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Frequently asked questions about credit

What exactly is bad credit?
There are numerous types of credit report problems that would cause a lender to reject your application for a loan. Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.

How do you clear up bad credit?
There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual’s credit record from 7 to 10 years. The first step is to check your existing credit record. Anyone can obtain copies of their own credit report free of charge if they have been turned down for credit recently. For a fee, people can request copies of their own credit report online or by phone from the three major credit reporting agencies: Experian at (888) 397-3742, Equifax at (800) 997-2493 and TransUnion at (800) 888-4213. The bureau also should provide instructions on how to read the report and how to dispute any inaccuracies it contains. If the credit report is correct, take care of any outstanding delinquent obligations first.

What can I do if I am denied credit?
If your application for a credit card or loan is rejected, the federal Equal Credit Opportunity Act requires that the institution that rejected your application provide a written letter that explains why credit was denied. They must also include the name, address and phone number of any credit bureau from whom they requested your credit report. The telephone number given for the bureau will probably play a recorded message telling you how to go about getting a copy of your credit report. Write the bureau within 30 days of your denial and request a copy of your report. It must be provided free of charge as long as it is requested within 30 days of being denied credit. If the credit report contains errors, the bureau can explain how to have the mistakes corrected.

Do credit bureaus decide whether I should get credit?
Credit bureaus don’t determine whether or not you get credit. Only the company that orders the credit report can do that. You could have the cleanest credit history in the world and still be turned down for a loan. Conversely, your credit report could have more bruises on it than a month-old banana and you still might be able to get a credit card. A credit bureau’s business is credit reporting. It collects information from credit grantors such as banks, savings and loans, credit unions, finance companies and retailers. It stores this information in a database, then provides it to credit grantors when you apply for a new credit card or loan. Each credit grantor decides what standards you must meet to be granted credit. The credit bureau doesn’t even track the decision a credit grantor makes after ordering a credit report.

What types of questions cannot be asked by a creditor?
When you apply for a loan or a credit card, the federal Equal Credit Opportunity Act requires that a creditor only ask questions related to your credit history and ability to pay your bills.

What is the Equal Credit Opportunity Act?
The Equal Credit Opportunity Act is a federal law that bars creditors from discriminating against you. Under the ECOA, a creditor is prohibited from refusing to grant credit because of your sex, marital status, race, color, religion, national origin or age. The ECOA provides other protections as well. For example, the law states that you cannot be refused credit merely because you receive some form of public assistance. If a creditor refuses to grant credit, the act requires that it provide you with a written explanation for its decision upon your request.

Can Social Security payments be listed as income when I apply for a loan or credit card?
If you receive Social Security checks each month, you can count the money as part of your monthly income when you apply for a loan or credit card. In fact, some lenders tend to favor applicants who receive Social Security payments over borrowers with alimony or part-time employment income. That’s because alimony checks don’t always arrive on time, and a part-time job can disappear overnight. Social Security checks, on the other hand, are guaranteed to arrive every month and can never be taken away. Since your income is assured, a lender will feel more comfortable about extending credit.

Can I list the alimony I receive for purposes of re-establishing credit after a divorce?
If you receive alimony, you don’t have to reveal that fact to a creditor unless you want to use it to demonstrate your own creditworthiness. If you do include alimony as part of your income on your credit application, however, the lender is entitled to examine whether your ex-spouse can be depended upon to make regular payments. The creditor might conclude that your ex-spouse is a poor credit risk, in which case alimony could be legally discounted as income, which could be detrimental to your application. In other words, receiving alimony can boost your ability to get a loan or new credit card -- but only if your ex-spouse is actually making the payments. A creditor does not have to give you "bonus points" for alimony that you are supposed to receive but cannot collect.

What is actually in a credit report?
For each credit account, the report lists the creditor, type of account, terms, amount of the original debt or credit limit, and balance outstanding on the most recent report. A payment profile for the previous 12 months is made that indicates whether the individual fell behind on payments at any time during the previous year. A credit report is not necessarily a complete credit history. For example, some card issuers do not supply credit bureaus with any information on cardholders’ accounts, claiming that this would be a violation of the customers’ right to privacy. Many gas credit cards report only delinquent accounts. Mortgage lenders seldom supply information to bureaus, because creditors assume that those obligations will be met even if you are behind on others. Most credit grantors are primarily interested in the latest 12- or 24-month reporting period. Many credit bureaus routinely delete older information from their files. However, a bankruptcy can stay on a credit record for up to 10 years and debts that a creditor writes-off as "uncollectable" can remain for seven years.

What is a credit report fee?
When you apply for a loan, the lender may charge you a credit report fee. This is the lender’s cost of obtaining your credit report. The fee generally ranges from $25 to $50.

What is an investigative credit report?
An investigative credit report is a report that goes far beyond your simple bill-paying history. Under federal law, a credit bureau that is asked to conduct an investigative credit report has the right to interview your neighbors, friends, associates or any other acquaintance who may have knowledge about your character, general reputation, personal characteristics or mode of living. However, the credit bureau must inform you in writing that it will be conducting such an investigation.

What is a non-investigative credit report?
A non-investigative credit report is the most common report issued by credit bureaus. A non-investigative report contains information that is only provided by subscribers to the bureau. This sets it apart from an investigative report, in which an investigator may get personal information about you by interviewing friends and business associates.

What are the "Big Three" credit bureaus, and how can I reach them?
The nation’s three largest credit-reporting bureaus are Experian, Equifax Credit Information Services and Trans Union Corp. Visit the Experian, Equifax and TransUnion Web sites. Or contact them at: Experian, PO Box 9595 Allen, TX 75013-0036; (888) EXPERIAN (397-3742). Equifax, P.O. Box 740241, Atlanta, GA 30375-0241; (800) 997-2493. Trans Union, P.O. Box 403 Springfield, PA 19064; (800) 888-4213.

How do I correct an error in my credit report?
If you get a copy of your credit report and find an error in it, call or write the credit bureau to correct the mistake. The procedures are usually explained in a letter that accompanies the report or appear on the report itself. Once it receives your complaint, the credit bureau will check with the creditor who reported the information. If the creditor realizes that it made a mistake, the blemish will be removed from your record and the credit bureau will send you a letter verifying its removal. But if the creditor still disagrees with your version of the facts, you have the right to add a 100-word statement to your credit file that tells your side of the story. Two of the three major credit bureaus make it fairly easy to dispute an entry in your credit report by calling a toll-free telephone number. The third, Trans Union makes you jump through a few hoops before they’ll talk to you by phone. None of the three is equipped to handle e-mail complaints, as yet. Equifax: Call (888) 909-7304. Experian: Call (888) 397-3742. TransUnion: You first have to contact the office listed at the bottom of your credit report by mail. Only then will TransUnion acknowledge receipt of your dispute and provide a toll-free number

Are credit repair services a scam, or can they really get "black marks" off my credit report?
Many companies operate so-called credit repair clinics, promising to have negative information removed from your report. Their pitches are tempting, especially if your credit is bad and you desperately want to buy a new car or house, but most of these firms are rip-offs. You will want to avoid these outfits, however. Many of their practices are illegal. But even assuming that the credit repair company is legitimate, don’t listen to its come-ons. These companies can’t do anything for you that you can’t do yourself. What they will do, however, is charge you between $250 and $5,000 for their unnecessary services. If there is inaccurate negative information on your credit report, you can have it removed for free by contacting the credit bureau yourself. If the black marks on your credit file are there for a good reason, you can’t get them removed and neither can anyone else. Remember that federal law requires certain negative information to remain on your credit record for as long as 10 years. So, unless the credit repair service has the power to change federal law, it really can’t help you.

My credit score is a mess. How can I clean it up?
Pay your bills on time. Your payment history accounts for 35% of your total credit score, according to Fair Isaac, the company that compiles the scores that most lenders use. Another 30% of your score is based on how much you owe. Owing some money is fine, but if your balances are too large, lenders worry that you're overextended and won't be able to repay them.

About 15% of your score is based on how long you've had a credit history; the longer, the better. Avoid closing a lot of old accounts or opening several new ones because that will lower the average age of your accounts. New credit makes up 10% of your score; lenders worry that you'll borrow too much money if you've recently opened a number of new accounts.

Finally, 10% of your score is based on your mix of credit cards, mortgages, installment loans and other debts. Lenders are most interested in your history of managing credit card debt.

Your credit score is based on information in your credit report, so it also helps to contact the three credit bureaus -- Equifax , Experian and TransUnion -- to make sure your reports are free of errors that could lower your score.

How can I reduce the flood of credit card offers I get in the mail?
Call 888-567-8688 and opt out of preapproved offers for every adult and college student in your family. If you prefer, you can also visit to opt out on credit and insurance offers. While you are at it, you can visit the Direct Marketing Association Web site and opt-out of catalog and direct marketing lists as well.

I have a spare $2,500. Should I pay down my credit card balance or add it to my retirement savings?
At first blush, it would seem that paying down your card balance is the better move: Fixed-rate credit cards are averaging 12.5% and variable-rate cards close to 12%, which certainly outpaces current returns on stocks and alternative investments. And you'd see your card balance drop by $2,500 overnight.

But that advice assumes you're not going to run your balance right back up again. If your spending is out of control, $2,500 won't make much of a dent in your debt repayment; you'd also be wise to get rid of your cards altogether or seek credit counseling.

Your decision also depends on the size of your retirement kitty. Once you have made a good start, you can afford to divert $2,500 to paying off debt. But if you have saved little or nothing, you might be better off putting some or all of your spare cash into a retirement account, where it will begin to grow. That's especially true if you have access to a 401(k) account with a company match -- a guaranteed return that far exceeds the interest on even a high-rate credit card.

Should I take out a home-equity loan to pay off my credit card debt?
On paper it's a great idea to trade in high-interest, nondeductible credit card debt for a lower-interest home-equity loan, or to borrow extra money when refinancing your house -- especially because the interest on up to $100,000 in home-equity debt is tax deductible.

In practice it works only if you actually pay off your debt and don't run up even bigger balances -- putting your house at risk.

I never got a credit card while I was in college. Now that I've graduated, what's the best way to get one?
Get a secured card. You'll have to deposit between $100 and $500 in a savings account to acquire a line of credit equal to that amount (a few issuers offer credit limits that are double the deposit amount). You'll earn interest on your deposit, but you won't be able to withdraw your money until the account is closed.

Nearly every secured card charges an annual fee, but you should never pay a processing or application fee. Interest rates run from 10% to 30%, so shop carefully.

Make sure the issuer will report card activity to all credit agencies (so that you can build a credit history) and will let you upgrade to an unsecured card after a year of making regular on-time payments.