5 ways to know you've got the wrong credit card for you

You had a closet full of clothes you adored as a teenager, but that doesn't mean you'd wear them now, right? The same thing goes for your credit card. Just because it worked for you 10 years ago doesn't mean it's a great fit for you today.

"As consumers, we evolve, and our needs change," says Bruce McClary, media relations coordinator for ClearPoint Credit Counseling Solutions in Richmond, Va. It only makes sense that our credit card changes along with us.

Unfortunately, we sometimes cling to an old card out of brand loyalty or sheer force of habit. But that can cost you cash in the form of useless fees, high interest rates and rewards you just can't use. Plus, you may be missing out on other advantages, such as the chance to pump up your credit history.

Granted, there's something to be said for keeping a credit card for a while, since a long history with a single creditor can boost your credit score. But if you haven't swapped cards since Bill Clinton was in office, make sure you're not making these mistakes:

Mistake No. 1: You carry a balance every month, but you have a really high interest rate.Welcome to the club, you're thinking. In this economy, who can get a great interest rate? Actually, it may not be as tough as you think. The average APR on a new credit card offer on Oct. 1, 2010, was 14.34 percent; meanwhile, the average default rate, which goes to cardholders who make late payments or other serious stumbles, was 27.88 percent. Even if you've been paying on time and have good credit, your credit issuer may have nudged your APR up around 20 percent.

On a big balance, sticking with that higher interest rate can cost you some serious cash. For instance, paid off over two years, a $5,000 balance on a card with a 21.99 percent APR will cost you about $1,225 in interest. With the 14 percent rate, you'll pay about $463 less. Of course, "moving debt around is not becoming debt-free," warns Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "You think, 'That new card we got has a really low interest rate, so surely it won't hurt to charge a little on it.' You add to the existing debt, and then when the introductory rate expires, you owe more than when you began."

Jumping from card to card can ding your credit report, too. But if you're committed to whittling away your balance before a low introductory rate rebounds, go to CreditCards.com's balance transfer credit card page to find a card that works for you. Or negotiate with your current card issuer for a lower APR. If they think of you as a valued customer, they may be willing to jump through a few hoops to keep you.

Mistake No. 2: You still have a secured credit card even though your credit score is on the mend. For credit card newbies or consumers with a Swiss-cheese credit history, a secured card -- one where you deposit your own money before you start spending -- is usually a smart way to build up a decent credit history. But according to McClary, it's not a card you want to live with forever. "It's the bottom rung of consumer credit card offerings at the most subprime level. So, once a year, check your credit score and see if it's where it needs to be for you to graduate to an unsecured credit card with a low rate and better terms."

What's the magic credit score number? It's a moving target, but aim for the high 500s or 600s before you start applying. CreditCards.com's list of credit cards for those with fair credit provides a good starting point.

Mistake No. 3: You pay an annual fee but don't take advantage of the perks. With 3 in 4 new card offers touting no annual fees, you've got to have a pretty good reason for shelling out $18 to $150 (and up) just for the privilege of keeping a card in your wallet. For some cardholders, generous rewards and better perks are reason enough, but if you can't remember the last time you actually used one of those rewards, it's time to rethink your card strategy.

For Galia Gichon, founder of DowntoEarthFinance.com, "the only reason to pay an annual fee is for frequent flier miles. But ask yourself if you've used a free flight in the last two years." If not, earn rewards with a no-fee card instead.

Mistake No. 4: You're racking up business expenses but you don't have a dedicated business card. For entrepreneurs and self-employed people, it's simple to charge business expenses to your personal credit card. But that's not necessarily smart. "I work with a lot of entrepreneurs," says Gichon, "and I'm a big fan of keeping personal and business expenses separate. You get more organized, you're more conscious of your cash flow, and when it comes time for taxes, your business credit card really helps you quantify deductions."

Mistake No. 5: You're still collecting travel rewards, even though you never have time to go anywhere. You may have opted for travel rewards back in the day when you still dreamed of your grand tour of Europe. But if you're now too busy to fly, those rewards may be going to waste. It could even happen if your miles are tied to a specific airline, but you've moved away from their hub. "I got an American Airlines card 10 years ago when I used to fly American a lot, but now I don't anymore," says Gichon, who ultimately swapped for a different card.

In the same boat? Switch to a card with rewards you'll love and use, such as gift cards, merchandise or a deposit to your kid's 529 account. Or go with the reward that 61 percent of American cardholders opt for these days: cash back. That's one reward you probably won't have to worry about using.

Learn the ABCs of credit scores, credit scoring

If you are completely confused by the concept of credit scores, you are not alone. In fact, you are probably part of the majority that finds themselves befuddled by how credit bureaus compile, calculate and use these scores to determine your creditworthiness, often with the input of credit card companies and other creditors.

Your keys to getting into the 700-plus credit score club
Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.

A credit score is simply a numeric value that has been assigned to your historical credit habits. The original company that pioneered the creation of this score is called Fair Isaac Corp., which forms the acronym "FICO."

The combination of credit bureaus, credit card issuers and massive databases that warehouse consumer data means that virtually every American now has a credit score. This score is vital to determining whether a person can access low-cost credit, something more expensive or is even eligible to get new credit at all.

In general, the higher the score, the lower the interest rate a person will have to pay on a new credit card or consumer loan. Conversely, a lower score will translate to higher interest and less desirable terms.

FICO-based credit scores can range from a low of 300 all the way up to 850. Lenders generally segment scores into six ranges for the purpose of determining to whom they will make credit offers and at what terms. Anyone below the sixth tier can usually only obtain credit from a subprime credit card lender at very high interest rates. Listed below are the six average credit score ranges used by many of the nation's largest credit card, mortgage and auto lenders:

• 720 – 850
• 700 – 719
• 675 – 699
• 620 – 674
• 560 – 619
• 500 - 559

Individual banks solely determine the credit terms that they offer to each FICO score tier, but in general the best offers go to the top tier. Many of the top credit card issuers specialize in super-prime lending, meaning they target consumers with these tier 1 credit scores. However, competition among the largest issuers could allow those in lower tiers to be considered for leading offers, such as those that feature 0 percent APR introductory rates.

Keeping credit scores clean before you close on a home

You've done everything right. You started your home search with a personal credit score of around 700. You took your time finding the right lender, the best interest rate, and made sure you prequalified for a loan before you started hitting open houses. You found the perfect place at the right price.

Now you're at closing ready to sign -- but something's amiss. You check your loan papers against your earlier documents and find that the rate you thought you had is significantly higher. Or even worse, the closing officer walks in with a pale expression and a cell phone and says it's your lender calling.

You don't have the loan after all.

It happens. Unwitting prospective homebuyers who go on credit card binges -- be it for appliances, furniture, paint or decor items -- for their new homes the minute their loans are approved could face the same situation.

While it doesn't happen all the time, some lenders' underwriting departments take one last-minute look at your score to make sure you're not overextended by the time the first payment rolls around. It's one more sign that credit scoring is a 24/7 process in a world stung by economic hardship.

Says one Chicago-area lending expert, "It's not something loan officers would do because they want to close loans. But in this economy, there are nervous underwriting departments behind them that do double-check scores before closing just to make sure that people can actually pay that mortgage on time."

Lenders policies vary
Such credit roadblocks are a frustration for potential buyers facing the most affordable U.S. home market in recent years. IHS Global Insight, a forecasting agency, released figures early in December 2008 showing that by the end of the third quarter, home prices across the United States were 6.5 percent below their 2007 peak.

Hoping to buy a home? Do a 1-year credit makeover

If you fear your credit score -- or any other aspect of your credit history -- may keep you from your dream of homeownership, now is good time to clean up your act. Here are some suggestions: Get those balances down: An ongoing change in Fair Isaac's FICO scores will reward lower debt utilization. Make a plan to get debt levels in each account under 50 percent or less. And be smart -- pay off your highest-rate balances first. Get some advice: You might be focused on pulling together a down payment, but it might not be a bad time to sit down with a tax professional or a financial adviser to talk about the way you're going to manage your debt going forward. Set a credit report review schedule:You have the right to get all three of your credit reports -- from Experian, TransUnion and Equifax -- once a year for free. You can do so by ordering them atannualcreditreport.com. Don't order all three of them at the same time, though. By staggering receipt of each of your credit reports, you'll get a continuous picture of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. Give up the late or minimum payment habit. If you've failed to make on-time payments of credit card bills, car loans or utilities, it's time to turn a new leaf. Likewise, adjust your overall spending -- give up a latte or six -- so you can pay more than your minimum balances. One trick for paying on time: get a calendar and when bills come in, mark the due date and then mark a mailing date five to seven days before that on the calendar. The other alternative? Go electronic. If you have electronic bill payment, you designate when the bill is due and pay the bill with a push of a button the day before. It'll keep you in good stead with your lenders while improving your cash flow. Lay off the cards (mostly), but don't close the account: Closing accounts -- even those that have had $0 balances for years -- is a bad idea. Lenders want to see a long record of credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint. Card issuers have become quick to close dormant accounts, so break out the card and use it occasionally.

According to Tom Kelly, a Chicago-based spokesman for Chase, double-checking credit scores after a loan approval is given is not their policy. "Once a mortgage application is approved and the rate is locked, we do not make additional credit inquiries. Regarding credit advice, we always ask potential buyers to review their credit file in advance, clear up any errors and get prequalified."

However, Barry Paperno, consumer operations manager for Fair Isaac Corp., the company that created the FICO credit score, says that based on what his company sees, lenders of all sizes sometimes do re-check credit scores during the loan process. "Lenders have always had the right to do that."

Homebuyers face stricter lending requirements
Yet Paperno notes that lender caution has set the bar significantly higher in the past year alone for borrowers hoping to score a lender's best rate. "Right now, 760 is the minimum requirement for the best rates on a 30-year fixed mortgage -- that's about 20 points higher than it was at the same point a year ago."

Henry Apfelbach, assistant vice president and home loan manager for Countrywide Home Loans in Chicago, says credit scoring is important, but only one major part of the picture when it comes to approving borrowers for favorable rates. "Loan-to-value matters too. I just priced out a mortgage loan at a 666 (FICO score), but it had an LTV of 31 percent, not 80 percent, and it got a very good rate. Maybe not the best, but these people had the right compensating factors to keep them in the game."

As for the scenario of borrowers being approved for loans only to see changes or cancellations later once they've gone overboard with spending, Apfelbach won't confirm or deny such scenarios, but will add this. "Any professional in this business knows the No. 1 thing and that's to set a borrower's expectations properly. I have to represent my company in the proper way, and that means coaching your client properly to manage that credit," says Apfelbach. "If someone is buying a home for the first time, and they're tight on things, I always tell them not to go wild on things. It's not only about a closing scenario, it's about how they're going to afford everything in their lives once they get into that home."

In any event, Apfelbach maintains that "anybody who qualifies in the normal tradition of a loan is not seeing any more difficulty than they did in the past. The only customers I see surprised in my business are those looking for no-doc or low-doc loans (loans based on limited income verification). These were really meant for people who didn't want to disclose income, so they were willing to pay a higher rate. They weren't meant for everybody as they came to be during the past couple of years."

One real estate agent says she feels a responsibility to keep her clients informed about maintaining their credit.  Judy Demetriou, a partner with Village Green Realty in Winnetka, Ill., says, "I generally go over the whole issue of keeping good credit data when we  first talk ... usually, buyers here don't go crazy buying things before the closing, but I do tell them to wait until they are in the house or condo a while to see how they use their space." Yet she adds that "today's young people, first-time buyers, have lived with using credit so easily that they don't understand the importance of good credit and how much debt they should have, though there's the beginning of awareness about this. It's starting to change."

How a new credit score will affect borrowers
Paperno says that Fair Isaac next year will launch an update of its FICO score and the more important issue may be how vigilant consumers are not only about their on-time payment behavior, but how well they monitor their balances going forward. On the good side, there will be a certain increased leniency toward one-time late payments on bills. "Let's say you're late once, but your history has been very clean over the last couple of years. With the new version, being late on one account will not have as much of an effect as it does right now," Paperno says.

Borrowers will take a heavier hit on balance levels in the future, he says. "Folks with higher credit utilization, the score will be more sensitive. So get those balances down." Paperno suggests that the best idea is to bring balances on all lines of credit -- and particularly credit cards -- to 50 percent of their limit and keep cutting from there. "The lower your utilization, the better your score."

8 legitimate ways to improve your credit score now

Building a good credit score is a lot like building a good reputation: It takes years of work and consistency. "It's a tortoise and a hare kind of game," acknowledges Craig Watts, spokesman for FICO, which invented and popularized credit scores. "You score inches up at a tortoise's speed, and it drops at a hare's speed if you stumble."

That's disheartening news if you have a bad credit score -- but that doesn't mean you're out of options. While it's true that the best way to ratchet up your credit score is to pay off your bills and loans on time each month for years, there are a several ways you can nudge up your score, starting today.

1. Piggyback. If someone with high credit score (usually a family member) is willing to add you as an authorized user to one of their credit cards, you'll start reaping the benefits of their strong history. FICO "is fine with the piggybacking notion for family members," says Watts. "Within that context, there are ample opportunities for education, shared experience and coaching on how to use credit." But don't buy into a company's offer claiming that, for a hefty fee, it can boost your score by piggybacking on a stranger's account. A revised FICO scoring formula, due in 2009, will minimize the positive impact of piggybacking between strangers.

2. Report errors. An oft-cited study by the U.S. Public Interest Research Group found that 79 percent of credit reports contained a mistake -- and a quarter were errors that could lead to the denial of credit. Head to www.creditchecktotal.com to check your report for free -- and send a letter to bureaus to clear up mistakes.  "If you get those errors cleaned up, it can make a big difference," says Chris Farrell, economics editor at public radio's "Marketplace Money."

3. Get a rapid rescoring. Generally offered only at the time of a home purchase, rapid rescoring can help clean up errors fast, says Liz Weston, author of "Your Credit Score." "If there's a known error on an account, and you can provide legitimate documentation showing it's an error, you can get a quick recalculation of your score to help with a lending decision," she says. Judgments are made within 72 hours. Because of its expense -- generally more than $100 for each disputed line -- it's usually valuable only to those who need changes quickly for a substantial loan. Though it's not an option offered directly to consumers, a broker can arrange for this service.

4. Automate. Late payments can demolish credit scores faster than you can say "Where's a stamp?" If absentmindedness accounts for many of your late payments, it may be worth heading online to sign up for automatic payments. "Automatic bill payments is a terrific way to make sure you don't accidentally miss a payment because it got lost in the mail, or it fell behind the desk, or it got ignored when you were on vacation," says Watts.

Your keys to getting into the 700-plus credit score club
Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.

5. Explain yourself. If the number on your credit score doesn't tell the whole story, consider attaching a note. "You can attach a letter of up to 100 words that explains extenuating circumstances ," explains Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. "Instead of creditors looking at the information and wondering what happened, they'll know you lost job, got another one, and started paying on time again. That can bode well for you."

6. Pay twice a month. If you're someone who charges close to your credit limit each month -- even if you pay it off in full -- it could damage your score, says Weston. "Your credit score is incredibly sensitive to how much you're charging compared to what your credit limits are," she says, for many cardholders. The solution is to pay off the bill in installments -- once before the statement closing date, and once after. "It's kind of gaming the system a bit," Weston acknowledges. "But when I've been close to my limit like that, I've seen my score drop 40 points."

7. Pay down the card that's closest to its limit first. Your credit score is affected not only by your total debt-to-credit available ratio, but by that ratio for each individual card. If you have cards that are closed to maxed out, pay off those first, says Weston. "If you have cards that are way up there, it's depressing your score," she says. "You're risking having your other issuers raise their interest rates or having other credit problems."

8. Diversify. If you're someone who's only had revolving credit, your score may get a boost simply from getting another type of loan -- a personal loan or a car loan, for example. While you shouldn't rush out to get a loan simply to bring up your score, it's not always a bad thing to have a loan on your record. "The lift your score may receive from a richer mix of credit on their credit report can, in some cases, outweigh the negative pull that comes from opening a new account," says Watts.

9 credit score myths do more harm than good

In today's economy, a good credit score is more valuable than ever, and for many, improving your score has become a financial priority. Turn on the radio, flip on the TV or head to the company water cooler and you'll likely be bombarded with various credit-improving strategies. But not all advice is good advice. Here are nine credit score myths that could actually do more harm than good:

1. Closing out old, inactive accounts will help your score.
Your credit score is based, in part (30 percent) on your utilization rate -- your total balances versus the total amount of credit available to you. Canceling old accounts reduces the total amount of your available credit, changing that ratio. Any balance will utilize a higher percentage of your credit, which will hurt your score, according to Heather Battison, consumer education director for TransUnion.

2. Opening (but not using) accounts will help your score.
To improve their utilization rate and, theoretically, their credit scores, some people open as many accounts as they can. Rod Griffin, director of public education for the credit bureau Experian, says this strategy is more likely to raise eyebrows than your credit score. "Your score is affected by how well you manage the credit you do have over a period of time, not by how many credit cards you have or the available balances."

3. You should avoid using your credit cards at all.
Remember the advice that you should stick your credit cards in a bowl of water and freeze them, ausing them only for emergencies? If you're a financially responsible consumer, that approach could negatively impact your credit score. Bruce W. McClary with ClearPoint Credit Counseling Solutions explains that your score reflects the responsible use of credit. If you're not using your credit, you're not building credit history. He advises using your credit from time to time and then promptly paying off the balance.

4. Dispute letters can clean up your bad credit.
Errors on your credit report can and should be disputed, but don't expect to magically erase accurate but negative credit history. Disreputable credit repair firms will advise that if you send enough letters disputing legitimate but negative records on your credit report, eventually the lender will not be able to respond quickly enough and the credit bureau will have to remove the item permanently from your credit report. Griffin says that's not the case. Dispute letters may force the removal of negative items temporarily, but once the lender can prove the record's accuracy, it will reappear on your credit report.

5. Paying off old debts and judgments will help your score.
Have a judgment or an account that went to collections? Don't expect to make that negative "disappear" by paying it off. Negative records -- judgments, collections accounts, bankruptcies or late payments -- remain on your credit report for seven to 10 years, regardless of any remedies you've made.

6. Credit inquiries hurt your score.
Inquiries alone have little impact on your score. Coupled with a history of bad credit, a hard inquiry, such as an inquiry for credit, could factor negatively into your score, but again, the effect would be minimal. Another myth? Pulling your own credit report, a soft inquiry, lowers your score. In fact, checking your credit report on a regular basis allows you to catch errors that could affect your score and identify those areas that need improvement.

7. Using a credit counseling service lowers your score.
Credit counseling services no longer figure into the FICO scoring system, so although your report might indicate you are receiving credit counseling, using those services won't lower your score. It could actually help your score, according to Todd Christensen, director of education at Debt Reduction Services Inc. "You're making your payments on time and paying down your debt, the top two factors in credit scoring," he says.

8. There's a set formula for obtaining good credit.
Be suspicious of any blanket statement about what people should or shouldn't be doing to improve their credit scores. "Credit is a very individual thing," says Griffin. "Credit scoring looks at everything and takes it all into account. If you are keeping your balances low and paying your bills on time, you'll have good credit and a good credit score."

9. You can get a perfect score.
Don't go to Herculean efforts trying to obtain that elusive 850 -- getting a perfect credit score is nearly impossible. Your credit score is a reflection of your credit risk, and regardless of your credit history, there's always a risk. Doug Minor, author of "Anatomy of Credit Scores," recommends working toward a score of at least 740. "It's more realistic and attainable than 850," he says.

The truth about 7 common credit report myths

Most people have a credit report, but how many actually know what goes into them? If you listen to educators at the top three credit bureaus -- Experian, Equifax and TransUnion -- the answer is: not many. 

"People don't understand what is actually included in their credit report," says Demitra Wilson, director of media relations at Equifax. Consumers will stress over details that aren't even included and will get themselves into trouble over urban myths like the tale of the magically disappearing delinquency.

It's a problem, agree educators. Here are just seven of the most persistent myths that the top three credit bureaus say they hear all the time. 

1. Myth: Your credit report includes your credit score.  The truth: "Your credit report does not contain your credit score," says Wilson.

Consumers often think that when they pull a free copy of their report a tCreditchecktotal.com, they should also get a copy of their score, she says. However, if you want a copy of your FICO credit score (which is the most widely used score by lenders), you'll usually have to pay up to $19.95 (at myFICO.com) to get it. The exception is if you are denied a loan or given higher rates based on your credit score. In that case, a lender is required to send you a free copy of the score they used to make their decision.

You can also access a free credit score through a service such as Creditchecktotal.com. However, those scores aren't necessarily going to be the scores that lenders use. That's because "there are many different credit scores," says Rod Griffin, director of public education at Experian, and the score that gets used depends on the lender and the type of loan they are handing out.

The good news is that even though you can't control the formulas that lenders use to calculate your many different credit scores, you can influence the information that goes into them. "You as a consumer have the ability to control the information in your report," says Griffin.

2. Myth: Intimate details, such as race, income or medical history, are included on your credit report. 
The truth: "Your credit report only includes information that's debt-related," says Griffin. It doesn't include your race or ethnicity, your income, your investments and assets or your criminal record, he adds. (It does, however, include your address, your Social Security number, your date of birth and possibly your place of employment.)

Some consumers also worry that late payments to their doctor's office will appear on their reports. However, that's false, says Griffin. "There's a law called HIPAA, the Health Insurance Portability and Accountability Act. It prohibits or regulates the sharing of medical information," he says. So credit reporting agencies are legally barred from including any information about your recent doctor's visits, the kind of treatment you received or the name of the health care provider that you visited.

Seven years is a rule of thumb that applies to late payments. The confusion comes in when that seven years actually starts.

-- Rod Griffin  Experian

That said, if you miss a payment on a medical bill, your health care provider may send that uncollected debt to a medical collection company and the name of that company could appear on your personal credit report, says Griffin. Your lender, however, won't see the medical company's name when they pull your report. They'll just see you have a medical collection listed.

That's the confusing part, adds Griffin. Consumers often don't realize that what they see on their personal credit report isn't necessarily what a lender sees.

The same is true for soft inquiries, he says. A soft inquiry is listed when someone such as a credit card lender who's thinking about giving you a special deal or a potential employer asks to see your report. However, unlike hard inquiries (which occur when you apply for a new loan or credit and temporarily ding your credit score), soft inquiries aren't shared with lenders -- and don't affect your credit score -- because you haven't applied for any credit. "We don't share soft inquiries with anyone but you, the consumer," says Griffin. "It's there so you know who's looked at that report."

3. Myth: Checking credit reports too often will hurt your credit score. 
The truth: "Viewing your own credit report has no impact on your credit score," says Cliff O'Neal, senior director for corporate communications at TransUnion. "You could view your credit report every day and it will have no impact." 

However, if you give a lender permission to pull your credit report, that will affect your score, says Equifax's  Demitra Wilson. "Where people get confused is if you actually go into a creditor or merchant and you apply for a loan or apply for credit and you give them permission to access your credit report. That kind of inquiry is called a hard inquiry and that kind of inquiry can impact your credit score," says Wilson. 

Luckily, credit agencies will give you a break if you're shopping around at different dealers. "If you're shopping for a loan and are concerned that will hurt a score, know that we realize that you are shopping for a car or a mortgage or something of that nature," says O'Neal. If the credit agency sees that your report has been pulled multiple times within a 30-day period, they will group those inquiries together and count them as just one hard inquiry.

4. Myth: If you pay off a delinquent debt, the missed payment will be removed from your credit report. 
The truth: The only thing that clears a negative mark on your credit report is time.

"People think that if they pay off an account, it automatically falls off their credit report," says Equifax's Wilson. However, that's just magical thinking, she says.

Instead, it will take up to seven years for a missed payment to disappear from your report and up to 10 years for a Chapter 7 bankruptcy to disappear.

Meanwhile, don't think that you can just pay a credit repair company to clear those negative marks. Any credit repair company that says they can scrub your credit report clean of accurate but negative information isn't telling you the truth, say experts.

People think that if they get a divorce, that automatically severs joint accounts that are listed on a credit report, and it doesn't.

-- Demitra Wilson Equifax

They may be able to assist you with disputing negative information. However, the cost it takes to do that probably isn't worth it, says TransUnion's O'Neal. "Anything that a credit repair company promises, you can do yourself," he says. There are no quick fixes when it comes to repairing your credit. "Just as it took time to damage your credit, it's going to take time to improve your credit," he adds.   

The amount of time you'll have to wait for a black mark to disappear can also be a major source of confusion, adds Experian's Rod Griffin. "Seven years is a rule of thumb that applies to late payments. The confusion comes in when that seven years actually starts," he says.

The good news is if you only missed one payment, the math should work in your favor. For example, if you miss a credit card payment, the clock will start on your credit report as soon as the payment is listed as late. Credit reporting companies call that your "original delinquency date."

If you fail to pay that debt off and the account goes into collections, the clock will keep ticking and won't reset, says Griffin. "Federal law requires that collection agencies carry over the original delinquency date from the original account and report that" to a credit reporting company.

Where it gets murky is if you make payment arrangements to clear a debt on an overdue account and then later miss another payment. Then the clock will start over from that second missed payment instead of the first one, says Griffin. "It gets a little bit confusing because an account can actually have more than one original delinquency date," says Griffin. The first missed payment will be deleted seven years from the first time you were late. The second missed payment will then be treated as separate and will be deleted seven years after that one was reported as delinquent.

5. Myth: Your credit reports merge when you get married and split when you divorce. 
The truth: "Getting married does not cause your previous credit histories to be merged," says Griffin. "Everyone has their own credit report even after they are married." So if your spouse has a spotty credit history, it won't show up on your report.

That said, if you live in a community property state, loans that you accumulate while married may automatically be joined together and show up on both reports.

Any loans that you co-sign with your spouse will also appear, says TransUnion's O'Neal. "When you co-sign for a loan, activity on that joint account will be displayed on your credit report as well as the person you co-signed with," he says.

However, simply being married won't make you financially liable for a spouse's loans (but it will if you co-signed) -- unless you live in a community property state. States with community property laws hold both spouses liable for debts accumulated during the marriage. Arizona, California, Idaho, Louisiana, Nevada, Texas, Washington and Wisconsin are community property states; Alaska is an opt-in community property state. See "Compare states' community property laws" for more details.

Joint debts -- in which both of you sign a contract with a lender or credit card company -- do make you equally responsible for repayment. Meanwhile, if you split up, the jointly held debt that you acquired as a couple will stay put on both your reports, no matter what you agreed to in the divorce. "People think that if they get a divorce, that automatically severs joint accounts that are listed on a credit report, and it doesn't," says Equifax's Wilson. You'll both still be on the hook for that debt, unless your creditor agrees to take one of you off the account.  

6. Myth: Credit agencies are responsible for granting or denying credit.
The truth: "We don't do that," says Experian's Rod Griffin. "We don't approve or decline a person's credit application."

Instead, credit agencies gather your information in one place so that lenders don't have to do it themselves. "The role of the credit reporting company is to compile information about a person's debts and put them in a form that lenders can use," says Griffin. "We don't make any judgments about the information that is in the credit report."

7. Myth: If you pay all your bills on time, you don't need to check your credit report. The truth: "It's always important to look at your credit report from time to time and make sure it is up to date with the most current information that reflects your credit history," says TransUnion's Cliff O'Neal.

After all, you may be surprised at what's in there. "One of the main misconceptions is that people think that if they pay their bills on time, they don't need to check their credit," says Demitra Wilson. "Your credit report is changing all the time ... You want to make sure that the information that is being reported is accurate and correct. Even though you know that you're paying your bills on time, the data furnisher may not be reporting it correctly."

It also helps to know how you're doing with your money. "When you know what's in your credit file, you know your financial standing," says Wilson. "You know your financial health so you're able to take charge of your credit and know when is the best time to apply for a loan or seek preapproval for a mortgage."

Fair Credit Reporting Act: a guide to your rights

It's not always easy to correct errors on your credit reports. However, don't give up just yet: You have a decades-old law on your side that requires credit reporting agencies and data providers to correct their mistakes -- and recent changes make it easier.

The Fair Credit Reporting Act was enacted in October 1970, just as consumer credit was exploding -- and so was the power of the private companies that keep track of consumers' payment behavior. Credit reporting agencies, once small and local, were consolidating to create a national credit reporting system, and the law offered a consumer-friendly counterweight to keep the playing field even.

"As laws go, the Fair Credit Reporting Act is a pretty strong one," says Cary Flitter, a consumer lawyer and law professor in Philadelphia. Per the law, credit reporting companies -- as well as the data furnishers that give them the information they file -- are required to follow a strict set of guidelines, fix mistakes and are legally on the hook if they fail to do so.

That said, "there are little pitfalls the consumer has to navigate," says Flitter, so it's important to be your own best advocate. If you're not quite sure what your rights are when it comes to your credit information, here are six things you need to know about the Fair Credit Reporting Act (FCRA) -- and how you can use it to protect yourself.

1. You have the right to know what's in your credit reports. 
The act requires credit reporting agencies to give you free access to the information they have collected about you and your financial habits once every 12 months.

You can access a free copy of each of your generic credit reports -- which contain information about how you have handled credit in the past -- from the three biggest credit bureaus (Experian, Equifax and TransUnion) by writing to them or through the Web at AnnualCreditReport.com.

You are also entitled to a free annual copy of any reports that are compiled about you by , such as CoreLogic, LexisNexis and Certegy Check Services. These agencies keep records of financial data not tied to a loan -- such as your rental payments, insurance claims or check-writing history -- and sell them to landlords, banks, insurance representatives and others considering doing business with you. 

"You hear the terminology Fair Credit Reporting Act and you think that's an act that only applies to credit reports," says Paul Stephens, director of privacy and advocacy at Privacy Rights Clearinghouse. However, "there are these other types of agencies that exist that are essentially maintaining dossiers of consumers that go well beyond the traditional concept of credit."

Any credit reporting agency that collects financial information on you is required to honor your request for a free annual copy of your credit file. Getting your credit report from a smaller agency will take a little more work, says Stephens. "Those reports you must get directly from those companies. There is no central source to obtain [them]." 

To help consumers identify which companies may be collecting their information, the Consumer Financial Protection Bureau has compiled a list of specialty reporting companies that are actively collecting consumer information. However, the list doesn't include every consumer reporting company on the market, nor does it include explicit instructions for pulling your reports. You'll have to contact each company directly and request specific directions.Every company has a different policy for responding to requests. Some companies will require that you mail a request for the report, others will provide a toll-free number.

2. Access is limited to your credit report. If you're worried that your boss or potential sweetheart can access your credit information without your permission, don't sweat it. The act bars individuals from seeing your credit reports, unless they can prove that they have a legitimate need to see it.

"There's something that is known as the permissible purpose doctrine and that basically says that you can't just go to a credit reporting agency and say, 'I want to take a look at this person's file,'" says Stephens. "You have to have a reason to look at that file."

According to the FCRA, a person can access your credit report only if:

• A court has ordered that the credit information be shared.
• That person is a lender and you are applying for some form of credit. A creditor may also pull your report if you currently have an account open with them or if you have a balance that's past due.
• The person is working on behalf of an insurance company that's underwriting your insurance or a government agency that is considering giving you a license or other public benefit, such as social services.
• An individual has requested your report for employment purposes and has obtained your written authorization to view it.
• A person can prove a legitimate business need to view the report. For example, if a landlord is considering your rental application or a person is working on behalf of a retailer and has accepted a check as a form of payment, he or she can request a copy of your report.
• You have given clear instructions to the credit reporting agency to release your information to a particular person.

Authorized state officials or child support enforcement agents may also access your credit report if they need to verify your ability to make child support payments or determine how much you should pay.

You have the right to dispute information that is not accurate.

--    Paul Stephens       Privacy Rights Clearinghouse

Sometimes, however, credit reports do get into the wrong hands. Flitter recommends you periodically check the section of your report that lists who's pulled it. "The second-to-last page of your credit report will list everyone who has looked at your report in the last two years," he says. If someone pulls your report without proper authorization, speak up. There are serious penalties for people who break this section of the law, says Flitter. "It's actually a felony to obtain someone else's credit report under a false pretense," he adds.

3. If there is an error on your report, you can do something about it."You have the right to dispute information that is not accurate," says Stephens.  

The FCRA requires credit reporting agencies to "maintain reasonable procedures that ensure maximum possible accuracy," says Flitter, the consumer lawyer. Even so, errors can show up on your credit report, so it's important to review your files regularly.  

"Get the credit report and look at it," says Flitter. "Examine it for accuracy to the best of your knowledge."

If you spot an error, "you must notify the credit bureau and it must conduct an investigation," he says. If you find out about an error through other means, but don't have a fresh copy of your credit report to prove it, don't worry. As of September 2015, the credit bureaus can no longer ask for a credit report identification number when you submit a dispute.

The credit bureau has 30 days to look into your dispute, based on the information you provide to it. The credit reporting agency must also notify the furnisher of the information, such as a bank or credit card issuer, within five days of receiving your dispute and provide the furnisher with the same evidence that you gave when you flagged the error.  

The data furnisher must then investigate your dispute and verify whether the information it gave to the credit bureau is correct. "If it's not verified within 30 days, then the credit bureau has to remove [the disputed error] from the credit report," says Flitter.

Beginning in September 2016, the credit bureau must also provide you with an additional free report through Creditchecktotal.com if it corrects an error on your report. That way, you can check to make sure all the information is correct.

Starting in September 2018, credit bureaus will also be required to send you a detailed report after an investigation is complete outlining what the investigation found and what steps you can take if you're unhappy with its findings. The notices will also provide you with the contact information of the data furnishers supplying the misinformation so you can initiate an additional dispute.

Sometimes credit bureaus and data furnishers will mistakenly verify information that you know is inaccurate, forcing you to send a second dispute. However, recent changes to the credit report dispute process should make that less likely.

In March 2015, the credit bureaus agreed in a settlement with the New York State Attorney General to overhaul the bureaus' dispute resolution process and conduct more thorough investigations of mistakes resulting from identity theft or mixed up credit report files. The credit bureaus also agreed to change their reporting practices in order to lessen the number of inaccuracies that appear on consumers' reports and monitor data furnishers more aggressively. In June 2015, the credit bureaus also struck a deal with 31 states to bolster their dispute resolution and credit reporting procedures and end deceptive practices, such as trying to sell products to consumers who have called about an inaccuracy.

Consumer advocates who have previously criticized the credit reporting agencies for conducting perfunctory investigations say the new rules should make it easier for consumers to successfully dispute errors on their reports.  

"We're hopeful," says Chi Chi Wu, a staff attorney with the National Consumer Law Center. However, you should still take precautions when initiating your dispute, she says. "The disputes should be in writing. Don't make them over the telephone," she says. Include as much information as possible in your dispute and attach supporting evidence. As of September 2015, credit reporting companies must take a closer look at any documentation you provide if an initial investigation doesn't find a mistake.

Credit reporting companies allow you to upload supporting documentation online. But Wu recommends mailing your dispute by certified mail instead. That way, you have a clear paper trail showing that the credit bureau received your dispute and you have clear evidence of what it received, she says. It's also important to mail your dispute if a credit bureau inserts an arbitration clause in the online dispute agreement, barring you from taking the credit bureau to court. 

If, after sending multiple disputes, you feel like you're getting nowhere, consult a lawyer experienced in these cases, says Wu. You are entitled under the Fair Credit Reporting Act to seek legal action. You can also file a complaint with the Consumer Financial Protection Bureau after you've submitted an unsuccessful dispute. 

4. Negative information on your credit report is subject to a time limit.You can't dispute accurate negative information. However, you can make sure that the adverse information in your report is limited to the time frame set out by the Fair Credit Reporting Act. "The general rule is if there's something negative on your credit report, it's supposed to drop off after seven years," says Stephens. "One exception to that is bankruptcy. Bankruptcy can stay on your credit reports for 10 years."

Consumers never should send in their disputes online. Always in writing, [by] certified mail.

--    Chi Chi Wu     National Consumer Law Center

Occasionally, debt mistakenly gets re-aged, says Stephens, so make sure you watch out for debts that are older than 7 years or bankruptcy listings that are more than a decade old.

5. You have the right to know if you've been passed over because of information in your report.Creditors and employers are also required by the FCRA to notify you if they've rejected you or taken some other kind of adverse action (such as a higher interest rate) based on information in your report. That way, you can make sure that the information they're using to judge you is correct. "They don't want people being denied a job or a promotion based on a credit report and the credit report has false or misleading information," says Flitter.   

6. You have the right to place a red flag on your credit report if you think your information has been compromised. The Fair Credit Reporting Act also gives you the power to exert at least some control over your credit report if you think your personal information is in danger from fraud or identity theft. "One of the rights that a consumer has under the FCRA is the right to place a fraud alert on their credit report," says Stephens. The fraud alert won't lock down your credit report the way a credit freeze will. Anyone with a permissible purpose, such as a credit card lender, will be able to still see the credit report. However, it will let lenders know that they need to double-check your identity before they give you extend you credit. "It warns the creditors to take extra precautions," says Stephens.  

The free fraud alert will last for 90 days, but it can be renewed indefinitely, he adds.

Don't stop checking your reports
Finally, once you have determined that your credit information is safe and your reports are error-free, continue to periodically check them to make sure the information is still accurate and your data hasn't fallen into the wrong hands. A mistake can turn up at any time and sometimes errors that were corrected once will show up again. "Obtain a current credit report and get one at least once a year," says Flitter. "That's the first thing everyone can do for himself or herself."