10 Steps to Improved Credit
Here are the top dos and don'ts to follow for building or improving your credit, protecting your identity, and guarding personal information from loss or theft.
1. Know What Your Credit Is
Did you know there are companies that keep track of whether or not you pay your debts and if you make payments on time? And that these companies make this information available in the form of a credit report and score?
A bad credit history can haunt you for a long time—seven years or more. That’s why the best thing to do is learn how to maintain good credit before there’s a problem. While this might seem complicated at first, it gets easier once you understand the basics of credit and how it works.
Credit is more than just a plastic card you use to buy things—it is your financial trustworthiness. Good credit means that your history of payments makes you a good candidate for a loan, and creditors (those who lend money) will be more willing to work with you. Having good credit usually translates into lower payments and more ease in borrowing money.
Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live, and sometimes even a job.
2. Understand Your Credit
Most creditors use credit scoring to evaluate your credit record. This involves using your credit application and report to get information about you, such as your annual income, outstanding debt, bill-paying history, and the number and types of accounts you have and how long you have had them. Potential lenders use your credit score to help predict whether or not you are a good risk to repay a loan and make payments on time.
Many people just starting out have no credit history and may find it tough to get a loan or credit card, but establishing a good credit history is not as difficult as it seems.
• You might apply for a credit card issued by a local store because local businesses are more willing to extend credit to someone with no credit history. Once you establish a pattern of making your payments on time, major credit card issuers might be more willing to extend credit to you.
• You might apply for a secured credit card. Basically, this card requires you to put up the money first, and then lets you borrow 50 to 100% of your account balance.
• You might ask other people who have an established credit history to co-sign on an account. By co-signing, the person is agreeing to pay back the loan if you don’t.
3. Read the Fine Print
When applying for credit cards, it’s important to shop around. Fees, charges, interest rates, and benefits can vary drastically among credit card issuers. And, in some cases, credit cards might seem like great deals until you read the fine print and disclosures. When you’re trying to find the credit card that’s right for you, look at the:
The APR is a measure of the cost of credit, expressed as a yearly interest rate. Usually, the lower the APR, the better it is for you. Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited-time offer.
This is the amount of time you have to pay your credit card bill after the date of the credit card purchase and before the date the company starts charging you interest on the unpaid amount.
Many credit card issuers charge an annual fee for giving you credit.
Transaction Fees and Other Charges
Most creditors charge a fee if you don’t make a payment on time. Other common credit card fees include those for cash advances and going beyond the credit limit. Some credit cards charge a flat fee every month, whether you use your card or not.
Customer service is something most people don’t consider, or appreciate, until there’s a problem. Look for a 24-hour, toll-free telephone number.
Creditors may offer other options for a price, including discounts, rebates, and special merchandise offers. If your card is lost or stolen, federal law protects you from owing more than $50 per card for unauthorized charges.
4. Improve Your Credit Record
A lot of people spend more than they can afford and pay less toward their debts than they should. To get control over your finances, and to manage your debt, try:
In many cases, people design and then stick to a budget to get their debt under control. A budget is a plan for how much money you have and how much money you spend. Sticking to a realistic budget allows you to pay off your debts and save for the proverbial rainy day.
Many universities, military bases, credit unions, and housing authorities operate nonprofit financial counseling programs. A credit counseling organization isn’t necessarily legitimate just because it says it’s nonprofit. You may want to check with the Better Business Bureau for any complaints against a counselor or counseling organization. Visit www.bbb.org for your local Better Business Bureau’s telephone number.
Creditors may be willing to accept reduced payments if you’re working with a reputable program to create a debt repayment plan. When you choose a credit counselor, be sure to ask about fees you will have to pay and what kind of counseling you’ll receive.
Finally, bankruptcy is considered the credit solution of last resort. Unlike negative credit information that generally stays on a credit report for seven years, bankruptcy information can stay on a credit report for as many as 10 years. Bankruptcy can make it difficult to rent an apartment, buy a house or a condo, get some types of insurance, get additional credit, and, sometimes, get a job. In some cases, bankruptcy may not be an easily available option.
When to Contact Creditors
If you’re having trouble paying your bills, contact your creditors immediately. Tell them why it’s difficult for you, and try to work out a modified plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. Take action immediately and keep a detailed record of your conversations and correspondence.
5. Keep Your Record Clean
It’s easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.
Patience is important in this process. It takes time to establish credit and build a record of consistency in making payments to demonstrate your creditworthiness. And it is much better to go slowly and develop a strong credit record than to apply for too many credit cards or a loan that is larger than you can handle. Start slowly, be cautious, keep track of your overall debt, and pay on time. Most importantly, remember that credit actually represents real money and has to be repaid with interest.
Good credit is important, now and in the future. In most cases, it takes seven years for accurate, negative information to be deleted from a credit report. Bankruptcy information can take even longer to be deleted—up to 10 years, depending on the type of bankruptcy.
6. Know What Creditors Look for on Credit Reports
Understanding what types of information most creditors evaluate is important. Your credit report is a key part of your credit score, but it is not the only factor. Other factors include:
• Your bill-paying history
• How many and the type of accounts you have
• Unused portions of credit lines
• Longevity of accounts
• Late payments
• Outstanding debt
• Collections actions
7. Obtain a Copy of Your Credit Report
Credit reporting agencies don’t share files, so you’ll need to contact each reporting agency to make sure the information about you is correct. The three major credit reporting agencies are:
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies—Equifax, Experian, and TransUnion—to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your free annual credit report online at www.annualcreditreport.com, by calling 1-877-322-8228, or by completing the Annual Credit Report Request Form found on www.ftc.gov and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
When you order, you need to provide your name, address, Social Security number, and date of birth. To verify your identity, you may need to provide some information that only you would know, like the amount of your monthly mortgage payment.
8. Keep Credit Cards Under Control
Whether you shop online, by telephone, or by mail, a credit card can make buying many things much easier; but when you use a credit card, it’s important to keep track of your spending. Incidental and impulse purchases add up, and each one you make with a credit card is a separate loan. When the bill comes, you have to pay what you owe or pay interest on unpaid balances. Owing more than you can afford to repay can damage your credit rating.
Keeping good records can prevent a lot of headaches, especially if there are inaccuracies on your monthly statement. If you notice a problem, promptly report it to the company that issued the card. Usually the instructions for disputing a charge are on your monthly statement. If you make a purchase by mail, telephone, or online, keep copies and printouts with details about the transaction.
These details should include:
• The company’s name, address, and telephone number
• The date of your order
• A list of the item numbers ordered
• The order confirmation code
• Any applicable warranties
• The return and refund policies
Finally, if you have a credit card, take the following precautions:
• Never lend it to anyone.
• Never sign a blank credit card receipt. Draw lines through blank spaces on receipts above the total so the amount can’t be changed.
• Never put your account number on the outside of an envelope or on a postcard.
• Always be cautious about disclosing your account number over the telephone, unless you know the person you’re dealing with represents a reputable company.
• Always carry only the cards you anticipate using to prevent the possible loss or theft of all your cards or identification.
• Always report lost or stolen ATM, debit, and credit cards to the card issuers as soon as possible.
9. Protect Your Identity
Identity theft involves someone else using your personal information to create fraudulent accounts, charge items to another person’s existing accounts, or even get a job. You can minimize the risks by managing your personal information wisely and cautiously.
Here are some ways to protect yourself from identity theft:
• Before you reveal any personally identifying information, find out how it will be used and whether it will be shared.
• Pay attention to your billing cycles. Follow up with creditors if your bills don’t arrive on time.
• Guard your mail from theft. Deposit outgoing mail in post office collection boxes or at your local post office. Promptly remove mail from your mailbox after it has been delivered. If you’re planning to be away from home and can’t pick up your mail, call the U.S. Postal Service toll-free at 1-800-275-8777, or visit www.usps.com to request a mail hold.
• For passwords on your credit card, bank, and phone accounts, avoid using easily available information like your mother’s maiden name, your birth date, the last four digits of your Social Security number or telephone number, or a series of consecutive numbers. It’s a good idea to keep a list of your credit card issuers and their telephone numbers.
• Don’t give out personal information over the telephone, through the mail, or online unless you’ve initiated the contact or you know with whom you’re dealing.
• Protect personal information in your home. For example, tear or shred documents like receipts, copies of credit offers and applications, insurance forms, physician’s statements, discarded bank checks and statements, and expired credit cards before you throw them away. Be cautious about leaving personal information in plain view, especially if you have roommates, employ outside help, or are having service work done. Find out who has access to your personal information at work and verify that the records are kept in a secure location.
• Never carry your Social Security card; leave it in a secure place at home. Give out your Social Security number only when absolutely necessary.
• Order your credit report from each of the three major credit reporting agencies every year to make sure it is accurate and includes only those activities you’ve authorized.
• Carry only the identification you actually need.
What to Do If You're a Victim of Identity Theft
If your cards, bills, or identification have been misused to open new accounts in your name, file a complaint with the Federal Trade Commission. Call toll-free 1-877-ID-THEFT (1-877-438-4338); TDD: 202-326-2502, or visit www.consumer.ftc.gov.
The FTC is the federal clearinghouse for complaints by victims of identity theft. Although the FTC does not have the authority to bring criminal cases, the FTC assists victims of identity theft by providing them with information to help them resolve the financial and other problems that can result from identity theft.
10. Guard Your Personal Information
A lost or stolen wallet or purse is a gold mine of information for identity thieves. If your wallet or purse is lost or stolen:
• File a report with the police immediately and keep a copy.
• Cancel your credit cards. Call the issuer(s) immediately. Many companies have 24-hour toll-free numbers to deal with such emergencies. The number is on your monthly statement.
• Get new cards with new account numbers.
• Call the fraud departments of the major credit reporting agencies and ask each agency to put a “fraud alert” on your account:
- Equifax 1-866-349-5191
- Experian 1-888-397-3742
- TransUnion 1-855-681-3196
• Report the loss to the fraud department of the bank where you have your checking and savings accounts. Ask about the next steps regarding your accounts, including your ATM or debit card.
• Review your credit reports regularly and have them corrected when necessary. Report a missing driver’s license to your state's department of motor vehicles.
• If your keys are missing, change your home and car locks.
Federal Trade Commission (FTC)
The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them.
Contact the FTC to file a complaint or to get free information on consumer issues:
Toll-Free: 1-877-FTC-HELP (1-877-382-4357)
The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the United States and abroad.
The JumpStart Coalition for Personal Financial Literacy
The JumpStart Coalition for Personal Financial Literacy seeks to improve the personal financial literacy of young adults by evaluating their financial literacy; developing, disseminating, and encouraging the use of standards for grades K-12; and promoting the teaching of personal finance.
The above information was originally taken from:
“What You Need to Know About Credit” by the Federal Trade Commission (unpublished pamphlet)
“How to Establish, Use, and Protect Your Credit” by the Federal Reserve Bank (unpublished pamphlet)