The Best Way to Help Clean Credit

Bad credit can keep you from owning a house, car or sending your children to college. There is good news: You don't have to have it forever. "Cleaning" your credit report is the process of improving your credit report by taking certain actions. One of the best ways to help clean your credit is to have bad accounts or notations removed from your credit report. These accounts include charge offs, collections and, to a lesser degree, late payments.

File an Online Dispute

If you have recently received your credit report, you have the option of filing an online dispute with the credit bureau. The bureau will ask the lender or collector to verify the account. If they do not do so with 30 to 45 days---depending on how you obtained your credit report, according to Equifax---the credit bureau will automatically delete the account under the Fair Credit Reporting Act. If you have an older, paid collection account or charge off, the lender or collector may not bother to respond to the dispute or may no longer have the information necessary to verify the account.

Ask Nicely

Although late payment notations don't hurt your credit as badly as a charge off or collection account, they still damage your credit score. The more recent the late payments were, the more they will hurt your score. If you have a good relationship with the company by which the late payments have been reported, then it may be worth your while to call the company's customer service number or write a letter and very politely ask to have the notations removed. You may want to mention your long payment history with the company or the years of on-time payments you have had since your late payment notations, if one of these applies to your situation.

Let it 'Fall Off'

All collection, charge offs and late payment notations should automatically "fall off" after seven years under the Fair Credit Reporting Act. For charge offs and collection accounts, the clock starts ticking 180 days after the date of the first delinquency; in other words, 180 days after the first missed payment. So, if you have a credit account that you last paid on in July 2004, it should "fall off" in February of 2012. This remains the same no matter how many collection agencies buy it during that time. The date of the first delinquency remains the same as does the date that the debt should "fall off" of your credit report, according to the Federal Trade Commission. Collection agencies may try to move this date forward, a process known as negative re-aging, but it is illegal and you should dispute this with the credit bureaus, according to Credit.com.

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Credit Score FICO Guidelines

Your FICO score is a measure of your credit report that is converted into a credit score. This score is available to you for your Equifax and TransUnion credit reports, but not longer for your Experian credit report as of early 2009, according to an Experian Consumer Alert. Experian still offers its own scores, FICO scores and other credit risk scores to its business clients, and you will have access to those other scores, too.

Payment History

Your previous payment history makes up 35 percent of your FICO score, according to MyFICO. This includes positive open accounts, as well as collections, charge offs and public records such as judgments and bankruptcies.

Current Balances

The amount of money you currently owe and how many cards you have with balances make up 30 percent of your FICO score.

Length of File and Accounts

How long you have had a credit file, or the length of your credit history, and how long you have had each of your open accounts make up 15 percent of your FICO score.

New Credit and Inquires

How much new credit you have and the number of credit inquires you have had within the last two years make up 10 percent of your FICO score.

Variation of Accounts

The variation of the types of accounts you have makes up 10 percent of your FICO score. If you only have revolving accounts or retail accounts, you FICO score may be a little lower than if you had revolving and installment accounts or retail and credit card accounts.

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How to Stop Inquiries on My Credit Report

A credit inquiry appears on your credit report any time a company obtains your credit report. Each time you apply for credit, such as for a car loan or a new credit card, the business offering you credit will run a credit report that will appear as a credit inquiry on your report. These credit inquiries that you authorize are the only type that affects your credit score. Inquiries that you do not authorize will also appear on your credit report, but do not count toward your credit score. These are made by companies that seek to offer you credit services, such as pre-approved credit cards. To stop unauthorized credit inquiries from appearing on your credit report by companies soliciting your business, you must sign up for the Opt Out Program maintained by the major consumer credit reporting bureaus.

Instructions

1

Visit the Opt Out Prescreen website (see Resources). On the homepage, you will find links to information detailing the benefits of receiving pre-approved credit card offers and to learn more details about the Opt Out program. To begin registering for the Opt Out Program, click the "Click Here to Opt-In or Opt-Out" button found at the bottom of the homepage.

2

Elect an opt out option. There are two opt-out options. The first opts you out of receiving credit offers for a period of 5 years. After 5 years, you will automatically "opt-in" and will continue receiving credit offers and the resulting credit inquiries on your credit report. The second option is to permanently opt out. This will stop all future credit inquiries, except those from companies with which you currently do business and nonprofit organizations, such as alumni organizations. After you select an opt-out option, click the "Submit" button.

3

Enter your information. The next page is a form that requires you to input your personal information, including your name, Social Security number, date of birth, mailing address and phone number. Although you do not have to input your Social Security number to opt out, doing so will help ensure that your request is processed quickly and accurately. Once you have entered your personal information, click the "Confirm" button at the bottom of the webpage.

4

Print out the confirmation page. If you selected the 5-year opt-out option, your request is complete. If you selected the permanent opt-out option, you will also automatically be enrolled in the 5-year opt-out program, but you must take another step to permanently opt out.

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Mail the confirmation form to permanently opt out. If you want to permanently stop credit inquiries and you chose to permanently opt out, you must print, sign, date and return by mail the confirmation page that loads after you submit your personal information. Failing to sign and mail this to the Opt Out Program will enroll you only in the 5-year program, subjecting your credit report to credit inquiries after 5 years have elapsed.

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What Are the Three Free Credit Reports Available?

Equifax, Experian and TransUnion are the three national credit reporting agencies that prepare consumer credit reports in the United States. Under federal law, you are entitled to a free annual credit report from each of these agencies. However, the reports you receive just contain your credit history and do not include your actual credit scores

Credit Report

Credit reporting agencies gather information on consumers from public records as well as collecting information from finance companies and banks. The reporting agencies keep track of your active credit accounts and maintain records that show your account balances as well as your payment history. Details of bankruptcies, foreclosures and other delinquent debts are also listed on your credit report. The reporting agencies use your name, Social Security number and date of birth to match newly gathered data to your report.

Fair Credit Reporting Act

The Fair Credit Reporting Act provides consumers in the United States with the opportunity to ensure that their credit reports contain accurate information. Negative credit events have a damaging effect on your credit score and can cause lenders to deny you credit. You should notify credit bureaus of any errors in your report; and if necessary, provide the bureau with supporting documentation. Credit bureaus are required to make necessary corrections to your report although this process can take upwards of 45 days.

Differences

Creditors are not required to file reports with the credit bureaus and it actually costs creditors a fee to submit a report. To save money, some creditors only submit files to one credit bureau. As a result, your three credit reports may contain entirely different information. Each credit bureau also has its own system for determining your credit score although all three firms use a system where high scores reflect good credit and low scores are bad. You can pay a fee to obtain you credit score from each of the credit bureaus when you request your annual report.

Other Considerations

Your credit report changes on a monthly basis as your creditors provide the credit bureaus with new information. You can pay for credit monitoring services that provide you with updated credit information on a monthly basis. Additionally, if a creditor denies your application for credit on the basis of information contained on your credit report, then you are generally entitled to contact the bureau that provided the report within 60 days and request a free copy of it. You can get this report in addition to the free annual report. You can then submit a request to make a correction if you find that inaccurate information on the report caused your loan to be declined.

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Does Your Credit Score Affect the Interest Rate of an FHA Loan?

Buying a new home is exciting, but it is important for a prospective buyer to know how his financial situation might affect the terms of his loan. If a borrower applies for a Federal Housing Administration loan, he should understand how his credit score might affect the interest rate offered by the lender.

What Is an FHA Loan?

If a borrower is unable to qualify for a standard mortgage loan, he can apply for an FHA loan instead. With an FHA loan, the borrower must secure mortgage insurance, which protects the lender in case of default and improves the borrower's chances of approval. An FHA loan commonly has less stringent standards for approval compared to a standard loan, though the applicant must still meet basic qualifications in terms of debt-to-income ratios and credit history. Most FHA loans have a fixed interest rate, but in some rare cases, the lender may offer adjustable rate loans.

Credit Score Effect

The credit score of the applicant does have an effect on the interest rate for an FHA loan. An applicant with a score at or above the average score of 690 for an FHA loan (as of 2010) commonly gets the best rates while lower scores of 600 (minimum as of 2010) get offers for higher interest rates. The rates fluctuate and vary depending on the program packages offered by each lender.

Other Factors

The applicant's credit score also affects the down payment required for the FHA loan. A low-end score usually equals a higher down payment. A lower score presents a higher risk for the lending institution, so the prospective buyer must invest more into the house upfront in order to get the mortgage loan. On the other hand, an applicant with a higher score can pay a down payment closer to the FHA minimum (about 3.5 percent as of 2010).

Improving Credit Rating

Once the borrower initiates the process of getting an FHA loan, it isn't likely he'll be able to improve his score at that point to get a better interest rate. For that reason, it is important for a prospective borrower to take steps to raise his score as much as possible months before contacting an FHA approved lender. Resolving unpaid debts, reducing running debt balances, catching up with late payments and resolving errors on a credit report are a few ways to improve a credit rating.

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How to Lock a Credit History

Consumers who have been victims of identity theft often request a security freeze or lock on their credit file. A credit report lock prevents anyone from viewing your credit history. This includes any potential lenders as well as yourself. When you request a credit-reporting agency to freeze your credit file, the only way your credit report can be viewed is if you contact the credit-reporting agency, in writing, and authorize the lender to have a copy of your credit file.

Instructions

1




Call the credit reporting agency

Call the credit agency with which you will place the credit file lock. Advise the telephone agent you are calling to lock your credit file. Give the reasons for the credit lock.

2




Answer all questions the agent asks you

Confirm your identity with the telephone agent. You will be asked multiple questions to include your name, birth date, address, Social Security number. You may be requested to fax over additional proof such as a copy of your I.D. or a utility bill showing your name and address. Additionally, you may be asked questions regarding your credit accounts. These may be questions regarding when an account was opened or the monthly payment.

3




Write down all information on how to unlock the file in the future.

Write down the security pin the telephone agent provides you. This pin will be used anytime you wish to unlock your credit file. Ask the agent to give you all details on how to unlock your credit file in the future. Ask the agent if there will be a charge to unlock the credit file in the future. According to Transunion, Equifax and Experian, there may be charges between $3 to $10 for each lock and unlock and this fee will be determined by the reason for your credit freeze. Victims of identity theft are not usually charged but the phone agent will determine any fees on a case by case basis.

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How to Improve Your Credit Score After a Chapter 7

Once you file for bankruptcy, the credit bureaus note your bankruptcy case on your credit report, which damages your credit score. According to The Fair Credit Reporting Act, a Chapter 7 bankruptcy will continue to appear within your credit file for up to 10 years.

Although you cannot have a legitimate bankruptcy petition removed from your credit record before the legal reporting period expires, you can improve your credit after the court discharges your Chapter 7 bankruptcy.

Instructions

1

Make timely payments on any debts you chose to reaffirm during your bankruptcy. Examples of reaffirmed debts are secured assets, such as a home or vehicle. Your payment history to your creditors accounts for 35 percent of your credit score, according to the U.S. Department of Commerce's Minority Business Development Agency. Because this is the most significant single factor influencing your score, ontime payments are vital to rebuilding your credit after Chapter 7.

2

Apply for a secured credit card. Secured credit cards often require a cash deposit to pull from in case you fail to make payments. The benefit is that your damaged credit won't influence your approval.

3

Charge no more than 10 percent to 30 percent of your spending limit to your new secured credit card. Carrying a higher balance affects your debt-utilization ratio, which is the amount of debt you carry compared to your credit limit. A high balance hurts your score.

4

Make all of your credit card payments on time. Like your reaffirmed debts, your payments to your new credit card company contribute to improving your credit score as long as they arrive on time.

5

Purchase your credit score after making timely payments to your creditors for six months. You can purchase your FICO scores directly from the Fair Isaac Corp. (see Resources section).

6

Compare unsecured credit cards that you are interested in. Unsecured credit cards look better to lenders on a credit report than secured credit cards do, and if your credit score has improved, you might be eligible for these cards in as little as six months. Unsecured credit cards do not require a cash deposit.

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Call various unsecured credit card providers and inquire about their eligibility requirements. If your credit score is high enough to qualify, apply for an unsecured credit card.

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