you need to know to polish your image
with lenders, score better rates and
guard against identity theft.
By Jean Chatzky,
MONEY Magazine editor-at-large
January 22, 2006: 8:43 AM EST
NEW YORK (MONEY Magazine) - Imagine
being rejected for a credit card because
you once forgot to return a library
book. Or not landing a job because
you were late paying bills while you
were unemployed. Or finding you can't
refinance your mortgage at a low rate
because a thief (or your cousin) opened
accounts in your name. All of these
scenarios are outrageous, but none,
unfortunately, are far-fetched.
Your good name, once something you
could build and nurture face to face,
is now analyzed by a computer and
ruthlessly boiled down to a single
three-digit number, your credit score.
That score not only affects how much
you can borrow and at what interest
rate, it also drives whether you can
get a decent rate on car insurance
or a new job.
And as creditors routinely peek at
your behavior with other lenders for
an excuse to hike your interest rate
to as much as 30 percent, or even
cut you off at the knees, just one
slip can be especially painful.
That's why being in control of your
credit is arguably the most important
financial move you can make. The good
news is that there's plenty you can
do to boost your credit score, keep
identity thieves at bay and restore
your good name--and, by extension,
qualify for better credit deals and
wow anyone who thinks a three-digit
number sums you up. The story that
follows will tell you how.
Step 1: See
how you look to a lender -- get your
credit report and score.
Exercise your right to
a free credit report
As of last year, everyone
is entitled to a free report from
each of the three major bureaus
-- Equifax, Experian and TransUnion
-- every year. The only source for
truly free reports is AnnualCreditReport.com
Why patience pays off
Getting your credit report
online can be an exercise in frustration.
Why? Proving who you are means answering
a series of detailed questions such
as the model-year of a car you sold
long ago or the name of the lender
that financed your home-equity loan
10 years earlier.
A better bet is to print out and
mail the short order form. Yes,
it will take two weeks for your
report to arrive. But unless you
are applying for a mortgage tomorrow,
that's no big deal.
Then find out your credit
There's one important thing
missing from your free credit report:
your credit score, which is the
calculation of your creditworthiness
that lenders, insurers and even
utility companies look at when you
do business with them. Your score
can range from 300 to 850, but practically
no one has one lower than 500.
To learn what your score is, you
have to buy it -- or ask a loan
officer when you apply for a mortgage
or other loan. By law, he must provide
it upon request.
Not all scores are equal
You actually have at least
three scores, each one generated
for a different bureau. You're best
off buying a FICO score (for Fair
Isaac, the company that pioneered
credit scoring) because more than
75 percent of mortgage decisions
are based on it.
Of the three credit bureaus, only
Equifax sells a FICO score, and
you can buy it for $6.95 at AnnualCreditReport.com
when you request your free report.
When you're applying for a major
loan, though, it's smart to get
FICO scores from all three bureaus
in advance because the information
can vary; you can buy the trio for
$45 at Myfico.com.
The higher your score,
the less you pay
A credit score of 720 might
typically qualify you for a credit-card
rate of 9.6 percent vs. 18 percent
for someone scoring 600. For every
$1,000 of your balance, you'd save
$86 in annual interest.
Step 2: Know
what lenders want to see on your credit
report -- and then give it to them.
Scour your credit report
A full 25 percent of reports
have errors serious enough to deny
you credit, according to the U.S.
Public Interest Research Group,
and it's up to you to fix them.
Your credit report includes directions
for filing a dispute.
For mistakes such as a misspelled
name, contacting the bureau by phone
or online is fine. For anything
else, write a certified letter with
return receipt requested. With a
free report, the bureau has 45 days
to investigate your claim. In the
meantime, contact the creditor who
erred as well.
A "consumer statement"
is generally a waste of time
You have the option to
add a 100-word statement to your
credit report that explains your
side of the story -- a dispute with
a lender, say, or a bankruptcy.
But think about how online mortgage
lenders work. You type in your personal
data and within a few minutes get
multiple offers. It's all computerized.
There's no one taking the time to
read your carefully crafted defense
of why a bill was late.
Even when there is, a statement
may not help and can occasionally
"People do more damage by
admitting to their bad behavior,"
says Stephen Snyder, author of "Do
You Make These 38 Mistakes with
Your Credit?" "It validates
the fact that it's actually true."
Always pay your bills on
Nothing is more important
to your credit profile (see the
chart). Missing your credit card's
2 p.m. deadline by even a few hours
can trigger a $39 late fee.
That's not all. Once you're late,
that issuer will hike your interest
rate into the stratosphere, and
after 30 days report your slip to
the credit bureaus. When other lenders
take a look at your file, which
they do from time to time, they
may raise your rate too.
Deny your kids
Adding a child to your
credit card can help his or her
credit but sabotage yours. If your
kids can charge on your account
at will, and their wayward spending
makes it tough for you to pay the
bills, both of you may end up regretting
Live well within your limits
How much you borrow vs.
how much you can borrow, or your
utilization ratio, is the second
most important factor behind your
score. Using 30 percent or less
of your available credit is best.
More than 70 percent is a serious
drain on your score.
You can reduce your utilization
ratio in two ways: Pay down what
you have borrowed or expand what
you can borrow. To do that, raise
your credit limits or open a new
card. Just be sure you resist the
urge to borrow more simply because
Watch out, big spender
Even paying your bill in
full every month doesn't guarantee
a low utilization ratio. How maxed
out you look depends on your balance
the day your issuer reports to the
If that's right after you've made
a big purchase but before you've
paid your bill, your score suffers,
notes Evan Hendricks, author of
"Credit Scores and Credit Reports."
For 60 days before you apply for
a loan, put off any major shopping
Open and close accounts
The most valuable accounts
are your oldest ones. If you cancel
credit cards that you've had for
a long time, for instance, you may
take a file that's 20 years long
and reduce it to four or five years.
To make sure a card company doesn't
try to get rid of you -- you could
be costing them more in postage
than you're producing in fees --
use the card every three to six
Be a snob about lenders
You can be docked for having
a finance company listed among your
creditors, says John Ulzheimer,
a credit expert at lifeafterbankruptcy.com.
"Finance companies are the
lenders of last resort," he
notes. Think you've never used a
finance company? You may have if
you have ever borrowed for a purchase
(furniture, say, or a computer)
through the store.
Trolling for credit can
ding your score
A flurry of credit applications
hurts you. Don't worry about shopping
around for a mortgage or a car loan
-- multiple applications you make
within 14 days for either loan count
as only one. But those cards you
apply for to earn 10 percent off
at the mall? Big mistake.
Be wary of "pre-approved"
When issuers compile prospects
for junk-mail campaigns, they make
a "soft" credit inquiry,
which has no impact on your score.
However, it doesn't give them enough
information to close the deal. For
that, you have to send back the
application, giving them permission
to do a "hard" inquiry.
That counts as a new credit application
and can take your credit score down
a handful of points.
Step 3: Defend
yourself from easy opportunity thieves.
Protect your paperwork
To thwart thieves who go into your
mailbox or trash (what's called Dumpster
diving), call 888-5OPTOUT to put a
stop to credit-card offers in the
mail, tell your bank not to share
your information and elect to receive
and pay bills online.
Think of your Social Security
number as the key to the kingdom.
Anyone who has it can easily open
an account in your name. Give it
out as seldom as possible, and don't
carry your Social Security card
in your wallet.
Shred what's left
Make a cross-cut shredder
your last line of defense. In a
MONEY field test of five machines
that ranged in price from $40 to
$380 ("Let It Rip,"),
the $130 Fellowes eight-sheet cross-cut
shredder (model PS-60C) won. A great
all-around machine, it eats old
credit cards as well as paper.
Trust your computer (but
Banking online is safer
than you may think -- and becoming
even more secure. Federal regulators
recently ordered banks to tighten
their online security by the end
of 2006, requiring more than just
a password to log on. Some financial
services companies, including E-Trade
and Bank of America, already offer
this two-factor authentication,
but you may have to sign up for
If the extra security isn't yet
an option, make sure your password
is a random sequence of letters
and numbers. Never respond to e-mails
that ask for your personal information
(what's called phishing). Instead,
contact your bank directly.
Be wary of wireless
The new frontier in phishing
is the wireless Internet connection.
When you attempt to log on to your
bank in a public place, explains
Internet security expert Richard
Rushing, an ID thief can capture
your data by misdirecting you to
a fraudulent network and recording
Mount your own defense
Credit monitoring services
scan your credit reports and alert
you to any changes daily or weekly,
from a new account to a new address.
For that, you will pay $25 to $60
a year, or even $150 or more for
services that include theft insurance,
score analysis or counseling to
rebuild your good name. But most
people can handle monitoring on
The exceptions: You've already
had your identity stolen and worry
that your personal information is
still floating around, or you run
a business that needs frequent cash
infusions and can't afford any credit
glitches. Or maybe a monitoring
service is the only thing that will
let you sleep at night. In any of
those cases, a no-frills service
that covers one bureau is enough
and should cost no more than $50
How to monitor your credit
No one should let too much
time pass between glances at a credit
report because creditors value recent
behavior more highly than ancient
history. If you're smart about it,
you can get a free report three
times a year from AnnualCreditReport.com.
Simply order a report from a different
credit bureau every four months.
Say no to ID theft insurance
Most ID frauds are simple
shopping sprees with your credit
card (or the number). In those instances,
federal law limits your liability
to $50, and major credit-card issuers
won't charge you at all. The pitch
for ID theft insurance is that a
policy will cover the costs you
incur to restore your identity,
such as legal fees and lost wages
if you miss work.
The majority of victims, however,
have no out-of-pocket losses, according
to the Federal Trade Commission.
For the few who do, the damage averages
about $500, a small loss compared
with the $25-to-$70-a-year premium.
Plus, your homeowners policy may
cover identity theft already. Bottom
line: You don't need this insurance.
Step 4: Recovering from identity
theft is a necessary hassle
When you suspect ID theft,
call a credit bureau first
If you lose your wallet
or see signs of ID theft (an unfamiliar
account on your credit report, say),
first contact one of the three credit
agencies and ask to have a 90-day
fraud alert placed on your report
(Equifax: 800-525-6285; Experian:
888-397-3742; and TransUnion 800-680-7289).
This lets creditors know that your
identity may have been compromised
and that they need to be cautious
about new loan applications. One
call will trigger an alert at all
Next, call your creditors. Close
accounts that have been tampered
with or opened in your name, and
challenge fraudulent charges. Follow
up with certified letters. Many
lenders have forms, or use the Federal
Trade Commission's ID theft affidavit.
File a police report, which will
let you extend a fraud alert to
To bounce back from mistakes,
become a model citizen
The best way to undo the
damage caused by your own bad behavior
is to pay bills on time, whittle
away at balances on cards that are
maxed out and resist opening new
Don't turn down help
If you are in deeper trouble,
consider credit counseling. Yes,
repaying debts through an agency
doesn't look good on your credit
report, but it can be less damaging
The industry has been plagued by
conflict-of-interest problems, so
start with the government's list
of approved counselors or the National
Foundation for Credit Counseling.
The secret of 24 months
Bankruptcy stays on your
credit report for seven to 10 years,
late payments for seven. But you
can vastly improve your credit within
two years. Creditors consider your
recent behavior a much better indicator
of your creditworthiness than what
you did in the past. Cleaning up
your act today can mean lower interest
rates by the time you ring in 2008.