Credit

How Credit Works
Each creditor with whom you have an account - both past and present - reports the payment history and amount of your loan or credit account. This information is gathered by three primary credit reporting agencies: Equifax, Experian and TransUnion. Before approving new loans or credit, a lender will retrieve an applicant's credit report from one or more of these agencies.

One common tool that lenders use to determine an individual's credit worthiness is called the FICO score, which is generated by each credit agency. As lenders know that all three agencies may not have all the most current information, many will use the average of the two highest scores to determine an applicant's credit status.

FICO scores range from 300 (poor) to 850 (excellent). Keeping your score above 700 will generally get you approved for loans or credit at favorable rates. However, the recent economic crisis has caused many lenders to require even higher scores (740 or greater). Some of the credit agencies will provide explanations for the key factors effecting your score - both positively and negatively.

Protecting Your Credit
The following steps will help to ensure a favorable credit score:

• Pay your bills on time! Even one "Past 30-day" payment on your credit report will have a negative effect.
• Keep credit card balances down. Revolving credit accounts have a significant effect on your credit score, and balances below 40% of the credit limit are looked upon favorably.
• Don't open too many credit accounts. Having too many open accounts - particularly revolving credit accounts - are considered risky. Avoid "hopping" (frequently closing/opening) credit card accounts as well. Find one or two credit cards with a low fixed rate and stick with them.
• Build long-term credit relationships. This will have a positive effect on your FICO score, and is also a characteristic that lenders like to see.
• Obtain a copy of your credit report from each agency every six months. Check for missing or inaccurate information. You have the right to dispute any item (in writing), and the reporting agencies must correct or confirm the information in question within 30 days. Report suspected fraud immediately!
• Guard your personal information! Identity theft is an unfortunate but real and growing problem. Never give your social security number to phone solicitors. When shopping online, ensure the site is secure. Tear up or shred old bills and credit offer mailings before throwing them out. The price of a good shredder is nothing compared to years of financial turmoil.
• If you do suspect potential fraud, contact one of the credit reporting agencies to immediately have a "Fraud Alert" placed on your file. A Fraud Alert will require anyone attempting to get loans/credit under your SSN to provide additional personal information. You may even request that you be contacted by telephone before any loan/credit application is completed.

Repairing Your Credit
If your credit is already damaged, the following steps will help you improve your credit score:

• Obtain a copy of your credit report from each reporting agency. This will help you identify your problem accounts and begin your plan of attack.
• Beware of "instant credit repair" scams. If the negative accounts reported are accurate, you may have to wait out the full seven years for the accounts to be removed from your file. Even if you were to find a legitimate credit counseling service, they won't be able to do anything for you that you can't do yourself.
• Communicate with your negative account creditors. Taking the initiative to contact them will show them that you are serious about repaying your debt. Work out a regular payment plan with them and stick to it. If possible, negotiate with them to reduce or cease accumulating interest. They may be more inclined to reverse some negatively reported information if you turn the relationship around, and will more than likely stop the harassing phone calls.
• Avoid bankruptcy and tax liens if at all possible. Bankruptcy remains on your credit report for 10 years. Tax liens don't go away for 15 years!
• Keep your positive accounts in good standing. These are the only items working in your favor.
• Make a budget plan to repair your credit and stick to it. Be patient, and your credit score will continue to improve as positive information is added to your report and negative information begins to disappear.
• Follow the steps in Protecting Your Credit to ensure an ongoing positive credit status.