Credit scores govern so much of our financial life, it is amazing that few of us really know what to do if we suddenly find out that we have a bad credit score. Bad credit can shut you out of mortgages, car notes, credit cards, and other loans you might need. In fact, even mediocre credit can prevent you from getting the credit you need! If you have bad credit, you need to know two main things. First, you need to know that bad credit is not like a tattoo. It will wear off after a while. The second thing you need to know is that it will only wear off if you do the right things (and stop doing the wrong ones). In the U.S., consumers have both a credit report and a credit score. Your credit report is actually a fairly complex file of financial transactions that provides information on your various loans (credit cards, mortgages), how you've handled credit, along with information on where you work, what you earn, and any court cases you're involved in. A credit score is a number, typically between 300 and 850, that gives an overall "snapshot" of how you manage your finances. In the U.S., Fair Issac & Company came up with a system to translate the bulk of data in the credit report into the snapshot credit score. Today, those scores are called FICO scores (for the name of the company that invented them). Three major credit bureaus maintain credit records: TransUnion, Experian, and Equifax. They all use a form of the FICO score. The good thing about credit reports is that they move forward with the time. Think of your credit score as a scale that weighs all the things you do well with your money on one side and balances it against all the money mistakes you've made on the other. This means that if you do more things right than wrong, even starting today, you can eventually clean up your credit. Fixing your credit report is slow, steady work. You can't do it overnight. But you can do it. The opposite is also true. Good credit today will not last if you don't keep doing the right things. Now that you know you can influence your credit report and score, you need to know what kinds of things are likely to move the score in your favor the fastest? The FICO score balances a lot of different activities. If you understand how the credit bureaus think, you'll know how to improve your scores (and you'll be wiser in how you deal with money). First, pay bills on time and keep paying them on time. If you're already in arrears, work out a plan to get back on track and keep up with payments. Late payments can really hurt your score. One late payment can offset many on-time payments! If you have credit cards, try to keep no or a low balance. A maxed-out card is bad for the report, but a card with a reasonable balance is fine. Reasonable is not a dollar amount! What's reasonable for one is not reasonable for another. There should always be a big difference between the amount of credit at your disposal and the amount of credit you're actually using at any one time. If you have a lot of credit card debt, it is better to consolidate it into one large debt than keep getting new cards and moving the debt around. In fact, the website http://myfico.com says that if you have a certain amount of debt, it will be better for your credit score if it's a larger amount on one card than the same amount on several cards. On the other hand, don't get a bunch of credit cards you don't plan on using. Having a bunch of available credit that is never used can hurt your score; it looks like you're preparing a way to go head-over-heels into debt. If you do apply for new cards or loans, do not go crazy. A sudden increase in credit card applications can lower your score. The best strategy is to apply for new credit and loans only as needed. If you had a financial disaster, whether a bill went to collections, a house went into foreclosure, you defaulted on a note, or you went bankrupt, be aware that the information about that problem can stay on your report for years, even if you have paid off the debt or otherwise managed the problem. A collection account can stay on your report for seven years. Seven years may seem like a long time, but you can eventually "outlive" a bad financial mistake. If you had a bankruptcy 20 years ago, that information will no longer be on your credit report. In fact, you could have sterling credit 20 years later despite that financial misstep. Furthermore, do not think that lenders are in any way obligated to use your credit report or your credit score. Lenders are free to lend to anyone they choose. Most lenders do, in fact, pull a credit report (that's called an "inquiry") but they will likely consider other factors, including your income, the type of loan, and whether or not they have had previous dealings with you. (That latter information can be bad news if you've ever not paid them on time-another good reason to keep your bills paid on time!) Credit scores change constantly. Every single month, information is updated. Do enough things right, and the good reports will outweigh the bad. That gets encapsulated into the score, which is really just a snapshot of your overall credit health on that day. Your credit report is available to you free once a year on request and you can also get a free copy if you are ever turned down for a mortgage; you can also get your credit report at any time for a nominal fee. My favorite resource for getting your credit report is the website at http://www.annualcreditreport.com. They work with all three credit agencies and can help you get your yearly free report and provide some general information on credit reporting. Lenders are in the business of lending money. They don't want to do that foolishly, but they don't want to keep credit-worthy borrowers away, either. The credit report is designed to be accurate and reliable to help borrowers get the credit they need (and can manage responsibly) and advise lenders as to which consumers are the most likely to repay a debt.
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