It Pays to Keep on Top of That Credit Report

Cleaning up your credit report is no easy task. The growing importance of credit scores and the rise in identity thefts, however, mean that reviewing--and, if necessary, fixing--credit files should be an annual ritual for most of us.

For those with good credit, the chore is equivalent to checking your home's rain gutters before winter. You may face a little cleaning up, but it could help you avoid major damage.

For those with poor credit, the assignment will be more onerous. Still, it can be an opportunity to speed up the healing of your troubled credit past.

Credit reports are compiled by independent companies that get information about borrowers directly from lenders. These credit bureaus make their money by selling your dossier to any company that may be considering lending you money.

The information on your debt and payment history typically is factored into a three-digit credit score that serves as a snapshot of your credit worthiness.

While credit reports have long been used by lenders to determine who gets credit and how much it costs, credit scores are now also used increasingly employers and insurance companies to evaluate applicants.

At the same time that credit scores are becoming more important, many people are finding their reports are filled with loan delinquencies and bills that have been run up by scamsters who have stolen their financial information to open fraudulent accounts.

The phenomenon of identity theft is receiving attention from Congress and from regulators. A Federal Trade Commission set up a hotline and Web site for identity theft victims as the incidence of this crime grew. (The hotline number is [877]-IDTHEFT; the Web site is http://www.consumer.gov/idtheft.)

People can help protect themselves from fraud by being careful with their financial information--for example, by shredding credit card offers and other discarded financial documents; keeping their Social Security number secret unless absolutely required to reveal it; and not giving out personal information over the phone or Internet unless assured of the recipient's trustworthiness.

Keeping track of bills is important, too; some criminals steal or divert mail to get financial information.

Even the most careful consumers can become victims, however. Some identity thieves have cribbed information from others' loan, rental and employment applications at the places where they work.

Often, people do not discover they've become victims of identity theft until they are turned down for credit. That's why an annual credit review is a good idea: It can help you spot a problem before it becomes large enough to wreck a mortgage application or other much-needed loan.

Online resources are making the credit-checking task somewhat easier; you can now order and, in some cases, view your credit report via the Internet. You'll pay about $8 for the privilege, whether you order by computer, by phone or by mail. (Note: Reports from the three major credit bureaus are free if you have recently been turned down for credit, employment or insurance.)

Correcting inaccurate information can still be a hard slog. You must write to the credit bureau, requesting an investigation of erroneous items. Victims of identity theft say the process often must be repeated over and over as the scamsters open new, phony accounts in their names.

Once notified of a problem, credit bureaus typically investigate and respond within 30 days.

There is no legal way to remove negative but accurate information. Late payments, collection actions, tax liens and most other black marks remain on a credit report for seven years; bankruptcy is typically reported for 10 years.

This is true despite advertisements by credit repair companies that promise to fix bad credit. When it isn't fighting identity theft, the FTC has its hands full cracking down on companies that use Web sites or e-mail to promote credit-repair schemes. These companies often sell kits that advise consumers to commit fraud by creating new identities.

What does help repair bad credit is time, and on-time payments. A credit score improves as negative items recede into the past and as timely payments are made to other credit accounts.

People who are trying to establish or improve their credit should make sure their timely payments are in fact being reported to credit bureaus; some lenders have been withholding such information, fearful that competitors will spot and steal away their good clients.

Consumers should also monitor their debt-to-income ratio--the amount of their monthly debt payments relative to their income. Lenders typically want to see non-mortgage debt payments, such as for auto loans and credit cards, equal no more than 20% of a consumer's monthly gross income. Lenders also are leery of borrowers who use up too much of their existing credit lines--running credit card balances up to the maximum, for example.

Several low-cost resources exist to help consumers interpret and clean up their credit reports. The National Center for Financial Education at http://www.ncfe.org or (619) 232-8811 offers a $10 "Do It Yourself Credit File Correction Guide."

Self-help publisher Nolo.com has a comprehensive book by attorney Robin Leonard called "Money Troubles: Legal Strategies to Cope With Your Debts."

Information about scoring by credit bureaus can be found at http://www.fairisaac.com.