Your Money_ The Missing Manual Part 12

Your Credit Report As you move through life, you leave a trail of transactions: You take out a mortgage, buy a new car, and use your credit cards. Every month, your creditors-the companies you owe money to-send info about your recent activities to a variety of credit reporting agencies (also called credit bureaus). Each agency collects this info into a file called a credit report.

This report is a history of how well you've managed your credit. It contains info about where you've lived, how much you've borrowed, and whether you tend to pay your bills on time. It also indicates whether you've ever filed for bankruptcy.

The credit bureaus-Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.transunion.com)-sell your credit report to other businesses so they can decide whether to lend you money, sell you insurance, rent you a place to live, or give you a job.

Credit reports may be boring, but they're vitally important because they're the basis of your credit score, which you'll learn all about starting on Your Credit Score Your Credit Score. Because they can play such a huge role in your finances, you should do what you can to keep your credit strong. You should also check your report a couple of times a year to make sure there aren't any errors and to protect against ident.i.ty theft. The next section explains how.

NoteAccording to a 2004 U.S. Public Interest Research Groups report, 79% of credit reports contain an error of some kind, and 25% contain serious errors.

Getting a Free Credit Report Happily, you don't need to pay to see your credit report. The Fair Credit Reporting Act says that each of the major credit bureaus has to let you view your credit report for free once per year. They do this through AnnualCreditReport.com, a site set up specifically for requesting these reports. This is the official, government-approved, free credit report site.

If you want, you can get reports from all three companies at once. Or you can stagger your requests, pulling one report every 4 months from a different credit bureau. You can get your report by calling 1-877-322-8228, going to www.AnnualCreditReport.com, or filling out AnnualCreditReport.com's report request form (http://tinyurl.com/mailreq), and then mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

NoteIf you plan to check your report online, be wary of impostor sites. Be absolutely certain you're on AnnualCreditReport.com. Another site-FreeCreditReport.com-lets you look at your credit report free for 7 days, but then it automatically enrolls you in a $15/month credit-monitoring service. Steer clear.

To get your report, you'll need to provide some basic info, including your Social Security number. You may also need to answer some questions about your current accounts, like how much your monthly mortgage payment is.

When you pull your credit report, don't be overwhelmed-it's not as scary as it looks. First, check your basic info (address, birthday, and so on) to be sure it's correct. Next, look at each of the credit accounts listed in the report to be sure they match your records. Finally, check the inquiries (listed under "requests for credit history") to be sure nothing fishy is going on such as credit checks from banks in eastern Europe. These could be signs that somebody's managed to swipe your credit card info.

NoteAnnualCreditReport.com lets you see your credit report, not your credit score-there's a difference (see Getting a Free Credit Report Getting a Free Credit Report).

If everything looks good, shred your report or file it someplace safe. If you spot errors, take the time to clean things up. The Federal Trade Commission publishes a 6-page guide to disputing credit report errors (http://tinyurl.com/FTC-corrections), but all you really need to do is: 1. Notify the creditor. Contact the company that reported the incorrect info in your credit report. In writing, explain why you think they're wrong. Provide copies of any paperwork you have to prove your case. Most companies (especially credit card issuers) have a specific phone number and/or address you can use to file these kinds of disputes.

2. Notify the credit agency. Contact the credit bureau in writing and explain what you think is wrong (the FTC guide mentioned above includes a sample letter). Again, if you have doc.u.mentation to support your case, include it; send copies, not originals.

Be sure to write down the name and employee ID of anyone you deal with. This may seem excessive, but it could save your bacon down the road.

TipHere's a step-by-step guide to getting your free credit report: http://tinyurl.com/GRS-crguide.

Your Credit Score While your credit report collects all sorts of info about your debt history, your credit score is a single number that summarizes all that data.

Credit scoring has been around for decades in various forms, but only became widely used during the 1980s when a firm called Fair Isaac (now known as FICO) developed a new type of credit score, called a FICO score. The mortgage industry adopted FICO scores in the mid-1990s, and now lots of other industries use them, too.

A FICO score takes bits from your personal credit report and compares them to similar data from millions of other people. FICO (the company) uses complex secret formulas to crunch all this info into a single number, which can range from 300 to 850. This number gives lenders a good idea of how likely you are to pay them back, and they use it to decide how much to lend you, what interest rates to charge, and what terms to set.

NoteThough the FICO score is the most widely used credit score, it's not the only one out there. Other companies provide competing scores, and FICO (the company) offers a variety of other, specialized scores that measure things like how likely you are to declare bankruptcy, close an account, and so on. You can read more about your "secret" credit scores at MSN Money: http://tinyurl.com/secret-scores.

"A bad or even mediocre credit score can easily cost you tens of thousands and even hundreds of thousands of dollars in your lifetime," Liz Pulliam Weston writes in Your Credit Score Your Credit Score (FT Press, 2009), which is full of info about how credit scores work. "You don't even have to have tons of credit problems to pay a price. Sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender's high-risk category." (FT Press, 2009), which is full of info about how credit scores work. "You don't even have to have tons of credit problems to pay a price. Sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender's high-risk category."

A high credit score will get you the best interest rates on credit cards and loans, including mortgages. With a low score, you'll pay higher fees and interest rates. The following table shows how much you might have paid for two types of loans in November 2009, depending on your credit score: Table8-1.The cost of lousy credit (numbers as of November 23, 2009)

36-month $10,000 auto loan .

Credit score .

650.

700.

800.

Interest rate .

13.35%.

7.55%.

5.94%.

Monthly payment .

$338.63.

$311.30.

$303.96.

Total interest .

$2,190.78.

$1,206.84.

$942.44.

30-year fixed $200,000 mortgage .

Credit score .

650.

700.

800.

Interest rate .

5.59%.

4.77%.

4.55%.

Monthly payment .

$1,147.40.

$1,046.07.

$1,019.44.

Total interest .

$213,064.50.

$176,584.89.

$166.998.48.

Bad credit can be a downward spiral: Your money mistakes lead to bad credit, which costs you more money and leads to more debt, which gives you worse credit...and so on. But your credit history doesn't just affect your ability to borrow money. Nowadays it's used by insurance companies, landlords, and even employers: - Some insurance companies use a specific credit score (known simply as your insurance score)-combined with other info-as a gauge of how likely you are to file a claim. A lower score can lead to higher insurance premiums. You can read more at http://tinyurl.com/iscore.

- When you try to rent a place to live, your prospective landlord may run a credit check (http://tinyurl.com/lscore). If your credit score is low, she may see you as a high-risk tenant and ask for a bigger security deposit or simply reject your application.

- Current and potential employers can pull your credit report if you give them written permission (http://tinyurl.com/wscore). This is especially true for jobs where security is important: To some employers, a good credit record shows you're less likely to steal from the company, take bribes, or reveal sensitive information.

As you can see, your credit score can have a very real impact on your life, affecting everything from where you live and work to how much the credit card company charges you for interest. But where does your credit score come from? Let's take a look.

The Anatomy of a Credit Score According to FICO, the company that developed credit scores, certain factors can predict how likely you are to repay the money you borrow. Your credit score tracks 22 specific pieces of info from five broad categories: - Payment history (35% of your FICO score): Do you pay bills on time? If you pay late, how late? How long has it been since you missed a payment? How many times have you had problems? The more responsible you've been, the higher your score.

- Amounts owed (30%): How much credit do you currently have? And of that credit, how much do you actually use? How many of your accounts have balances? The less of your available credit you use, the better your score.

- Credit age (15%): How long have your accounts been open? How long has it been since you used them? The longer you've had accounts, the better your score.

- Account mix (10%): How many different types of credit accounts do you have? (The two main kinds are installment debt like a car loan or a mortgage, and revolving debt like credit cards.) How many do you have of each type? Your FICO score will be higher if you use a mix of different kinds of credit.

- New credit (10%): Have you opened new credit accounts recently? How many? Opening new accounts may ding your score, especially if you open a lot at once.

NoteFor some people-like young adults who don't have a lengthy credit history-the importance of each category may be somewhat different.

The site myFICO.com has a detailed list of what goes into a credit score ( has a detailed list of what goes into a credit score (http://tinyurl.com/FICO-pie), but the actual formula is a secret. Because FICO makes its money selling credit scores, they're hush-hush about how the numbers are calculated. However, the company shares some basic stats. According to myFICO.com, the median credit score in the U.S. is 723, meaning half the population has a credit score of 723 or above, and half has a score of 723 or below.