by By Andrew Pryor for Sound Mind Investing
When purchasing my current home, I met with a mortgage lender who, as standard procedure, had pulled my credit report. To my dismay, there appeared on the list numerous credit accounts that I had closed years earlier. There were others that I forgot I even had (remember that time you were offered a 20% discount on your Macy's purchase if you would agree to charge it to your new Macy's credit card?).
In addition to the active and closed accounts, there was a list of everyone who had looked into my credit over the past two years (most of which were credit card companies who later sent me unsolicited "special" offers). The credit agencies had used my credit history to "pre-qualify" me to various companies (such as banks, car dealers, credit card companies, mortgage lenders) who were looking for new customers. So there were all these inquiries on my report that made it look as if I had been applying for credit with wild abandon!
Our credit report showed us in a very positive light. We haven't a mark against us. But there were accounts open that I didn't use, let alone need, and I was energized by the thought that they could, in any way, hinder my ability to close my home purchase on schedule (or get other credit I may need down the road). So that began my mission to tidy up my credit report. My research began with a few questions. First, how did the credit agency get my private information and what does a credit rating ultimately mean? It seems that periodically my creditors (banks, credit card company, etc.) provide this information to the leading credit reporting agencies — Equifax (800-685-1111), Experian (888-397-3742), and TransUnion (877-322-8228).
Over the years, as I travel the credit highway, taking out and then paying off car loans, student loans, credit cards, etc., my creditors report my activities to these agencies. This information is used to establish a "credit scoring" method which gives points based on the weights of various credit experiences such as bill-paying history, late payments, age of accounts, etc. (Interestingly, counter to what you might think, the shorter you keep credit accounts, the worse it affects your rating.) Each lender assigns "points" and "weights" according to its own criteria. You'll never know quite where you stand until the lender has obtained your credit report and gone though this process. This was very unnerving to me.
To remedy these kinds of problems, your first task is to get copies of your credit reports. A new law was passed by Congress in 2003 that requires each of the three major credit-rating agencies to provide consumers with one free copy of their credit report annually. In order to get your free credit reports, you'll need to visit Annualcreditreport.com.
The first thing I needed to decide was which of the three agencies to contact for my information. They all have credit data on me, and presumably, it's similar in each case. I could see from each of their Web sites that there are two kinds of reports available — a single report, or a 3-in-1 report which includes data from all three agencies. You can also add your credit score for an additional fee for reports that don't already include it. The 3-in-1 report costs $30, which is costly compared to "free," but does offer convenience and lets you wrap everything up at once.
On the other hand, if you're the type of person who doesn't mind this kind of chore, you might prefer to spread them out so as to keep more of a year-round eye on things. The new law entitles you to receive one free credit report from each agency every 12 months, but it's your choice whether you order all three at the same time or order one now and others later. The advantage of ordering all three at the same time is that you can compare them. However, you will not be eligible for another free batch for 12 months. The advantage of ordering one now and others later (for example, one every four months) is that you'll become aware of any inaccurate or potentially damaging information more quickly.
I opted for the 3-in-1 report. After entering all the information and credit card requirements, voilà!, my report was displayed on my computer monitor for my perusal. You can also order a report for mail delivery if you'd rather. After printing out my report, I began looking it over. My main area of concern had to do with what I found in the "revolving credit" section of my report. I only had one credit card...that I was aware of. But my credit report said I had three additional credit cards — two retail store cards and one Visa card. This was leftover debris from my earlier adventures in using credit. I called the two retail companies (using the telephone number provided on the credit report) and had the accounts closed effective that day. I also asked them to send me a confirmation letter as well as send a letter to the credit reporting bureau. Next, I called the Visa company. I thought I had closed this account over two years ago! Indeed, they told me my Visa account was "technically" closed (whatever that means), but promised to send the appropriate documentation to Experian to let them know the account was officially closed in 1997.
It's important to clean up these old accounts because they are considered to represent available credit. Even if you never use the cards, potential lenders get the impression that you have a large amount of credit at your disposal. In their eyes, this makes you a higher-risk borrower. I, for one, don't want to be refused a mortgage or car loan because of the Visa company's bad record keeping.
The reports are pretty easy to understand once you've read the instructions and picked up on what the many abbreviations and codes mean. Along with the credit report, the agencies provide information on how to report mistakes, handle disputes, or report fraudulent activity. As these things go, my experience in cleaning up my credit report was relatively hassle-free. Hopefully, yours will be also.
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