Building Credit

What Is Good Credit?

If you were lending money to someone you didn’t know, what would you want to know about that person? Probably the same things potential lenders ask about you: How much do you earn? What do you do for a living? How long have you had your job? Do you own a home or rent? How often do you move? Do you pay your bills on time?

When you apply for credit or a loan, the potential lender turns to a credit bureau for answers to these questions. The credit bureau’s report normally includes four kinds of information:

• Identifying information. Your name, current and previous addresses, Social Security number, date of birth, and current and previous employers. This information comes from the credit applications you fill out, so be sure to complete all applications clearly, completely, and consistently.
• Credit information. Every account you have or have had within the past few years, the date opened, credit limit or loan amount, balance, monthly payment, and payment pattern. The companies that give you credit or lend you money supply this information. Negative information may remain on your report for up to seven years.
• Public record information. Federal district bankruptcy records, state and county court records, tax liens and monetary judgments. Some states also report overdue child support payments. This information comes from public records. Bankruptcy reports remain in your file for ten years.
• Inquiries. The name of anyone who has asked for a copy of your credit report. The credit bureau supplies this information, and it can remain available for as long as two years.

What Does Your Credit Report Look Like?

To obtain a copy of your credit report, contact one of these credit bureaus:

Resolving a Credit Dispute

Check to be sure that there are no mistakes in your credit report. If a company has made a mistake on your report, you must make sure it gets corrected. Unfortunately, no one else will do it for you.

• Contact the company that listed the mistake. Ask them to write a statement of the error and send it to all three credit bureaus.
• Write your own letter to the credit bureaus, detailing the mistake, and including your full name, Social Security number, address, and birth date. If your name includes a junior or senior, point that out, too. If the mistake involves someone with the same name as you, include a copy of your birth certificate.
• Follow up with all three credit bureaus to make sure the corrections have been made.
• Keep records of any documentation that supports your claim and any correspondence with the company and the credit bureaus. Send all correspondence by certified mail and keep the receipt.
• If the problem is not solved to your satisfaction, write a statement about the mistake and send it to the credit bureaus. The statement must be included every time the report is sent out.
• If a credit bureau does not respond promptly and fairly to your correction, contact the state attorney general or the Federal Trade Commission at 1-202-FTC-HELP or FTC.gov.

Improving Your Credit Rating

If you’re starting from scratch or trying to repair a poor rating, start small. Get a credit card that is easy to get, perhaps one from a retail store or gas company, or get a secured credit card by depositing money with the issuer. Use the card and pay your bills on time. Add other credit or loans gradually, in small increments.

Don’t apply for loans you can’t qualify for. Every time someone checks your credit record, the credit check is noted in your record, too. If a lot of potential lenders have checked your report in a short period of time, other lenders will wonder why you’re trying so hard to go into debt.

Don’t keep credit cards with high limits that you don’t use. Potential lenders see open lines of credit as an opportunity for you to go on a shopping spree and go deeply into debt.

Pay your bills on time. Pay your bills on time. Pay your bills on time. Have we made our point?

Dealing with Debt

You’ve read all the tips for handling your money wisely. You’ve tried to do everything right. But, for whatever reason, you’re in financial trouble. Maybe your credit cards got away from you. Maybe you had an emergency that you weren’t prepared for. In any case, you’re seeing one or more of these warning signs:

• You’re late with bill payments
• You’re trying to decide which bills to pay and which ones to let slide another month
• Bill collectors are calling you
• You spend more than you earn
• You’re at or near your credit limit
• You’re carrying a credit card balance, and can only make the minimum payment
• You put off important things like medical visits because you can't afford them right now
• You have a history of bounced checks
• You can’t afford your car payment
• You’ve moved or considered moving because you can’t afford the rent or mortgage payment
• You don’t have a safety net set aside
• You can’t list all the people and companies you owe money, or how much you owe them

If you’re seeing any of these red flags, or if you’re just not comfortable with the amount of debt you have, follow the steps below.

1. Take stock of your situation. List all the people and companies you owe money to and how much you owe them. Find out how much interest you are paying on each bill. Add up the payments you must make this month.
2. If you can’t make all of your minimum payments this month, contact your creditors. Tell them that you can’t make this payment and how you intend to make future payments. You’re much more likely to get help from them if you contact them before your payment is late.
3. If a collector calls, stay calm and tell him or her the truth. Say why the payment is late and how you intend to catch up. Let him or her help you figure out a reasonable payment plan, if necessary.
4. Take the list you made in Step 1 and figure out the best way to pay off your debts. Use this calculator to help you.
5. Get help. If you can’t do it alone, contact the National Foundation for Consumer Credit for help in finding a reputable credit counseling center near you. Talk to a non-profit credit counseling service before you think about applying for a debt consolidation loan. Such a loan may not be in your best interest. A good credit counselor can help you figure out the best way to deal with your unique situation.
6. When you’ve paid off your debt, rebuild your credit one step at a time.