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Rebuilding Credit
What's
the first step in rebuilding credit?
To avoid getting into financial problems
in the future, you must understand
your flow of income and expenses.
Some people call this making a budget.
Others find the term budget too restrictive
and use the term spending plan. Whatever
you call it, spend at least two months
writing down every expenditure. At
each month's end, compare your total
expenses with your income. If you're
overspending, you have to cut back
or find more income. As best you can,
plan how you'll spend your money each
month.
For more detailed information
on how to create a budget, see How
to Make a Budget and Stick to It.
If you have trouble putting together
your own budget, consider getting
help from a nonprofit group such as
Consumer Credit Counseling Service
(agencies affiliated with the National
Foundation for Credit Counseling)
(www.nfcc.org),
or Myvesta.org (www.myvesta.org),
both of which provide budgeting help
for free or at a nominal fee.
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Where
do credit reports come from?
Credit reports are compiled by credit
bureaus -- private, for-profit companies
that gather information about your
credit history and sell it to any
number of businesses that are allowed
to see your credit report: banks,
mortgage lenders, credit unions, credit
card companies, department stores,
insurance companies, landlords, and employers.
Credit bureaus get most of their
data from creditors. They also search
court records for lawsuits, judgments,
and bankruptcy filings. And they go
through county records to find recorded
liens (legal claims).
To create a credit file for a given
person, a credit bureau searches its
computer files until it finds entries
that match the name, the Social Security
number, and any other available identifying
information. All matches are gathered
together to make the report.
Credit reports include noncredit
data such as names you previously
went by, past and present addresses,
Social Security number, employment
history, marriages, and divorces.
Credit data includes the names of
your creditors, type and number of
each account, when each account was
opened, your payment history, your
credit limit or the original amount
of a loan, and your current balance.
The report will show if an account
has been turned over to a collection
agency or is in dispute.
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How
can I get a copy of my credit report?
There are three major credit bureaus:
Equifax, Trans Union, and Experian.
It's best to order your report from
all three. The federal Fair Credit
Reporting Act (FCRA) entitles you
to a copy of your credit report, and
you can get one for free if:
- you've been denied credit because
of information in your credit report
and you request a copy within 60
days of being denied credit
- you're unemployed and looking
for work
- you receive public assistance,
or
- you believe your file contains
errors due to fraud.
In addition, you can get one free
copy each year if you live in Colorado,
Georgia, Maryland, Massachusetts,
New Jersey, or Vermont.
The law says that if you don't qualify
for a free report, you should pay
no more than $9 (this amount usually
goes up at the beginning of each year)
to obtain a report from Equifax (P.O.
Box 740241, Atlanta, GA 30374, 800-685-1111,
www.equifax.com),
Trans Union (P.O. Box 1000, Chester,
PA 19022, 800-888-4213, www.tuc.com),
or Experian (P.O. Box 2002, Allen,
TX 75013, 888-397-3742, www.experian.com).
When you request your report, provide
the following information:
- your full name (including generations
such as Jr., Sr., III)
- your birth date
- your Social Security number
- your spouse's name (if applicable)
- your telephone number, and
- your current address and addresses
for the previous five years.
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What
should I do if I find mistakes in
my credit report?
As you read through your report,
make a list of everything out of date.
The credit bureaus should remove this
information from your credit report:
- Lawsuits, paid tax liens, accounts
sent out for collection, criminal
records (except criminal convictions,
which may be reported indefinitely),
late payments, and any other adverse
information older than seven years.
- Bankruptcies older than ten years
from the date of the last activity
(usually the date you received your
discharge or the date the case was
dismissed, although credit bureaus
sometimes start counting from the
earlier date of filing).
- Credit inquiries (requests by
companies for a copy of your report)
older than two years.
Next, look for incorrect or misleading
information, such as:
- incorrect or incomplete name,
address, phone number, Social Security
number, or employment information
- bankruptcies not identified by
their specific chapter number
- accounts not yours or lawsuits
in which you were not involved
- incorrect account histories --
such as late payments when you paid
on time
- closed accounts listed as open
-- it may look as if you have too
much open credit, and
- any account you closed that doesn't
say "closed by consumer."
After reviewing your report, complete
the "request for reinvestigation"
form the credit bureau sent you, or
send a letter listing each incorrect
item and explain exactly what is wrong.
Once the credit bureau receives your
request, it must investigate the items
you dispute and contact you within
30 days. Some states require bureaus
to complete reinvestigations more
quickly. If you don't hear back within
30 days, send a follow-up letter.
If you let the bureau know that you're
trying to obtain a mortgage or car
loan, it can do a rush investigation.
If you are right, or if the creditor
who provided the information can no
longer verify it, the credit bureau
must remove the information from your
report. Sometimes credit bureaus will
remove an item on request without
an investigation if rechecking the
item is more bother than it's worth.
If the credit bureau insists that
the information is correct, call the
bureau to discuss the problem:
- Experian: 888-397-3742
- Trans Union: 800-888-4213
- Equifax: 800-685-1111
If you don't get anywhere with the
credit bureau, directly contact the
creditor and ask that the information
be removed. Write to the customer
service department, vice president
of marketing, and president or CEO.
If the information was reported by
a collection agency, send the agency
a copy of your letter, too. Creditors
are forbidden by law to report information
that they know is incorrect.
If you feel a credit bureau is wrongfully
including information in your report,
or you want to explain a particular
entry, you have the right to put a
brief statement in your report. The
credit bureau must give a copy of
your statement -- or a summary --
to anyone who requests your report.
Be clear and concise; use the fewest
words possible.
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What
can I do to rebuild my credit?
After you've cleaned up your credit
report, the key to rebuilding credit
is to get positive information into
your record. Here are two suggestions:
- If your credit report is missing
accounts you pay on time, send the
credit bureaus a recent account
statement and copies of canceled
checks showing your payment history.
Ask that these be added to your
report. The credit bureau doesn't
have to, but often will.
- Creditors like to see evidence
of stability, so if any of the following
information is not in your report,
send it to the bureaus and ask that
it be added: your current employment,
your previous employment (especially
if you've been at your current job
fewer than two years), your current
residence, your telephone number
(especially if it's unlisted), your
date of birth, and your checking
account number. Again, the credit
bureau doesn't have to add these,
but often will.
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I've
been told that I need to use credit
to rebuild my credit. Is this true?
Yes. The one type of positive information
creditors like to see in credit reports
is credit payment history. If you
have a credit card, use it every month.
Make small purchases and pay them
off to avoid interest charges. If
you don't have a credit card, apply
for one. If your application is rejected,
try to find a cosigner or apply for
a secured card -- where you deposit
some money into a savings account
and then get a credit card with a
line of credit around the amount you
deposited.
But a word of caution: It won't do
you any good in the long run to apply
for credit before you're back on your
feet financially. You'll just end
up with high cost credit that will
put you back in the hole again. Even
if you can get a card earlier, wait
until you are ready to start using
credit again.
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How
many credit cards should I carry?
Once you succeed in getting a credit
card, you might be hungry to apply
for many more cards. Not so fast.
Having too much credit may have contributed
to your debt problems in the first
place. Ideally, you should carry one
or two bank credit cards, maybe one
department store card and one gasoline
card. Creditors want to see that
you can handle more than one credit
account at a time. But use all of
the cards only if you can pay the
charges in full each month. You don't
need to build up interest charges
on these cards, but use them and pay
the bill in full.
Creditors may frown on applicants
who have a lot of open credit. So
keeping many cards may mean that you'll
be turned down for other credit --
perhaps credit you really need. And
if your credit applications are turned
down, your file will contain inquiries
from the companies that rejected you.
Your credit file will look like you
were desperately trying to get credit,
something creditors never like to
see.
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How
long does it take to rebuild credit?
If you follow the steps outlined
above, it will usually take about
two years to rebuild your credit so
that you won't be turned down for
a major credit card or loan. After
around four years, you should be able
to qualify for a mortgage.
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