Wednesday, January 28, 2009
Consumers see the ads in the newspaper and read the signs nailed to telephone poles: “Credit problems? We erase bad debt.” It sounds so easy. Just call the phone number and pay a fee, and your credit woes will disappear.
The reality is that bad credit does not vanish by paying someone to remove it. Are there legitimate credit repair organizations out there? Sure, and they can help remove inaccurate information from credit reports. But even they can’t get rid of correct information, however damaging it may be.
When it comes to outright mistakes on their credit report, though, it’s imperative that consumers have them fixed-whether they hire an agency or do it themselves.
The first step in fixing credit report errors is to identify what’s wrong. Consumers have to obtain a copy of their credit report (everyone is entitled to one free report per year from each of the three credit bureaus: Experian, Equifax, and TransUnion) and review it for accuracy. Look for:
- Late payments. There should be no late payments over seven years old on the report. This is important, as approximately 35 percent of a credit score is based on timely payments.
- Collections. The report shouldn’t show any collections or charge-offs more than seven years old. It’s a good idea for consumers to save copies of their credit report for seven years so they have proof of when an item was added.
- Payment records. All paid-in-full installment loans and all collections that have been paid in full or settled for less than the amount due should show a zero balance. Sometimes collections are not updated after they’ve been paid or settled.
- Mysterious accounts. Consumers should be able to recognize all accounts listed on the report. Incorrect accounts do sometimes appear, either by mistaken identity or by identity theft. Consumers should contact the creditor immediately to compare their name and Social Security number with the one shown for the incorrect amount. In the case of an incorrect collection, consumers may have to request a “validation of debt,” or what is sometimes called a “media packet,” which provides details on the account holder. If the account is a case of identity theft, the consumer should request a fraud affidavit from the creditor. It’s also a smart idea to file a police report.
- Original dates. Length of credit history is 15 percent of a credit score, so consumers should be sure the original dates they opened their accounts are accurate. Original account dates could be reported inaccurately if a credit card company is acquired or merged, or if a credit card is reported lost or stolen.
- Available credit. Credit limits on the credit report should match up with credit card statements. It’s best to keep balances under 50 percent of the available limit; less than 30 percent is even better. Debt accounts for 30 percent of your score.
- Types of accounts. Sometimes accounts are not categorized correctly. A home equity line of credit should be listed as a second mortgage, not just a line of credit. If the account type is not reflected properly, consumers should contact the creditor.
- Reason codes. Consumers should read what the credit bureau has to say about why their score is what it is. These so-called “reason codes” appear in the credit report to explain what factors played into the credit score and what actions can be taken to improve the score over time. One caveat: If a consumer already has a good credit score, ignore the reason codes, as making changes could actually result in a lower score.
One last word of advice for consumers: Think twice before closing that credit card, which shrinks the available credit listed on your report and hurts the credit utilization ratio.
The key to good credit is being proactive in reviewing credit reports regularly. If consumers find their credit score is a respectable 680 or higher, removing minor dings may not be worth the effort. Otherwise, finding and eliminating errors is one way to get the high credit rating they deserve.
For more, including tips on how to avoid credit repair scams, read Part 1 of this report, Rx for Consumers’ Credit. Writer Patrick Ritchie is the author of the book The Credit Road Map, which is available at REALTOR.org/store. He can be reached at 480-203-4641 or[email protected].
Note: This column provides general information only. Tax laws change frequently and are not intuitive. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For advice on a specific matter, consult your attorney and CPA.