Credit abuse is an American pastime that reflects the general lack of interest in working toward a good personal credit score. Not having a good score can result in interest rates so high that consumers can barely afford to pay the monthly interest.
However, steps can be taken to increase one's credit score, maintain a good score and correct inaccuracies.
Explaining and obtaining your credit report
A credit report contains information on where a person lives, how bills are paid, arrest history, bankruptcy and legal judgments. Consumer reporting agencies sell this information to creditors, insurers, employers (only with your consent) and businesses that provide credit, insurance, employment or rental history.
The report is compiled using a formula based on the amount of debt, type of debt, payment history, account longevity and other things that rate the risk of lending someone money.
Late payments, corrections, judgments and carrying a high credit card balance can lower credit ratings. Lenders then consider the applicant a high risk, resulting in higher interest rates than someone with a good credit score.
U.S. consumers have the right to obtain a free yearly copy of their credit report from each of the nationwide credit reporting companies (Equifax, Experian, Trans Union), according to the Fair Credit Reporting Act. A copy of each report can be requested at www.annualcreditreport.com.
The Federal Trade Commission enforces the FCRA and warns about imposter Web sites that promise "free reports." The free annual credit-report program has only one authorized site.
It is important to note that the annual free credit report does not report the actual credit score, but it can be purchased through the Web site or through one of the consumer reporting agencies.
The main thing is to make sure the accounts that are reported are accurate and any late payments or derogatory findings are accurate as well, said Robert Bancroft, wealth adviser for Morgan Stanley. Also, make sure there are no duplicates.
"Consumers should look for accounts or creditors that they don't recognize and confirm the credit lines and repayment reports," said Ben Woolsey, director of marketing for CreditCards.com.
Credit scores can range from a low of 400 to a high of 900. Mortgage lenders use the midscore of the three credit reporting bureaus to determine credit level.
Above 720 is a good score, said Kevan Austin, a mortgage and financial consultant. "With a 679 and below, there is usually something going on to bring your credit score down," he said.
Working toward good credit
Austin said that distributing debt to a balance that is below 50 percent of the credit limit on all cards will improve one's credit score.
"When the balance is up near your credit limit, it looks like you are in trouble to another lender and to the reporting bureaus."
Not having any credit can sometimes have the same result as bad credit. It depends on the type of loan.
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Austin said that students trying to establish a history of credit can buy some jewelry at a chain store on credit or have their parents add the student's name and social security number to their credit card. Use and on-time payments will help establish a history of credit for the student.
Reach the reporter at Miriam.Cronkhite@asu.edu.
