Sunday, January 14, 2007

Repairing past sins, part II: Rebuilding your credit score & report

My last post was about your legal responsibility for old debts, particularly those that are beyond the statue of limitations -- meaning you no longer have any legal obligation to pay. (Er, is it still "tomorrow"? Pretend I posted this Thursday ...)

This one is about how to minimize and repair the damage to your credit report and your FICO score. (Remember, your credit report is different than your credit score -- and you actually have three FICO scores, one each from Equifax, TransUnion and Experian. The FICO post explains the basics.)

First, to reiterate a point made at the end of my last post: Be very, very careful about paying anyone anything on an old debt. If you're four months late on your Visa bill, by all means, call the provider and start negotiating a payment plan you can afford that will get you current. (Remember, providers want to help you find a way to pay your debts. If they have to charge them off, they get much less than they will by working with you.) If you're four years late, ignoring the debt and refusing to pay anything might be the soundest strategy for protecting your credit report.

That's because credit reports track charge-offs (when the original creditor consigns your debt to "bad debt" and takes it off its books; this almost always happens within one year of you not paying) and accounts referred to collections (when that bad debt is sent over to an agency to hunt it down). But FICO scores and credit reports care very little about what happens after that. Depending on what's actually showing up on your individual credit report, the effect of reviving an old debt to settle it will probably range from "very mildly positive" to "crushingly bad."

MSN Money has an article that does a good job of explaining all the various pitfalls of trying to settle an old debt. The gist is that it's a murky minefield.

Basically: avoiding having items sent to collections and charge-offs is very, very good. Do that if you possibly can. (If there's interest, I can do a post on negotiating with creditors over current debts you're behind on paying.) But once an item has gone that way, the value to *you* of clearing the debt goes down dramatically, and continues dwindling as it ages.

So if you've got old black marks, what do you do?

The first step to rebuilding a good credit rating is having credit. As anyone without any loans or credit cards learns the first time they apply for credit, you don't get brownie points for not incurring debt. The only way to build a good credit rating is to actually have a credit line, with activity on it. Opening a Visa and never charging a penny on it won't do much for you.

The easiest, safest, fastest way to build a credit record is to be an authorized user on the credit card of someone else who uses the card in credit-score-improving fashion -- someone who charges purchases on it, keeps the usage below about a third of the card's total credit line, and always pays at least the minimum balance due each month, on time. (It's even better if it's a longstanding account. FICO scores weigh the length of time an account has been open as a positive factor.) There are two types of "joint" credit card accounts: actual joint accounts, where each party shares liability for the account, and "authorized user" accounts, where an individual adds someone else as an authorized user on their own account.

Authorized user accounts are pretty interesting from a credit-reporting standpoint. They get reported to credit agencies like a joint account -- ie, the activity on them will affect the credit report, and score, for the authorized user. But, unlike a joint account, the authorized user has no legal responsibility for the account, or any debt incurred on it. All responsibility remains with the individual account owner. So, if you're an authorized user on some else's account, and you run up a bill on it, they're the ones with the legal responsibility for it.

However, there's no requirement that the account holder actually give the authorized user a card to use. If you need to repair a besmirched credit report, and you have someone you're close enough to request the favor from (a parent, spouse, relative, etc.), you can ask to be added as an authorized user on one of their accounts. If they (or you) don't trust you(rself) with the credit line, cut up the card. So long as there's positive activity on the account from the main user, you'll benefit. (Credit reports don't track whose card is used for purchases; if the card you're issued as an "authorized user" is never used, it doesn't matter a bit.)

Another option is a secured credit card. The first resort for people with lousy credit, secured cards require you to pay a deposit, typically 50 to 100 percent of the card's credit line. The credit card company holds this deposit in a savings account. If you default on paying, the company can withdraw what you owe from your deposit. Because the credit provider has that security, secured cards are easy to get, even if your credit rating is in tatters. And, because it's a credit card, activity on the card affects your credit report. If you pay at least the minimum due on time each month, your credit score will start recovering. Bankrate has a list of secured cards; if you have a checking account, your bank probably offers them as well.

Those are two of the aboveboard ways to start fixing bad credit. You'll be surprised how fast your score can change; as I mentioned in an earlier post about FICO scores, I've seen mine jump 60 points in a month when I did things it recorded as positive. (In my cast, that was increasing my Amex credit limit so my utilization percentage tumbled, and paying off a balance on another card.)

The other tactic you can use is slightly sneakier: Challenge negative items on your report, even if they're accurate. The Fair Credit Reporting Act gives you the right to dispute anything in your report you think is incorrect. Once you send in a dispute, the credit reporting agency (TransUnion, Equifax or Experian) has 30 days to investigate the dispute. If at the end of 30 days they can't confirm the information, they're required to remove it from your report. This tactic can be like going to court to fight a speeding ticket; if the cop who wrote the ticket doesn't show up to affirm it, you win by default. If the creditor, collections agency, etc. doesn't provide the credit reporting agency with validation of the debt and nonpayment within the 30-day window, the item is legally supposed to disappear.

In practise, getting the agencies to honor their obligations can be a horror show. The Boston Globe had a great piece recently about one consumer's nightmare of trying to untangle an identity fraud case. Still, challenging negative items costs you nothing, and can work in your favor. You can even dispute items online now -- here are the links for Experian, TransUnion, and Equifax.

Whew, that was long. This set of posts (continued from Wednesday) was prompted by a question from a friend about repairing a bad report. I'm happy to go investigate stuff in response to questions; anyone interested can reach me in comments or by email (stacy at covehurst dot net). Discretion guaranteed, of course.