How to Improve Your Credit

Credit reports should be accurate, but it is important to make sure that yours is. Errors or outdated information could hurt your chances of getting a new loan or the job you want (employers may ask to check your credit, too). A valuable resource for improving your credit is Fannie Mae’s booklet Knowing and Understanding Your Credit.
(Click on the link or go to the Resources section to find more information on contacting Fannie Mae to obtain a free copy of this booklet.)

If you do find errors, the good news is that you have the right to have the mistakes corrected at no charge to you. Here’s how:

• The credit report may include information on how to correct errors. Follow the instructions that you get with the credit report to tell the credit-reporting agency about the mistake.
• A phone call to the agency alerting it of the error will often take care of the problem.
• If the credit reporting agency needs additional information, it will tell you what you need to supply to help correct the error. For example, the agency may request copies of cancelled checks or other payment information. If you’ve kept good records and have them organized, it will be much easier to show where a mistake occurred.
• You may want to explain the problem in a brief letter. The credit-reporting agency must investigate your complaint within 30 days and get back to you with its findings. As part of its investigation, the agency will check with the creditor whose information you are questioning. If the agency finds that the information in the credit report is inaccurate, the creditor must notify the other major credit-reporting agencies of the error so they can correct their information.
• If the credit-reporting agency doesn’t find an error, but you still believe your credit report is inaccurate, you can contact the creditor directly to try to straighten out the problem. When you resolve the dispute, ask the creditor to send a correction to all the credit-reporting agencies.
• You also have the right to explain your side of the story on the credit report if the issue remains unresolved. You may write up to 100 words to explain the situation and that statement will appear on your credit report. For example, if you did not pay a car repair bill because the mechanic did not fix the problem, the unpaid bill may show up on your credit report—but so will your explanation.

Steps You Can Take on Your Own

• Pay loans first—before spending money for things like going out to dinner or to the movies. Missed payments hurt your credit rating.
• Pay off credit cards every month. If this is difficult to do, cut up the card so you can’t use it or put the card away until you pay it off. Then only use the card if you have an emergency or know you can pay the balance every month. Otherwise, write checks or pay cash for items you buy.
• Remind yourself that credit cards are loans. Before you pull out your credit card, ask yourself, “Would I really take out a loan to buy this?”
• Charge less than the maximum amount available on your credit card. Even if you make the payments on time, creditors may think you have too much debt.
• Only apply for the credit you need. Every time you apply for credit, it appears on your credit report. If you apply often, creditors may be concerned that you are using too much credit. Even if you do not open the charge account, your application may raise a flag that you may be having cash-flow problems. Avoid applying for credit cards just for fun, or to get a “free” gift or a discount on a purchase.
• If you feel you can wisely use a credit card, choose one with a low interest rate and no (or very low) annual fees. Credit cards issued by department stores, gasoline companies, or other stores usually charge higher interest rates than bank credit cards. You can use the Internet to shop for a card with low fees and low interest rates. Compare the fees and rates of any offers you receive in the mail. Don’t pay an up-front fee to get a lower rate on a credit card. An up-front fee is different from an annual fee and often is a scam.
• Try to pay more than the minimum due each month. When you only pay the minimum, you end up paying a lot of money in interest charges. For example, assume you use a credit card with an 18 percent annual interest rate to buy a sofa for $1,000. You only make the minimum payment of two percent each month (about $20). At that rate, it will take you about 90 months (or seven and a half years!) to pay off the couch, and it will end up costing you about $1,800 when you include interest charges.
• Use your credit card to establish good credit. Although you can get into debt trouble if you overuse credit cards, you can also use credit cards wisely to show that you can manage credit well. Just be sure to pay off the credit card balances every month or keep the balances very low.

Keep track of bills and past-due notices. Don’t think that a debt has disappeared just because you’ve stopped receiving notices. For example, doctors or hospitals sometimes stop sending bills to patients after several months. Even so, if they turned the bill over to a collection agency, it will show up on your credit report. Unpaid student loans will also appear on your credit report and may prevent you from getting a loan. Check your credit report to see if you have any of these debts. Then take steps to start paying them before you apply for a new loan.