Can you really repair your credit?
We receive many emails from people trying to “clean up” their credit.  The one thing we tell them is that there is no quick way to fix bad credit.  Do not fall for scams that claim to clean your credit file in 30 days. This just will not happen.   However, you can dispute information in your credit file and the creditor is required by law to verify the disputed information within 30 days.  Information that can't be verified must be removed. 

Follow these steps for legitimate credit repair that you can do for yourself.  

1) Obtain your credit report from EACH of the three credit bureaus:  Experian, Equifax, and Transunion. It is cheapest to purchase your reports online directly through each credit bureau's web site rather than going through a reseller (who makes a profit).

2) Check for accuracy/errors.  Make sure all of the accounts listed are YOURS.  Make sure all closed/paid accounts have been reported as such.

3) Dispute inaccurate information through EACH bureau.  This is a very important point.  Since each credit bureau is independently owned and operated, they do NOT share information.  You must dispute inaccurate information with EACH one separately.   Just because you file a dispute with Experian does not mean it will be corrected in the databases of the other two credit bureaus.  Disputed information that cannot be verified within 30 days MUST be removed from your credit file. 

4) The best way to build and repair credit is to obtain credit!  Fortunately there are bad credit lenders who will grant small loans, secured credit cards, and unsecured credit cards with low credit limits.  Proper use of the credit privilege provided by these lenders is reported to the credit bureaus and your credit scores will improve over time!  

5) Reduce your balances on existing credit cards to 75% or less of your available credit (30% is preferable). This is one of the most important points of all!  High debt to credit ratios will have a significantly negative impact on your credit rating.

6) Finally, do NOT fall for credit repair scams!  The only way to repair credit is by following the steps above.  You can do all of this yourself for free (excluding the cost of your credit report purchased from each of the three bureaus).
 

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Credit traps for the unwary
It's hard to imagine functioning in today's society without access to credit. However, you need to be careful not to fall victim to some of the pitfalls associated with it.

Revolving credit can make it hard for you to pay off debt
Credit cards allow you to spend money you don't currently have, and to repay what you've spent over time instead of all at once. When you use a card, the balance you owe increases, and your remaining available credit decreases. As you make your payments to reduce your outstanding balance, your available credit once again increases. Thus, your credit revolves around for you to use again.

Since you can spend more than you currently have, you can easily spend more than you can afford. As your balance increases, your minimum monthly payments also increase, and soon you'll find yourself in over your head--especially if interest rates and a variety of fees are high.

Interest and fees can add to the cost
Credit card debt generally carries a high interest rate, usually 16 to 24 percent per year. Your minimum monthly payment--a percentage (often as low as 2 to 4 percent) of the total balance due--may cover little more than the monthly interest charge. Consequently, your minimum payment may only minimally decrease what you already owe. If possible, increase your monthly payment above the minimum required. The higher you can make the payment, the faster you will pay off the debt.

When opening a new account, always check to see how the finance charge is calculated. Here are some of the methods used:

• Adjusted balance method: Balance due at the beginning of the billing cycle less any payments made during the cycle; excludes new purchases made during the cycle
• Previous balance method: Balance due at the beginning of the billing cycle
• Average daily balance method: Total of the balances due each day in the billing cycle divided by the number of days in the cycle; payments made are subtracted as posted to determine daily balances; new purchases may or may not be added in
• Two-cycle average daily balance method: Same as the average daily balance method, but over two consecutive billing cycles

The amount of your finance charge can vary widely from method to method. Because finance charges result in higher interest charges, creditors favor either of the last two methods mentioned above.

In an effort to attract your business, many lenders offer very low introductory rates--3.9 percent annually or less. However, these rates generally last no more than three to six months and increase to the current market rate thereafter. Moreover, the introductory rates may apply only to balances you transfer from other cards. They may not apply to new purchases and rarely if ever to cash advances. Finally, if your monthly payment is late, the interest rate may be automatically raised to the current market rate--and sometimes beyond.

If you have two different interest rates on one account (e.g., a lower rate for purchases, a higher one for cash advances), the creditor will post the payments toward the lower interest rate balance, not the higher. To avoid this, use two different cards if possible--one for purchases you will pay off when the bill comes (thus incurring no interest charge) and the second, lower-rate card if you have to carry a balance.

You may also incur a wide variety of fees. Creditors may charge you an annual fee to maintain the account. These fees can range from $25 to $50 or more each year. They may also charge fees to transfer balances from other cards. Generally, these processing fees equal 2 to 4 percent of the amount you transfer. Many banks levy a similar surcharge on transactions involving conversions from foreign currencies. If you're late with your monthly payment, you may be charged a late payment fee that can range from $18 to $29 each month you're overdue. If your account balance rises above your approved credit limit, you will be assessed a monthly over limit fee until you bring the total balance due under the limit you're allowed.

When these fees add up, you may find that making your minimum monthly payment won't bring your balances down. In fact, your balance will increase if your monthly payment isn't greater than the accumulated interest and fees due, since these unpaid charges become a part of the principal you owe. Moreover, your account may then be considered past due and reported as such to the credit bureaus.

If you surf your debt, beware of the wake
You may periodically transfer your balance from one introductory offer to the next. This is known as surfing. Done successfully, surfing lets you avoid the higher interest charges that your debt would incur when the original card offer expires. By the time the interest rate on the original card increases, you've surfed over to a new offer at another low rate.

Although surfing helps keep your interest charges to a minimum, it's not without pitfalls. You may be offered a low rate only on balance transfers; if new purchases and cash advances are billed at a higher interest rate, these charges could offset the savings you would otherwise enjoy. Moreover, as creditors move to counteract the surfing trend, many stipulate that if you transfer balances to another card within a certain time after opening your account, you'll be retroactively charged a higher rate of interest on the amount you transfer. Thus, surfing before this time period is up eliminates the savings.

Finally, if you transfer balances to a new card, close the original account as soon as you've paid it off. Write the creditor a letter (keep a copy for your records) asking it to inform the credit bureaus that the account was closed at your request. This prevents new potential creditors from denying you credit when they see too many open lines of credit, and it also deters anyone else from fraudulently using an inactive account.

Protect yourself against credit fraud and identity theft
Credit fraud (the illegal use of your accounts) and identity theft (opening new credit using information about you) are two of the fastest-growing crimes today. In many cases, you may not know you've been victimized until it's too late. Here are some indicators of these crimes:

• A creditor informs you that it received an application in your name
• You've been approved for or denied credit you didn't apply for
• You no longer get your credit card statements in the mail
• Your credit card statements include purchases or cash advances you never made

To minimize the chances of being victimized, take precautions to safeguard your credit account information. Don't carry credit cards you don't use often. Be sure to sign your cards, and never sign a blank charge slip. When you use the card, try to keep it within your sight. Save your receipts, and obtain and destroy any carbons. Don't allow a sales clerk to write your credit card number on a check "for identification." Finally, never give out your account number over the telephone unless you initiated the call and know the organization to be reputable.

Note: The Fair and Accurate Credit Transactions Act of 2003 (FACTA) provides all consumers with a new arsenal of weapons to fight against credit fraud and identity theft, although they won't take effect until December 1, 2004. But make a note to take advantage of one of the most important protections under the new law--ask the credit bureaus to truncate your Social Security number on any disclosures they send to you, including your credit reports.