Clean Up Your Credit Report | The Frugalista

Clean Up Your Credit Report

by frugalista on January 10, 2012

cash credit cards 150x150 Clean Up Your Credit ReportHey! I’ve gotten quite a few questions about credit clean up. Yay! I decided to bring in some aid and assistance to tackle the topic here on TheFrugalista.com! Please read below the Q&A interview I did with CreditCards.com columnist Erica Sandberg, on “How to Clean Up Your Credit.” See, I love you all! xo!
 
 

Credit Cleaning for the Frugal and Fabulous- A Q&A conducted by Natalie P. McNeal on Erica Sandberg!

ericasandberg 150x150 Clean Up Your Credit Report1)Why is it important to have credit? What is a good credit score?
Credit is the ability to borrow for what you want and need. You don’t have to have it, but it can be a great convenience. When you use it, by getting a credit card or taking out a loan, you’re building your credit worthiness. The lender sends your charging and payment activity to the consumer credit bureaus. That data is transformed into a score that others can use to determine their risk in doing business with you.

The better you treat credit, the better your score will be. FICO is the most commonly used model – the scale is a low of 300 to a high of 850, and a good score begins around 700.

2) If you have a low credit score, what are some steps that you can take to make it higher/clean it up?
Well, FICO rates certain activities more strongly than others, so concentrate on the areas that carry the most weight. For example, 35% of your score is payment history. If you’ve fallen behind on payments, get back on track. 30% is outstanding debt in relation to the amount you can borrow – so if you’re at or close to your limit, pay your balances down as soon as you can. Your score will climb quickly with just these two actions.

3) Is it smart to pay off an old debt? Is it OK to look the other way after a few years?

If you borrowed the money, you should pay it back. That’s the morally correct answer. However, you can make other decisions based on practicality and the law. If you can’t be sued for the debt because the statute of limitations has run out, and it’s not appearing on your credit report anymore (most negative information drops off after seven years), you may choose to not pay.

On the other hand, if the debt is young, it’s hurting your credit rating. In that case you should deal with it.

4) How long do bad marks on your credit report last?
Credit scoring models only draw from the information on your report. So if something bad is on there, it’s going to be factored in. They last seven years.

5) How do you suggest a person rebuild her credit?
If it’s damaged, identify the problem. So many people concentrate on ridiculous things, like inquires, which are only 10% of a score. For example, I’ve heard over and over again how someone has “A-1” credit but they can’t get a new card or loan. The reason they think they have perfect credit is because they have never missed a payment. With a little digging though, I find they owe up to their eyeballs.

Once you know where you’ve gone wrong, you can do something about it. The perfect formula, though is this:

1. Pay all debts to zero
2. Perfect your payment pattern
3. Have a long history of using credit
4. Prove you can handle multiple types
5. Only apply for the credit you need

6) How can a college student build credit? I know I had a hard time with that my first job!
The best way is with a low limit secured account. They’re easy to qualify for because they are collateralized with a small amount of cash.

7) What goes into your credit profile?
It’s in sections – the first is your personal information, like your name, SSN, address and employer (but NOT your income).

Then trade lines, which is everything having to do with credit. For example, when you got the account, what the limit is, the current and highest balance, your monthly payment activity, if it’s individually or jointly held…it will all be listed in great detail.

After that, public records. If you’ve been sued and owe a monitory judgment, that will be in this section (as will a bankruptcy, tax liens, fines, and other legal matters).

Inquires is last. This lists who you’ve pursued credit from, as well as who’s been checking your file.

8 ) If you get married to a person with bad credit, does it lessen your credit score?

Nope! You may be merged in love, but not credit – unless you get it together later on.

9)What’s the best way to get your credit score? I know you can get your credit report from annualcreditreport.com but how can you get the actual score?
Go to MyFico.com You can purchase them there for a small fee.

10) What’s the worst kind of infraction to have on your credit report? Bankruptcy? Foreclosure? Does it matter? Are all debts the same?
Bankruptcy is the most egregious, but collection accounts and delinquencies are really harmful too. Recency, severity, and frequency matter greatly. Therefore, one late payment of a nominal amount years ago will barely affect a score. But consistently paying late on big balances in the last twelve months and you have a major problem.

11) Can you trust any credit clean up programs? Are they legitimate? If you can, which ones?
As a general rule, I’m not a fan. Some law firms settle debts and they’re fine, but they can charge a lot for the service. I’d rather you put that cash toward the amount you owe! More, you can do your own negotiations for free.

Plainly put, if the information is correct and current, it’s on the reports. You can’t clean it up by removing it – but you can improve your reports and scores with excellent credit use from this point forward.

Erica Sandberg is the editor at large and lead columnist for CreditCardGuide.com, twice per week I give readers advice on the wide spectrum of personal finance topics.

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{ 1 comment… read it below or add one }

Eric Johnson January 17, 2012 at 7:50 pm

Nice article and interview, Natalie. One alternative to simply not paying back a debt, particularly for credit cards, is that the card company or collection agency will often be willing to negotiate a lump-sum payment for less than the total amount you owe, simply to get SOME money back. You can negotiate these types of deals yourself or they’ll even be offered to you in collection mailings.

Be aware, however, that if you go this route, you will be liable to pay federal tax on the amount of the debt that was “forgiven.” You can find out from your tax person or the IRS what this percentage will be. Pay it with your taxes for that year, or you’ll end up with IRS tax bills in addition to unpaid debts!

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