to collection that appear on your credit report. Document any collection attempts as thoroughly as you can. If the collection agency violates the Fair Debt Collection Practices Act, you may be entitled to sue them for the debt to be discharged along with damages for each recorded violation of the law. Start by requesting a "pay for delete" for the account for 10% of the total debt. You may also request a "pay for settlement" or "paid in full" entry on your report, even if you only pay a fraction of the amount owed. Ensure that you get an agreement from the agency in writing before you provide any payment. A deletion from your credit report is the best possible result for your credit score.

5

Defend yourself against any lawsuits that may be filed against you to collect delinquent debts. Appear at any court dates that you may be requested to. Provide documentation of any violations of the FDCPA to bolster your defense. Request that the creditor submit proof that you owe the debt in court. A debt lawyer may be able to assist you, but is not necessary. Many creditors decline to pursue judgments against defendants who show up to their court dates, because it is otherwise so simple to get default judgments against debtors that fail to make an appearance. Attempt to reach a settlement using a similar strategy to the one outlined in Step 4 with the creditor's representative in court, also requesting that any agreement be in writing.

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Main Credit Reporting Companies

Federal law mandates that the three nationwide consumer reporting agencies provide citizens with a free copy of their credit report every year. The Fair Credit Reporting Act (FCRA) sets the standards for information included in a report, such as where you live, if you have been sued or arrested, bankruptcy filings and how you pay bills. The FCRA is enforced by the Federal Trade Commission.

Equifax

Equifax is the oldest credit reporting agency in the United States. Founded in 1899, the Atlanta-based global company of approximately 7,000 employees provides a wide range of credit and financial services to consumers and businesses. It is a publicly traded company on the New York Stock Exchange under the ticker symbol EFX. Equifax, like all three credit reporting companies, sells consumer credit information to banks, employers, creditors and other business that use the information to evaluate job, credit, rental, insurance and other types of applications. Equifax's practices of collecting personal information not related to finances led to the congressional hearings and the passage of the FCRA in 1970 and subsequent amendments to the legislation. Consumers can dispute information on Equifax reports on the company's online dispute website.

Experian

Experian is a multinational credit services and marketing company based in Dublin, Ireland, with over 15,000 employees worldwide. Experian North America is based in Costa Mesa, California, and manages the credit reporting services for American consumers and businesses. However, the company's National Consumer Assistance Center in Allen, Texas, handles credit report disputes. Customers can file disputes about information on Experian reports on the company's website. Experian also owns FreeCreditReport.com, a for-profit credit reporting service marketed to consumers. Criticism of the company from the media and consumers focuses on the fact that it sells credit reports that can be obtained for free by law under the FCRA. Experian is a publicly trade company on the London Stock Exchange under the symbol EXPN.

TransUnion

Chicago-based TransUnion LLC is the smallest credit reporting agency. Ownership in the global firm is nearly evenly split between the private-equity firm Madison Dearborn Partners LLC and the members of the Pritzker family. The private equity firm has controlling interest in the company with a 51 percent stake. Over 4,000 people work for TransUnion. The company provides credit reporting services to consumers similar to other leading credit reporting agencies. TransUnion Direct provides resident screening services for rental properties, including credit history reports and criminal background checks. Consumers can dispute erroneous information in TransUnion reports online.

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The Meaning of FICO

FICO, short for Fair Isaac Corp., is usually placed in front of the term "credit score." Fair Isaac created a scoring model based on credit information and it is used by all the major credit bureaus. This score affects most financial areas of your life.

FICO Score

The FICO score is a numerical representation of what type of credit user you have been in the past. Credit bureaus look at your credit report and use the information in it to create a FICO score. Once this score is calculated, it can be used by creditors to make quick decisions about whether they should extend credit to you. The credit scoring system ranges from 300 to 850 points. The higher a score is the better.

How it is Used

Your FICO score is used in several ways, and they can all affect you financially. For example, when you apply for a loan such as a mortgage or auto loan, the lender uses the credit score to determine if you should be approved. Beyond that, the score also helps determine how much you pay in interest on the loan once you receive the money. Your credit score is even used by your insurance provider when calculating your insurance premiums.

What's in FICO Score?

Your FICO score is comprised of several parts in relation to your financial life. The biggest portion of your FICO score is your payment history. This means that if you always make your payments on time, this factor helps you get a higher score. Another portion of your score is based on the amount of debt that you have in relation to available credit. The length of your credit history and the types of credit you have also play a role in calculating your credit score.

Considerations

Although every credit bureau uses the same basic FICO formula to calculate your score, each credit bureau can have a different score for you. This is because not every creditor reports all the same information to each credit bureau. You could have different credit scores from each of the three major bureaus. Your score can change as you improve the way you use credit in the future as well. To find out your credit score, you can buy a copy of your credit report from the major credit bureaus.

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How to Remove a Tax Lien From Your Credit

If you do not pay your federal or state taxes, the government may place a lien against any property that you own. While state tax liens and what they encumber vary depending on your state of residence, a federal tax lien attaches to all property you own -- in addition to appearing on your credit report. Tax liens that appear on your credit report will damage your credit score. You can appeal to the credit bureaus to remove some old tax liens.

Instructions

1

Locate your formal Certificate of Lien Release. Unpaid tax liens can remain on your credit report indefinitely. The Fair Credit Reporting Act, however, restricts the credit bureaus to reporting paid tax liens for no longer than seven years.

2

Pull your credit reports and check the date on the tax lien. Compare the date to the date on your Certificate of Lien Release. If the date on the Certificate of Lien Release precedes the current date by seven years or more, you can dispute the tax lien on your credit report as obsolete.

3

Make a copy of your Certificate of Lien Release.

4

Write a letter to the credit bureaus whose credit reports still contain evidence of the tax lien. Notify them of the date you originally paid off the tax lien and note that you have included a copy of your Certificate of Lien Release as proof that the credit report entry in question is obsolete and must be removed.

5

Send the copy of your Certificate of Lien Release and your dispute letter to the credit bureaus via registered mail. This ensures that the credit bureaus receive your dispute for immediate processing.

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Does Closing a Credit Card Hurt My Credit?

After the hard work of paying off a credit card's balance is done, many people close the account to avoid temptation. However, as people learn more about their credit and just how important their FICO scores are, they're beginning to second-guess traditional wisdom. The short answer is: Yes, closing a credit card can hurt your credit.

FICO Explained

Your FICO score (named for Fair Isaac Corp.) is a number designed to measure risk, specifically the risk lenders take in offering you loans. To come up with your score, each of the three credit reporting bureaus--Equifax, Experian, and TransUnion--uses slightly different formulas and analyzes different information. There are five factors that go into every score: payment history, balances, credit history, new accounts, and types of credit. Your balances and credit history are why closing a card can hurt you.

Debt Ratio

The second-largest factor in your credit score is your ratio of debt compared to your available credit. This accounts for 30 percent of your score. Say you have two credit cards, both with $5,000 limits. Say you have a $3,000 balance on the first card, and you decide to close the second. You used to have a ratio of 3/10, but after closing the second card, you now have a ratio of 3/5. You're now much closer to your overall credit limit, which will make your score drop.

Credit History

The other reason that closing a credit card could hurt your credit is the history that is tied up in the card. Credit history accounts for 15 percent of your score, and when you close an account, that history is lost. A credit card that has been open and maintained for 10 years is a signal to lenders that you're trustworthy and know how to handle credit. Unless the credit card has unreasonable terms, it's best to keep it open and its history intact.

Avoid Closing

A major reason that people close credit cards is the temptation to spend. If the card has a low limit and has been open less than a year, closing might not affect your credit score too much. But if you have a good limit, a long history, and no desire to use the card in the foreseeable future, freeze the card in a block of ice. You won't be able to use it or abuse it. Should you need the card in the future, just set the ice block in the sink and wait.

Choosing the Right Card

Many people choose to never open a credit card, having heard too many horror stories of crippling debt. However, a large portion of your credit score is made up of credit cards. You'd have a score even if you didn't have cards, but lenders prefer customers with a history of managing credit responsibly. Choose a card with a low interest rate and no annual fee, even if the line of credit isn't that big. Over time, you'll prove your worth and will be offered larger lines of credit. Personal-finance guru Suze Orman recommends applying for credit cards through credit unions, as they tend to have better terms.

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FICO Score Credit Repair

Expensive purchases such as a house or car require a credit score. Every consumer with a credit account has a credit report and score. Unfortunately, not every consumer has a good credit rating; and a low FICO credit score limits your credit options. However, repairing your credit opens the door to several different finance options.

Length of Credit History

The length of time that you've maintained your credit accounts play a role in credit scoring, and people with long credit histories tend to have better scores than someone who just opened their first account. For this reason, keeping accounts (especially older accounts) open helps build your credit rating, whereas closing an account may decrease your length of credit and bring down your score.

Controlling Debts

The way you manage your credit determines your credit score. Managing credit involves using credit, which means pulling out your credit cards occasionally to keep your accounts active. Credit in itself isn't bad. Problems arise when consumers buy impulsively with credit, and then have no intentions of paying off the charge. Debts contribute greatly to credit scoring, and keeping your debts to a minimum helps repair a damaged credit score. The balances on your credit cards should stay well below the limit. Plan to pay off balances completely at the end of each billing cycle to keep debt under control.

Payments to Creditors

A routine of on-time payments help repair a low FICO credit rating because payment history makes up the greater portion of your credit score (approximately 35 percent). There are tips to ensure that your creditors receive your payments on time every month. It helps to write down due dates when your statement arrives, perhaps on a calendar. Budget your money to ensure you have enough funds to make each payment. And lastly, plan to forward payments days before the due date. Disorganization can play a role in lateness, but with automated monthly payments, payments arrive on time each month. And if you can't make a payments, speak with your lender to discuss alternative options.

Cleaning Up Credit Report

Collection accounts, liens and other derogatory information on your credit report damages your file, and repairing your FICO score after a mishap calls for getting negative items removed. Creditors and lenders are under no obligation to remove legitimate negative information from your report. But if you agree to pay off a collection account or old debt, creditors may decide to update your file and remove this information. Check your report with Annual Credit Report and look for errors or derogatory statements. Work with creditors to pay old debts and remove mistakes from your report.

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Are Multiple Hard Inquiries on Your Credit Report Rolled Into One If in a Short Amount of Time?

Hard inquiries are placed on your credit report whenever you apply for a credit-related service, such as a mortgage or credit card. A hard inquiry can harm your credit score, but you may have been told that you can minimize the damage of multiple inquiries by applying at several places in a short period of time. This is true, but you have to make sure it appears to be rate shopping. Your credit score also could be reduced if the lender uses an outdated scoring system.

Identification

When the credit scoring model detects multiple hard inquiries for a loan in short span of time, it considers all of them a single inquiry for rating purposes, according to Equifax. The credit bureaus do this, because financially responsible people typically shop around for the best rate.

Time Frame

There is a time span for multiple hard inquires to be considered rate shopping and, therefore, counted as just one inquiry. As of 2010, the FICO scoring formula used by the major credit bureaus and most lenders gives consumers 45 days to submit applications for their loans to be considered rate shopping. Lenders, however, may have an older version of the credit scoring software that allows only 14 days.

Warning

The credit score relief for rate shopping only occurs when you apply for credit that typically involves rate shopping, such as a mortgage, student loan or auto loan, according to Bankrate. Multiple hard inquiries for other credit, such as a credit card, or for utilities, such as a cellphone, do not have the grace period. All hard inquiries stay on a report for two years, but only count during the first year.

Tip

When hunting for a loan that qualifies for rate shopping, be prepared to submit all of your applications at once or as soon as possible to fall within the grace period. Also, you can run a credit check on yourself to see how many inquiries you have, so you can avoid having too many inquiries within one year. (A check on your own credit is considered a soft inquiry and does not affect your credit rating.) Data from the Fair Isaac Corporation reveal that people with six or more hard inquiries are eight times more likely to declare bankruptcy than someone with no inquiries.

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How to Obtain a Credit Score From a Bank

Your credit score lies somewhere within the range of 300 to 850 and helps lenders evaluate the potential risks associated with lending to you. A high credit score indicates that you are a low-risk borrower who is responsible with your debts. This will allow you to qualify for credit and loans more easily. If you would like to know your credit scores, you may purchase them either from the credit reporting agencies or from myFICO.com. You may also acquire a credit score by requesting that a local bank pull it for you.

Instructions

1

Visit a local bank and indicate that you are considering opening up a new account but do not know if your credit score is high enough to qualify.

2

Provide the bank employee with your name, Social Security number, and birth date. You will also need to provide a picture ID to prove your identity.

3

Sign the form that grants the bank permission to pull your credit score. Not all banks will require written permission, but most will.

4

Wait while your credit score is pulled. This process usually takes no more than five minutes.

5

Ask the bank employee to tell you your score.

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Do I Need Credit Monitoring?

The statistics are frightening: According to Harris Interactive, over a three-year period "49 million Americans were told that their personal information was lost, stolen, or improperly disclosed by government agencies, banks, or various other companies." Out of this amount, roughly 19% ended up having an identity theft or financial loss issue stemming from the breach. Credit monitoring is supposedly the best defense against this, but that may not be the case.

The Best New Technology, or Not?

For those looking for the most comprehensive credit protection, simple report monitoring probably won't do the job. By the time a thief has accessed your information and done something reportable, it may be a significant amount of time after the offense. A newer security measure called ID fraud protection "keeps an eye on other windows by trawling Internet chat rooms and directories and by sifting through online public records for signs of Social Security Number fraud, stolen credit-card account trafficking, and other types of ID theft," according to Consumer Reports Money Adviser. On top of that, these plans usually include credit report monitoring, giving more bang for the buck.

Is Your Social Security Number Too Available?

Because of the way incidents are reported on a credit report, it could be awhile before an item turns up under your particular Social Security Number. Consumer Reports says that a thief can take advantage of a "temporary fragmented file" that matches a number to a completely different person. It could be a significant amount of time before the information is melded together in an actionable manner. Credit monitoring didn't save one couple whom Consumer Reports cites in their write-up; The victims were members of credit monitoring services from all three major credit reporting agencies when they were victimized.

Companies are Secure Already

Smart Money writer Aleksandra Todorova writes, "Already, most lenders engage in...real-time monitoring of consumers' personal identity information by calculating identity scores that rate the likelihood that a specific credit transaction or application is fraudulent." This explains the inconvenient declines at the register that necessitate a call to the bank when you've spent more money than usual. Even though this fact seems in contrast to the large data breaches that occur yearly, the vast majority of questionable charges and purchases get stopped at the bank level. Credit monitoring might not serve to do much more to stop fraud than already-existing algorithms and fail-safes.

Privacy Issues

You don't want credit monitoring if privacy is a concern. Credit monitoring services archive every charge for analysis. This means that your information could later be used by people and organizations without prior consent or knowledge. Todorova notes the growth of information brokers who sell dossiers containing personal data, noting that "huge databases of consumers' personal information can be used by lenders, marketers or any other service provider willing to pay the 50 cents to $2 charge per transaction to have it scored for the likelihood of fraud."

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Why Are Companies Doing Credit Checks Before Hiring?

According to MSN Money's Liz Pulliam Weston, a 2006 member survey conducted by the Society for Human Resource Management revealed that 43 percent of companies conduct credit checks on job applicants.

The Facts

Companies perform credit checks on applicants to gauge their responsibility. If a person cannot manage his finances, a company may be less likely to hire him. In addition, employers may consider individuals in debt a higher theft risk, Weston says.

Significance

A potential employer will most likely conduct a credit check on applicants for a job that involves handling money or other high value items.

Considerations

The bad credit sometimes caused by unemployment can be the very thing that prevents an applicant from landing a job that could improve his credit.

Options

If events beyond your control, such as a divorce or medical emergency, contributed to a derogatory credit rating, discuss it with an employer before a credit check, suggests employment attorney Manesh K. Rath in Weston's article.

Effects

Employers will often conduct a "soft pull," reports lendingtree.com, a credit check that appears on your credit report but can only be viewed by you, not future lenders or employers, and does not negatively impact your credit score.

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Will My Credit Score Go Up After Paying Off a Credit Card?

Paying off debt, particularly high balances, does increase a credit score. The increase depends on total amounts owed, debt-to-credit ratios, initial credit scores and charging habits. Additionally, when your score changes depends on the credit card issuer's reporting time frame and how often credit reporting agencies update your score. Consumers are encouraged to check their credit history for accuracy after paying off debt, closing accounts or any other credit-altering activities.

Credit Scoring

Many factors such as payment history, length of credit and inquiries influence your overall credit score. The total amount of debt and amounts owed compared to available credit determines 30 percent of your score. While having credit cards near the available limit or numerous cards with balances lowers your score, low balances in comparison to high limits increases scoring. Any delinquency marks remain on your credit report for up to seven years regardless of the payment status. However, the further back on your credit history delinquencies are, the less they affect your score.

Time Frame

Generally, most creditors report to credit reporting agencies every 30 days. While a report may reflect an account is paid, it may not immediately reflect on the score depending on reporting agency scoring adjustment dates. It may take a month or two for the reporting agency to change a credit score, but lowering overall debt eventually increases scoring. Adversely, if you charge a card up each month after paying it off, your score may continually reflect the high balance dependent on your issuer's reporting date. Waiting a month between paying the balance and making charges helps your score reflect accurate debt ratios.

Concerns

Closing revolving lines of credit alters your debt-to-credit ratio and the length of credit history. While closing accounts to avoid spending is always a good idea, consider leaving paid accounts open to increase your credit score. If you decide to close a credit card after paying it off, do it in writing and check your credit report to make sure the account reflects the paid status and states "closed by consumer" rather than the issuer.

Considerations

Check your credit report regularly for errors. While many errors are minor, multiple listings for the same debt, inaccurate balance reporting and account status mistakes occur. Federal law entitles all consumers to a free copy of their credit report from all three major credit reporting agencies --- Equifax, Experian and TransUnion --- once yearly. Correct errors by calling the lender to have the information changed or by contacting the credit-reporting agency to have the information removed.

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Canadian Credit Information

Most adult Canadians have credit reports on file that outline their basic identifying information such as current address as well as their bill-paying history, according to both Equifax Canada and Credit Counseling Canada.

Identification

Two major agencies issue reports about Canadian consumers in the country; Equifax and TransUnion.

Significance

Credit reports not only help potential lenders decide whether to risk extending an account to a consumer, but also potentially impact a Canadian's ability to get some apartments, according to Equifax Canada and Credit Counseling Canada.

Potential Problems

If you haven't paid your credit card bills on time, you might experience problems getting a good car insurance rate, a housing rental and even some jobs, according to Equifax Canada.

Time Frame

Negative account information such as late payments, bankruptcy and unpaid bills sent to collections typically stay on credit reports for six years, according to the Spend on Life website. The time may vary in some provinces.

Considerations

Every time you apply for credit, "inquiries" post on your reports, according to Equifax Canada. Inquiries remain for three years and too many can impact your ability to get new credit.

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How Do Credit Report Agencies Obtain Their Information?

Credit Reporting Agencies

A credit reporting agency acts as an intermediary between you and creditors. Potential lenders are able to determine if you are financially responsible from your credit report, because the agencies report your credit history, showing how you handle credit and debt.

A credit reporting agency is also referred to as a credit bureau. Most creditors request a copy of your report from one of the big three -- TransUnion, Experian or Equifax.

How Credit Reporting Agencies Obtain Information

Credit reporting agencies obtain their information from creditors with whom you have done business in the past, and they also gather personal information from public records. According to Experian, creditors that supply information to credit reporting agencies have to follow credit reporting guidelines detailed in the Fair Credit Reporting Act, such as verifying that the furnished information is accurate and complete with specific account details. The information being furnished must be related to payments or payment history, tenancy, employment and past or present insurance claims. In addition, the business entity that supplies the information must include its name, address and phone number.

The Information

The information the credit reporting agencies collect from creditors is stored in a large database, and the agencies are responsible for updating your credit report each time something in your financial file changes. Most reported information remains on your report for up to seven years; a bankruptcy remains on your credit report for 10 years.

Errors

The information credit reporting agencies obtain from creditors is not infallible, so it's important to check your credit report at least once a year. The Fair Credit Reporting Act gives you the right to obtain a free copy of your credit report each year from all three credit reporting agencies (see Resources). An error on your credit report can cost you hundreds of dollars in high interest rates, or you may even be denied credit because of an inaccurate report.

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Credit Bureau Problems

Credit bureaus assign individuals a credit score to indicate whether or not they pose any potential credit risk. Credit scores typically range from 300 to 850, with higher numbers awarded to people with good credit. A low credit rating, caused by unpaid bills and credit late fees, can make it difficult for individuals to acquire a mortgage, business loan, auto loan or other form of financial assistance. You should always try to keep tabs on your credit score, as one error in your credit report could result in disastrous consequences for your financial future. And credit bureaus aren't immune to mistakes.

Errors

Up to 70 percent of consumer credit reports contain errors, according to CreditReport.com. The most common missteps include incorrect reporting of unpaid loans or debts, misfiling of credit card accounts, confusion over family members with similar names or accounts being opened without your consent. These simple errors can lead to many serious and ongoing problems when dealing with credit bureaus.

Fraud

Sometimes credit bureau problems aren't due to accidents but deliberate criminal activity. Once only associated with identity theft, credit fraud has become far more prevalent due to the increase of online transactions and online banking. Criminals may also simply swipe credit cards and run up hefty expenses before the transactions can be stopped. If left uncorrected, these fraudulent activities can destroy an otherwise healthy credit score and lead to countless problems when trying to deal with credit bureaus.

What to Do

If you suspect your credit report contains erroneous information, you'll need to contact the credit bureaus immediately to dispute the claims. Once the bureaus are aware of the problem, contact the responsible creditor to get written proof of the mistake and then present the documentation to the bureaus. Always keep a paper trail with copies and certified mail receipts for any mailed documents. Filing a complaint with the Federal Trade Commission will also help expedite the process, as the complaint will get forwarded to the three major credit bureaus. If problems persist and you're unable to resolve the issue on your own, you may need to hire an attorney to pursue the matter.

Prevention

Taking a few extra precautions may help you guard against credit fraud and avoid unwanted credit bureau problems. Review your monthly credit statements for any anomalies or unknown charges. Never carry important documents such as your Social Security card or birth certificate that could be used to steal your identity. Also, limit the number of credit cards you carry in case you ever lose your wallet or purse. Even the pre-approved credit offers you get in the mail can be used to perpetrate credit fraud. Shred all such offers to prevent them from falling into unscrupulous hands.

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Would Lowering Your Credit Limit Lower Your Credit Score?

Many credit card companies are lowering their borrowers' credit limits to reflect the recessionary economy. Borrowers often are surprised by this, and many find out the hard way when they try to charge something. More important than the inconvenience is the impact a lowered credit limit can have on your credit report and score. Understanding how credit reports work can help you minimize the impact on your credit score.

The Effect of a Lower Credit Limit

While the precise formula for calculating a credit score has never been made public, nearly one-third of the score is based on how much debt you have compared to how much credit you have available. The wider the gap between your debt and your credit limit, the higher your credit score will be. For example, if you have a credit card balance of $750 and a credit limit of $3,000, you are only using a small portion of the credit available to you -- 25 percent. This is viewed favorably when determining credit risk, and, therefore, it boosts your credit score. If, however, you have a $5,000 credit limit and you have maxed out your card by using all the available credit, this will seriously harm your credit score. Therefore, having your credit limit lowered can have a negative impact on your score, because the percentage of available credit used will be higher.

Minimizing the Impact

If your credit limit has been reduced, you should try to reduce your credit balances by the same percentage as your limit reduction. This keeps your debt-to-credit ratio roughly the same and should minimize the impact on your credit score. If you do not have the money to pay down the debt, try to have the credit limit raised on another of your revolving credit lines. The impact is measured in totality (the debt-to-credit ratio of all your accounts combined), so it does not matter where the extra credit room comes from.

Closing Your Credit Account

If your credit limit is lowered, you may be tempted to close your credit card account. This will damage your credit score further, however. Credit scores favor those who have a lot of available credit and are using it wisely. By closing an account you are essentially dropping your credit limit in that account to zero. You should try to pay down your credit card balance quickly, but also try to use the account at least once a month to make a purchase to keep it active in the eyes of the credit bureaus.

Protecting Yourself from Credit Tightening

Monitor your credit accounts every month to ensure that your credit limit was not lowered without proper notification. By law, credit card companies must notify you by mail of a change in your credit limit. Review your credit limit on your statement and watch for changes. Also, make your payments on time to minimize the chance your credit limit will be reduced.

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Three Credit Rating Agencies

A credit rating agency gathers and analyzes information that individual or institutional investors use to assess the issuer of a debt obligation or securities will honor them at the due date. There are three major credit rating organizations in the United States: Moodys, Standard & Poors and Fitch.

The Ratings

Fitch introduced an AAA through to D credit rating system in 1924. Standard & Poors has since adopted the same system. The AAA grade represents the highest credit score, followed by AA and A through to D. Moodys uses a different system which starts with Aaa as the highest rating. The Aa1, Aa2 and Aa3 and A1, A2, A3 are grades given to companies with low credit risks in the immediate future, but susceptible to long-term risks. The Baa1, Baa2 and Baa3 ratings are for institutions deemed relatively risky. All these categories under Moodys system are considered investment grades. Non-investment grades start from, Ba1, Ba2, Ba3, then B1, B2, B3. The C grades are assigned to institutions already in default. All three agencies also give an intermediate between AA and B. For example, a country with a fairly troubled financial history seeking to issue international bonds could be assigned a B+.

Risk Assessment

All three crediting rating companies provide risk assessment and research data on both private and public institutions that issue debt and fixed-income securities. In June 2010, for example, Moodys relegated the Greek government bond rating to junk status because the heavily indebted country was struggling to honor its debt obligations. Other examples are in developing countries. Angola, seeking to issue international bonds amounting to $1 billion, was given a B+ rating by Standard & Poors, which means the risk involved is highly speculative. The ratings allow investors to make informed decisions about certain securities.

The Agencies

These credit rating agencies subject each other to the same scrutiny. In June 2010, for example, S&P, which has an A1 rating for Moodys, threatened to downgrade its short-term rating following legislation that could result in a change in the applicable pleading litigation brought against rating agencies. The credit rating agencies have also been criticized for failing to foresee the credit crisis and collapse of the housing market, which resulted in the global economic meltdown that began in 2008.

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Does a Credit Report Freeze Block Your FICO Score?

Requesting a credit report freeze provides an important weapon in fighting identity theft, because it prevents a lender from pulling a credit report -- something almost all creditors require, according to the Consumers Union. A credit report freeze can block your FICO score from most requests to see your credit history.

Function

A credit report freeze blocks any new lender from looking at your credit history and score, according to Experian. The lender instead receives a code signifying a blocked report. Anyone else who might want to see your credit score, such as an employer, utility company or even yourself, cannot pull your credit report. The credit reporting agencies will still update your report with new information.

Current Lenders

Nothing stops current lenders from looking at your FICO score, according to MSN Money Central. If you wanted to, for instance, raise your credit limit, a credit report freeze would not impede your ability to do so.

Lifting the Freeze

You can temporarily allow lenders to view your credit report even after instituting a permanent freeze by setting up a personal PIN or password, according to MSN Money Central. To lift a credit report freeze, you will have to contact all three credit reporting bureaus and ask them to temporarily lift the freeze and give them your PIN or password.

Fraud Alerts

You will have to pay a fee -- between $10 and $12 depending on your state of residence -- to freeze your credit report, according to MSN Money Central. Alternatively, you can get a fraud alert for free and all it takes is a phone call. A fraud alert requests the lender viewing the report to verify the identity of the applicant. The downside is that lenders can essentially ignore fraud alerts because the law does not dictate what constitutes reasonable measures to verify identity. Also, fraud alerts only last 90 days, while credit freezes can last a lifetime.

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How Payments Affect Credit Score

Of the many factors that affect your credit score, payments are arguably the most important. Keeping up with payments improves your credit score, while missing payments destroys it. It can take years of financial diligence to repair a few months' worth of mistakes. Managing your payments responsibly is the best thing you can do for your credit score.

Credit Scores

A credit score is a three-digit summary of your credit history over the last seven years. Each of the three major credit bureaus calculates its own credit score using a slightly different formula, so you have at least three scores. Your credit score reflects your overall debt amount, your repayment history, the length of your credit history, the type of credit you use, and other factors. Every time you miss or are late with a payment, your credit score will drop. Making payments on time will raise or maintain your credit score.

Preventing Missed Payments

It can be hard to keep track of all your bills. If possible, try to set up an automatic payment to pay the minimum amount each month. Pay more than the minimum if you can, but always try to pay at least the minimum. If you're late once by a few days, it won't hurt your score very much, but if you're late regularly, or if you fall behind by more than 90 days, you can lose over 100 points. It can take up to two years of regular payments to undo this damage.

Why It Matters

Many people don't think about their credit scores unless they are applying for a mortgage, when 50 points can make a huge difference in getting a loan. However, your credit score affects many other aspects of your life. Every time you apply for a loan, a credit card or a cell phone contract, the lender will run a credit check. Many property owners run credit checks before renting out apartments. Some employers have even started running credit checks on prospective employees. No one wants to employ someone who is bad with money, so a bad credit history can hurt your chances of getting your dream job.

Raising Your Credit Score

In addition to keeping up with payments, you can raise your credit score by paying down enough debt to decrease your debt-to-credit ratio. If you've paid off a credit card, don't automatically cancel it; keeping the same card for several years will increase the length of your credit history. You should also diversify the types of credit you have. Lenders like to see that you can pay off different types of debt, not just credit cards.

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How Many Points Does a Paid Tax Lien Decrease Your Credit Score?

A tax lien will definitely hurt your credit score, but it's impossible to say by exactly how much. It's also impossible to say exactly how much paying the lien off will improve your score. Companies treat the systems used to calculate your FICO score and other credit scores as confidential information. Credit bureaus do say, however, that the effect of any one item will depend on what else is in your report.

Tax Liens

A tax lien gives a government body a claim on your property -- a house, a car or a boat, for instance -- for unpaid taxes. Local governments can levy liens on your real estate if you fail to make your payments; the IRS may use liens if you don't pay income tax. To pay them off, you'll have to settle not only the original debt but any interest and penalties the government has applied. Even if the government doesn't foreclose, it's difficult to sell property with a lien already on it.

Credit Reports

Even after you pay off a tax lien, it will stay in your credit file for seven years. Unlike other bills, if you pay off only part of a tax debt -- the IRS sometimes accepts partial payment -- it will still be treated in the report as if you'd paid it off in full. However, there is no guarantee that paying it off will restore as many points as filing the lien took off your score.

Credit Score

Your payment history is the largest part of your FICO credit score. It's based on whether you pay your bills regularly, how late your late payments are and the size of the delinquent debts. Timing is also important: A tax lien you paid off six years ago will matter less than a lien you paid off six months ago. The lien's effect on your score depends on the overall report: If you have bankruptcies or several delinquent credit accounts, paying off one bad debt may not help much.

Errors

If you discover your credit report lists an unpaid lien that you already settled, you're entitled to have it corrected. Contact the credit bureau and present the proof that the lien was settled. Check with the three big credit bureaus, Experian, TransUnion and Equifax, in case they all have the same mistake, and correct it there too. When you check your credit again, make sure the bureaus removed the information and didn't re-enter it. The Annual Credit Report.com website will provide you with three free annual reports, one from each bureau.

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How to Monitor All Three Credit Bureaus & Scores Monthly

The three primary credit bureaus, Equifax, TransUnion, and Experian, all receive and report slightly different information on your credit report. They also calculate credit scores, the three digit number creditors check before issuing you a credit card or loan, differently. Viewing your credit report from all three ensures that you have the full picture of your credit history. Monitoring it monthly helps you track changes, report any fraudulent activity immediately, and manage and hopefully improve your credit score.

Instructions

1

Find a site that offers monitoring of all three credit bureaus. Most cost around $10-$15 per month and automatically refresh your credit score and credit report monthly. You can pay for the services with a credit card, debit card, or PayPal debit card. There are websites that charge the same amount to track only one bureau, so make sure you read the description before signing up. Each of the credit bureaus has its own online credit monitoring service, but each costs $10-$15 to track only their own reports. Some comprehensive credit report monitoring companies include Bank of America, Triple Alert and True Credit.

2

Apply for your credit report monitoring. Some sites offer a free or $1 trial month so you can try their services. You will need to enter your Social Security number, birth date and other personal information, so check the URL for "https" to make sure it's a secure connection. This may seem like too much personal information, but it's something credit bureaus already have and they need it to ensure that only you are receiving the information. If you don't have a Social Security number you'll need to apply for one before you can access your credit report.

3

Check the website every two to four weeks to monitor any changes in your credit report. If an account or credit card is opened that you did not authorize, call the credit bureau immediately to put a "fraud alert" on your account. Monthly credit report monitoring services have tools that help you plan and improve your credit by making smart choices with your money, paying bills on time, and keeping your information current and accurate.

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How to Understand Credit Rating Points

Every consumer who has a credit file also has a credit score that is compiled by adding up a number of points based on his credit rating. While there are actually different types of scores, the Fair Isaac Corp. score, commonly known as a FICO score, is the most commonly used number. While the exact formula by which it is calculated is not public, it is influenced by your credit rating points in several areas, such as bill-paying history and available credit. If you understand these points, you can use them to better understand your credit score.

Instructions

1

Obtain your current FICO credit score from a free website such as Credit Karma. To understand your credit rating points, it helps to know your score so you can work backwards and evaluate the various factors that go into its calculation.

2

Obtain your current credit report from at least one of the three major credit reporting bureaus. The three major bureaus (Experian, Equifax and Transunion) are all required to give you a free copy of your credit report once each year. You will need at least one of these reports to get the information that will help you understand the credit rating points that went into calculating your credit score.

3

Check the section on bill paying and note whether your credit report contains any negative information, such as late payments and collections. According to Bankrate, the way in which you pay your bills accounts for 35 percent of the credit rating points that make up your score.

4

Tally up your available credit on all of your open accounts, even if you are not currently using them. Bankrate warns that if you have too much available credit, it can negatively impact your credit rating points because potential lenders will be afraid that you might use your available credit and rack up debts that you cannot afford to pay. Bankrate says that available credit accounts for 30 percent of your credit rating points.

5

Calculate the amount of time you've had your oldest accounts. Bankrate says that your credit rating points are boosted by old accounts that you've held for a long time with the same lender or credit card issuer. The length of your credit history counts for 15 percent of your credit rating points.

6

Count the different types of credit accounts to see how many you have of each type. Bankrate says that lenders like to extend credit to consumers who have a wide range of accounts. If your credit is spread out between installment loans and revolving credit cards, you'll get more credit rating points. This mix contributes 10 percent to your credit score.

7

Count the number of recent inquiries that are listed on your credit report. Every time you apply for a loan or account and the potential lender pulls a copy of your credit report, it will be noted. If you have a large number of applications in a short period of time, lenders will worry that you may be desperate for money or that you are planning to run up bills prior to declaring bankruptcy. Too many applications will bring down your credit rating points. This accounts for 10 percent of your points.

8

If your score doesn't seem to line up with these five areas, recheck your credit report and see if there is any erroneous negative information. If there is, you can dispute it with the credit bureau. If the credit bureau cannot confirm it, it will be removed and your credit rating points will go up.

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How Does an 18 Year Old Build Credit to Buy a Car?

Once you turn 18, you can legally enter into a contract, but that doesn't mean you'll necessarily qualify for most credit accounts or a car loan. If you can get that first account, however, having a short credit history can help you out due to the way the FICO model handles new borrowers. Just make sure you never miss a payment or run up a large bill.

Standard Credit Card

A parent can add you as an authorized user to his account at any time. This helps you build credit based on your parent's credit. You do not receive the bill, and if the parent feels uncomfortable giving you access to the account, does not need to let you use the card to build credit. Of course, this only benefits you if your parent doesn't carry balances over from month-to-month and pays on time. As an alternative, if your parent feels you are ready, under the Credit Card Accountability Act of 2010, or CARD Act, those under 21 can get a credit card if they can verify income or if a parent co-signs.

Secured Cards

Being willing to put down a few hundred dollars as a deposit and pay a yearly fee almost assures you a secured credit card account. The deposit makes this type of account so low risk that rejections are a rarity. However, the creditor must report to the major credit agencies or else this is a futile effort. Most of the top banks report to the bureaus, so the BCS Alliance suggests going with a well-known national bank.

Alternative Credit Bureaus

Alternative credit bureaus let you report payments that typically do not build credit with the major bureaus, such as rent and cell phone contracts. However, you will have to go to the agency and pay them to verify your payment history with a company -- lenders usually only report data to the three major credit bureaus. If, for example, you wanted an alternative agency to report payment history on a cellphone contract, you would have to seek out an alternative credit bureau, sign up for their service and send in documents like canceled checks and statements from the cellphone company. Lenders might accept an alternative credit score when you have no traditional credit history, but this is not a guarantee. Thus it is usually better to go for an account that reports to Equifax, Experian and TransUnion -- the major credit agencies in the U.S.

Tip

Do not open too many accounts at once and, instead, work on paying the monthly bill and avoid carrying any debt. After about six months you should have sufficient history for the credit bureaus to calculate a credit score. While a short credit history is usually a bad thing, it could help you if you have a perfect credit file. The credit bureaus use a different formula for young buyers and only compare them to people with short histories, so a good credit history could put you far ahead of the pack of other borrowers in your age group.

When Are You Ready?

Once your score reaches about 620 you can probably qualify for a car loan, but not at a reasonable rate. It pays off in the long run to hold off until your score gets into the 700s or higher.

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How to Remove Bad Debt That Has Been Paid Off From Your Credit Report

Credit reports can contain many errors, including purchases you never made or the inclusion of bad debts you already paid. To correct your credit report that claims that you have not paid a bad debt, you must write a letter to the credit reporting agency and include supporting documents, if you have them. The agency then has 30 days to respond to your dispute.

Instructions

1

Review your credit report from all three major credit reporting agencies for errors. The agencies are Equifax, TransUnion and Experian. Highlight any bad debts that should not be there because you already paid them off. A free copy of your report from each bureau is available from Annualcreditreport.com annually (see Resources).

2

Write a letter to the agency that is incorrectly reporting this information. Include your full name, Social Security number and the name of the company with whom you are taking issue. Include details about when you paid off the debt. Attach copies of confirmation letters, canceled checks or credit card statements that back up your case.

3

Send the letter certified mail and ask for a receipt. Keep the receipt as proof that the agency got your letter. The agency must contact the company with whom you have a dispute. Once they settle the dispute, the agency must notify the other major reporting agencies of the correction.

4

Send the company one more letter asking them to send copies of the corrected report to anyone who has checked on your credit in the last six months. The agency is required by federal law to comply with this request, according to the Federal Trade Commission.

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Problems with Credit Reporting Agencies

If you have ever dealt with a credit reporting agency, you know there could be a number of problems you could encounter. Sometimes it takes a significant amount of time to resolve the various disputes and problems that arise. Some of the errors can lower your credit score and cost you money when it comes time to borrow. Always get a copy of your credit report, at least once per year, to see if there is any information which is not yours.

Similiar Names

The credit reporting agencies have been known to make errors. If your name is similar to another person's, the credit reporting agency may mix up your credit files. A person with the name "James Taylor" and another with the name "James Taylor Jr." can easily have their credit files intermingled. Another problem can arise even after the error has been corrected. Sometimes the reporting error happens again and again.

Dispute Codes

If you pay off a judgment or collection account and it remains on your credit file after the seven years has expired, it may be difficult to have the item removed. Numerous attempts are sometimes needed to get the credit reporting agency's attention. The credit reporting agency has two codes which are designated for disputes. The two common designations are: someone indicates an account is not theirs and a customer states that the account is closed. If disputes fall outside of these categories, it can take time to resolve these issues.

Voice Mail

If you need to speak with a representative at one of the credit reporting agencies, it will be difficult at best. You can call a toll-free number, but there is a good chance that you will not be able to speak with a representative. A pre-recorded message will provide you with information you may need, and sometimes you can be re-routed and transferred from department to department without getting your issue resolved.

Legal Action

Sometimes you may have to bring legal action against a credit reporting agency to get information on your credit file corrected. This can be time consuming as well as costly. There could be mountains of paperwork and documentation you will need to prove your claim. Only bring legal action against a credit reporting agency as a last resort.

Considerations

Negative information on your credit file can cost you a job. When you find out about the derogatory information, it may be too late to save a job offer. Having negative information which is not yours reported on your credit file will increase the likelihood that creditors will deny your credit application or charge you a higher rate of interest plus fees. Negative information impacts your ability to rent a car or an apartment.

Pre-Approved Offers

Credit reporting agencies sell your personal information to credit card companies and insurance companies that offer pre-approved offers for credit and insurance products. A lot of people do not wish to receive this information, and they must opt out by going to the appropriate website, otherwise the offers will continue.

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Will it Hurt My Credit Score If I Ask to Lower My Credit Limit on My Credit Card?

Asking the credit card company to lower your limit could be an effective way to control spending, but this might damage your credit score and make you appear to be a worse borrower. The percent of your credit limit which you use is an important ratio in the FICO score calculation, and one you have much control over. Instead, request a higher limit.

Identification

Losing available credit hurts your credit utilization score -- the percent of your total credit limit available on all cards, and that on each account, according to Bloomberg. If you had $2,000 on a $10,000 limit across all cards and cancel an account with a $2,000 limit, for example, your utilization jumps from 20 percent to 25 percent. Good borrowers do no use more than 25 to 35 percent of their credit limit.

Effect

A rising credit utilization rate could lower your score by up to 45 points, and take you from the category of excellent borrower to above-average or average. This could mean paying a higher interest on future credit cards you apply for, or any other loan. Most credit card companies lower limits when they consider you a high risk, so there is little need to do it on your own.

Ask for a Higher Limit

If you care about maximizing your credit score, you should ask for a higher limit on your card. The bank will probably grant your request, unless you have a poor payment history or a maxed-out line. This is also a great way to potentially boost your score without applying for a loan or taking on any more physical debt, as long as the lender does not perform a hard credit check. Hard credit checks will hurt your score a few points, and much more when you have six or more within a year. The only way to know for sure if the creditor does a hard check is to ask the customer service representative.

Tip

Despite popular misconception, the FICO model does not ding you for having too much available credit. Any score that does is not a true FICO score, and of little importance in the consumer credit industry. In addition to asking for a higher limit, try to cut credit card debt as much as possible. Thirty percent credit utilization is a good goal, but aim for 0 percent.

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How Much Do Collections Lower Your Credit Score?

Bills can go to collection agencies if they are not paid. Generally a lender waits about six months before turning accounts over to outside debt collectors, according to MSN Money writer Liz Pulliam Weston. First internal agents call you, asking for money and sometimes making settlement offers. After 80 days, the lender charges off the account for tax reasons and sells it to a collection agency. The collector badgers you for payment, dropping your credit score.

Impact

Your credit score is calculated based on a wide spectrum of financial information, according to the MyFICO scoring company. Collection accounts play a role, but so do many other things like your payment performance on non-collection accounts, balances, available credit, number and type of accounts and how long they have been open. Collection accounts are very negative, but their exact impact depends on your other information. Your score will probably drop into sub-prime territory, since collections are preceded by lengthy payment delinquency. MyFICO explains that late payments and collections fall under "Payment History," which is 30 percent of your score.

Time Frame

Collection accounts appear on your credit reports for a limited time. The Federal Trade Commission (FTC) website advises that most negative items, like late payments, collection accounts, repossessed cars and foreclosed homes, are erased by the Equifax, Experian and TransUnion credit bureaus in seven years. Your credit score comes from data on your reports, so collections lose their impact completely once they get removed. Erasure should happen automatically, but the FTC explains that you have a right to use annualcreditreports.com to check your credit reports at no cost and dispute outdated items with the credit bureaus if they still appear.

Settlements

Collection agencies pay less than face value for debts, so they will usually settle for a discounted amount as payment in full. Paid collections are just as bad for your score as unpaid accounts, according to Bankrate.com columnist Steve Bucci, so aim for removal when discussing a settlement with a debt collector. The agency can stop reporting the account to the credit bureaus, thus removing its influence on your credit score. Ask for a removal commitment in writing before paying the debt.

Considerations

Credit cards, loans, cell phone accounts and medical bills are not the only things that go to collection agencies. Pulliam Weston warns that some libraries turn book fines over to collectors, and cities often use private agencies to get payment for old parking tickets. These minor obligations impact your credit score as much as a credit card or loan in collections.

Disputes

Sometimes companies turn bills over to collection agencies if you refuse to pay for what you believe is a valid reason. For example, you might disagree on the amount owed to your former cell phone company. Pulliam Weston advises disputing such accounts with the credit bureaus, as they must eliminate challenged information if they do not validate it. Debt collectors sometimes ignore inquiries on old or small accounts.

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How to Order a Credit Report

Every United States consumer receives a free annual credit report, on the condition you request it. Under the Fair Credit Reporting Act, each of the three major credit reporting agencies --- Trans Union, Experian and Equifax --- must provide a free annual credit report to each consumer who requests it. When you request your credit report, you need to have your Social Security number handy and be able to answer personal questions that only you would know. This protects you against identity theft.

Instructions

1

Visit the free website provided by the three credit reporting agencies to request your free credit report via the Internet. Navigate to the AnnualCreditReport.com website. Don't misspell the name as several scam artists have established websites with similar names in an attempt to steal your information. This free website is the only website authorized by the Federal Trade Commission and endorsed by all three credit-reporting agencies.

2

Select your state and press "Request Report."

3

Enter your first name, middle initial, last name and suffix, if any. Enter your date of birth by month, date and year. Input your Social Security number and check the box under this field that says "Check this box if, for security reasons, you want no more than the last four digits of your Social Security Number to appear when you view or print your credit report."

4

Scroll down, enter your current address and answer the question that indicates if you have lived at that address for the past two years. If not, scroll further down and enter your previous address. Below this, enter the security code from the screen and press "Continue."

5

Click each check box next to the report desired: Experian, Equifax and Trans Union. If you selected all three reports, the program takes you to each one of the credit reporting agencies for your individual report. After viewing the individual report, the process requires you to click the link at the top of the page "AnnualCreditReport.com" that brings you back to the Annual Credit Report website. Press "Next" to continue or "Cancel" to quit.

6

Choose "Annual Credit Report" on the next screen and answer a series of personal questions that verify your identity. Questions may include former addresses, people who lived with you, your current mortgage amount, former street names and cities or counties in which you previously or currently reside. Click "Submit."

7

Print the credit report or save it as a PDF document on your computer. Select "Print Report" to open the report in a second screen for printing. Close when complete. Hit the "AnnualCreditReport.com" button to return and request reports from the other two agencies.

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Does Opening a Credit Card Affect Your Credit Score?

You must have credit cards, loans and other accounts to build up your credit history. It's a delicate balance, because too little credit means lenders don't have enough information to judge your payment history and other factors. Too much means you might overextend yourself and default on your accounts. Credit applications can be positive or negative, depending on your overall financial picture.

Process

You must fill out an application to open a credit card. The bank will get a copy of your credit report and will assess your financial picture, including existing accounts, income, payment history and the overall length of time you've been using credit. This credit review is considered a "hard inquiry," which will show up on your credit report so other lenders know you recently submitted an application.

Effects

Your credit card application will affect your credit score in two ways. The hard inquiry will deduct up to five points, according to major credit score compiler Fair Isaac Corp., or FICO. It will bring your score down even more if you make several applications within two or three months.

The new credit card account will have a positive or negative impact, depending on your overall credit history. It will help you if you have a modest amount of available credit overall and are using it responsibly and making payments on time. It will hurt if you already have numerous credit cards with high credit limits that are completely maxed out, especially if you pay late or skip payments.

Benefits

The benefits of opening a new credit card often outweigh the credit score impact. For example, you might find an account with a much lower interest rate that will save you significant money in the long term if you transfer your existing balance. You might find a reward card that pays you back in cash, airline miles, or redeemable points whenever you use it. It makes sense to lose five points for savings or rewards.

Misconceptions

You might think it makes sense to close old credit card accounts when you open new ones and transfer your balances. The opposite is true, according to consumer advocate Clark Howard. Your score might be harmed by closing credit cards because you lose the good history built up on those accounts. Howard recommends putting them aside and making a small purchase twice a year to keep them active and in good standing. Pay them off as soon as you get the statements.

Warning

It is absolutely essential to open credit cards after a bankruptcy or severe financial problems that have destroyed your credit score. You cannot rebuild credit without proving you can use it responsibly. Banks close your accounts if you stop paying and your debts are discharged in a bankruptcy. It is hard to open a new card unless you work with a bank that specializes in high-risk borrowers, and you'll be hit with a high fees and exorbitant interest.

Secured credit cards are a lower cost alternative, according to Jeremy Simon of CreditCards.com, but you must guarantee them with a bank deposit equal to the credit line. The money can be seized by the bank if you don't pay your bill. Your credit score will go up if you build up an excellent payment history on your high-risk credit card or secured account, and you will soon be able to qualify for standard terms.

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