Credit Score Rescue

You’re so much more than just a number to us. Still, a lot of folks — from your lender to your landlord to your insurer to your employer — define your character by the three-digit score that reflects what’s in your credit file. To them, whether or not to do business with you comes down to where you rank on the following scale:

• 750 and up: You’re golden and will get the best interest rates on loans.
• 710-750: Though you’re not quite a VIP, qualifying for competitive offers is no problem.
• 650-710: Approval is easy, but platinum status isn’t likely.
• 580-650: You qualify for credit at subpar rates and so-so terms.
• 580 and below: Brace for denial and/or loan-shark rates.

Source: John Ulzheimer, President, Credit.com Educational Services. Based on FICO scoring range 300-850. A higher score indicates lower credit risk.

Of course, what’s on the inside really does matter most of the time, but in matters of credit, you really can’t escape the scrutiny.

You know the drill, Fools: It’s time to get it done.

Nine ways to improve your credit score
If you’re on the cusp of decent creditworthiness, take heed: You can improve your lot in as few as three to six months (or even more quickly, if you discover that some of the errors being reported aren’t really your own). If your score suffers deeper scars, credit triage is about a 12-month process, though your actions will begin to positively affect your score in 30 to 60 days.

Here are nine tactics to improve your credit score ASAP.

Concentrate on performance factors: Payment punctuality and credit use levels account for 65% of the scoring equation. That’s why, even if you change nothing else, being an on-time, low-spending Goody Two-shoes for a while will do wonders for your reputation. The blow to your score for any 30- or 60-day late payments in the past year will begin to diminish after you mail the check and rectify your wrong. Recovering from a 90-day late payment (a ding that can be as damaging to your score as bankruptcy) will take longer. But it will fade to black eventually, particularly if your more recent payment habits are pristine.

Keep balances low: Aim to use 35% or less of your credit line to avoid lenders’ ire. (Of course, if you want to get on our Foolish good side, we’d love to see your debt levels at 0% after every billing cycle.) Before any major loan application process (mortgage, auto loan, etc.), get serious about paying down your debt. In this instance, usage of 10% or less is ideal. To keep balances low, postpone big purchases, keep card use to a minimum, and pay down as much debt as possible.

Get more credit for your history: Do not close old accounts, even if you never use them. Canceling lines of available credit hurts your credit utilization ratio (also known as your debt-to-available-credit ratio). Instead, give lenders some good news to report (instead of stagnancy) by using old cards every six months to buy something small.

Improve the looks of your limits: Are lenders reporting accurate credit limits? If not, ask them to. You can also improve your credit ratio by asking your banks to up your credit limits — with this caveat: Don’t do it if you think access to more money will go to your head and drive you to the mall. If you do ask for more rope, er, spending power, make sure the request won’t require your credit to be re-pulled; that can trigger a “hard inquiry,” which can bring about a potential score reduction of five points or more if enough are made within a 12-month period. Also, do not try to build creditworthiness by opening a home equity line of credit. A “secured revolving account” has little impact on your overall score.

Attack unattractive debts: Pay off no-money-down financing debts ASAP, possibly with a home equity loan (HEL). An HEL penalizes your score less than revolving credit card balances and financing deals because consumers are more conscientious about payments. Don’t swap debts lightly, though, since the roof over your head is at risk if you don’t pay what you owe on an HEL.

Deal with collection accounts: In a strange karmic twist, paying off debts that have been sent to collections won’t improve your score much (the biggest hit comes earlier from the “charged-off debt” designation), with one exception: if the payment lowers your outstanding debt. Try negotiating with the collection agency (in writing) to have them mark the account as “paid as agreed” or remove the notation from your credit report entirely.

Watch the clock when rate shopping: The credit scoring system treats clusters of credit inquiries for mortgages and car loans as a single hard inquiry, so long as you contain your loan-quote requests within a 45-day period. However (there’s always a “however,” isn’t there?), some lenders still use the old FICO system, which allows just a two-week window of safe harbor, so err on the conservative side when window-shopping for a loan.

Make sure that’s not a typo: Don’t assume that negative entry in your credit file is really your fault. Consumer watchdogs report that as many as 80% of credit reports contain errors — and a quarter of the time, those errors are significant enough to cause a FICO score drop of 50 points or more. Be sure to review your official records from all three major credit reporting agencies (Equifax, Experian and TransUnion), since not all institutions report activity to all three consistently.

Don’t ruin a good thing: Got good credit? Good news: Keeping it that way won’t require much more effort than what you’ve been doing to get it there. Just continue to pay your bills on time, watch your spending and don’t monkey too much with what’s clearly working (doing so may actually lower your score).

Finally, you may wonder why we didn’t mention the time-honored tactic of piggybacking on someone else’s already established good credit as an authorized user or joint account holder. That’s because the suits pulled the plug on this strategy after some businesses began using it in nefarious ways. In other words, the bad guys ruined it for all of us. Still, even though you’re on your own, following the rules above should have you earning your gold star all by yourself in no time.

Let us help you repair your credit today. Click here for your free initial consultation.

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WASHINGTON — When you’re quoted a higher interest rate than you deserve because of erroneous information in your credit file, wouldn’t you like someone to red flag it for you?

That’s an especially pertinent question in today’s mortgage market as lenders ratchet up their credit score minimums and use electronic “risk-based pricing” to set rates and other loan terms. If you really deserve a 720 FICO score, but you have been pulled into the low 600s because of incorrect or missing information in your national credit bureau files, you really ought to know about it.

To help with this, two federal agencies have proposed risk-based pricing alert procedures that would cover all lending situations — home mortgages, credit cards, auto loans, among others.

As part of credit reform legislation enacted at the end of 2003, Congress directed the Federal Reserve and the Federal Trade Commission to devise a system that would require lenders to notify consumers whenever credit file data contribute to a less favorable credit offer than they might otherwise receive.

It took four years, but the two agencies published their risk-based pricing alert proposal in mid-May. After a three-month comment period open to the general public and affected industry groups this summer, the FTC and the Fed could adopt the plan this year.

Here’s how it might work for home mortgage applicants: The bank pulls your credit files and prepares a rate quote. If your score comes in too low to qualify for the lender’s best deals, the loan officer would be required to use one of several alternative methods to notify you.

Using one method, the bank could provide you the credit score that governed your rate quote, along with a graphic representation of how your score compares with other mortgage applicants, plus the key factors in your files that depressed your score.

The notice would include information on how to contact the credit bureau that provided the score and how to obtain your full credit report.

Because you wouldn’t yet be contractually committed on the mortgage, you’d be free — if you so chose — to call a timeout and check what’s in your credit files. If derogatory information was erroneous — or if some of your creditors had failed to report your on-time accounts to the national bureaus — you’d be able to correct the files before proceeding further.

Not all applicants would be issued risk-based pricing notices under the proposal — only those whose mortgage terms and rate quotes are “materially less favorable than the most favorable terms available to a substantial portion of consumers (obtaining credit) from or through” that particular lender.

The FTC and the Fed offered two methods for lenders to determine which applicants fit that description. Using one approach, lenders would set a credit score cutoff point at which roughly 60 percent of customers have lower scores and roughly 40 percent have higher scores. Only loan applicants with scores below the cutoff would have to receive risk-based pricing alerts.

Under a second alternative, lenders would create a tiered pricing grid, with notices required only for applicants whose scores are in the lowest tiers.

For example, if a lender used five pricing gradations, only applicants who fell into the lowest three tiers would receive an alert.

In a key decision that could provoke controversy, the FTC and the Fed removed responsibility for issuing notices for most mortgage brokers — as long as they do not function at any time as a lender during a transaction and are solely intermediaries.

If finally adopted, that means that when brokers shop loan applications to multiple lenders and receive quotes, they would not need to provide multiple risk-based pricing notices.

In another limitation, the two agencies conceded that some consumers might not receive risk-based pricing notices even though negative information in their files depressed their scores.

That’s because mortgage brokers might send applications with apparent subprime credit exclusively to lenders who specialize in subprime.

In that event, an applicant’s high rate quote may be typical for that lender, and not “materially less favorable” than what the bulk of the lender’s other clients receive.

Whatever the shape of the final risk-based pricing alert plan, it almost certainly will heighten consumer awareness of the importance of credit data in determining mortgage rates and terms.

In the meantime, remember this: Always check at least one of your national credit bureau reports — on file with Equifax, Experian and TransUnion — months before applying for a mortgage.

That allows you the time to take remedial action if necessary and qualify for the best rate you deserve.

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Maybe you’re not checking your credit report, but plenty of other people are – especially now. As consumer defaults rise, wary lenders are more particular about who they give money to and are raising the standard for what qualifies as an acceptable credit score.

Though it’s always a good idea to check your credit report, “the need to do that is even more compelling now,” says Norma Garcia, a senior attorney at Consumers Union.

Even if you have impeccable spending habits, your report may well have errors, which you’ll need to fix. So now’s a good time for a primer on how to buff up your report, and your score.

First, some basics: Your credit report plays a part in deciding how much interest you cough up for your car payment, whether you qualify for a mortgage loan, and what kind of credit card you can get. In North Carolina, home and auto insurers can use it to help determine the premium they’ll charge you. Some employers will ask if they can check your report before they hire you. Landlords, cell phone providers and utilities may also want to look at your status.

Your credit report includes information about the balances, defaults and opening dates of your credit cards, mortgage payments, student loans and other loans. Information from public records, including bankruptcies, foreclosures or tax liens, can be included. It also tells you who has recently asked for a copy of your report. There are three national companies – Equifax, Experian and TransUnion – that collect this information, then sell it to lenders and others.

Diane Ervin, a mortgage broker in Charlotte, figures that 60 percent of the people who walk through her door have no idea what’s on their credit report. And the majority of them, she said, have errors. She worries that people will be denied loans because they didn’t bother to check and correct their reports.

Errors often happen when your file is merged with that of someone who has a similar name or address, said Travis Plunkett, at the Consumer Federation of America. And since lenders don’t have to share information with the credit bureaus, many credit reports are missing information. A 2004 survey by U.S. PIRG, the federation of state Public Interest Research Groups, found that one in four credit reports contained errors serious enough to result in a denial of credit.

If you’re applying for a job that involves handling money, your potential employer will probably ask for permission to pull your report. “If you’re a cashier, a waitress, a bookkeeper – your employer wants to know if you’re up to your eyeballs in debt,” said Leonard Gordon, a regional director with the Federal Trade Commission.

“Of course, you could be a trustworthy person with terrible credit,” he added, “but that’s not the way the business world thinks.”

How to get your credit report

Since 2005, the federal government has required each of the big three credit reporting agencies – Equifax, Experian and TransUnion - to provide you with a free copy of your credit report once a year. (You’re also entitled to a free copy under certain circumstances, including if you’ve been the victim of identity theft, if you’re unemployed but expect to apply for a job within 60 days, or if your application for credit, insurance or employment is denied.)

More tips

Each agency will try to sell you lots of extras, like e-mail alerts about updates to your report. You are not obligated to buy any of it.

You can get all three of your credit reports at once if you want to compare them, or you can space out your three free reports over the year. If you use up your allotment of free reports, you’ll have to pay up to $10.50 per report.

Where’s my credit score?

Your credit score is not the same as your credit report, and you are not entitled to get it for free. Your credit score is a number, ranging from 300 to 850, that’s based on information in your credit report. The higher your score, the safer you seem to lenders. And since you have three different credit reports, you also have three different credit scores.

You’ll have to pay to get your scores. You can buy your scores from each reporting agency when you get your free credit reports; the agencies will charge you about $6 to $8.

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