Every time you make a credit card purchase, get a car loan, or use another form of credit, you add to your credit history. Credit bureaus collect information about these transactions to create your credit report. They also use information from court files and other public records, and sometimes rental history. To learn more about what is collected and how, read Your Credit Report.
The credit bureau assigns a score based on how you have repaid your debts. This is your credit score. The credit score is an easy way for a lender to decide whether you’re a good credit risk.
Keeping Your Good Credit
If you have a long credit history and have always paid your debts on time, you may have a high credit score. Lenders are more willing to extend credit to people with a high score. You can protect a good credit score by continuing to make repayments on time and by avoiding certain kinds of debt.
Avoid High-Cost Debt
Payday loans, cash advances, and tax refund loans are forms of borrowing that will cost you a lot in the end. These types of loans are appealing because you can be approved easily and paid immediately. However, the very high service fees and short payoff period mean borrowers are often trapped in a cycle of debt. A payday loan can have an annual interest rate as high as 391%. A tax refund loan is similarly costly. To learn more, read The High Cost of Refund Anticipation Loans and Checks.
If you default on a payday loan or cash advance, it will cause your credit score to drop. The payday lender can sue you in court to collect the money.
You can avoid these loans by asking for more time to pay a bill or trying to get a small loan from your bank or a family member. You could also ask your employer for an advance on your wages or salary.
Beware of Debt Consolidation
Some companies offer to loan people money to “consolidate their bills.” You make monthly payments to the debt consolidator, and that company promises to pay off all your different bills. However, the debt consolidator will likely charge you a very high interest rate for this service. Some of your original bills (like doctor bills) may not have had interest at all. More seriously, the consolidation loan may turn unsecured debt into secured debt if you use your house or another asset as collateral for the loan. This means that if you default on the consolidation loan, the debt consolidator can take the asset to pay off the debt.
Another way to maintain a good credit score is to protect against fraud. Your identity is one of your most valuable assets. Criminals use the personal information of victims to apply for benefits, cash advances, car loans, and more. If not caught early, these schemes can cause long-term damage to the victims’ credit.
Anyone can become a victim of identity theft. Here are some tips to help you protect yourself:
Don’t give out personal information. Be suspicious of anyone who asks for your personal information, especially if it’s not a company or entity with which you normally do business. Sensitive personal information includes your Social Security number, credit card number, bank account number, and passwords.
Don’t be intimidated. Be suspicious of callers who want you to immediately provide or verify personal information. If it’s a legitimate caller, they should allow you the time needed to confirm who they are and why they’re calling.
Review your bank statements and credit card statements. Look at your monthly statements for any suspicious activity and report it immediately.
Use a shredder. Don’t throw in the trash or recycle bin any papers with personal information, including bank statements, credit offers, and insurance information. Instead use a shredder or tear up the papers before you throw them away.
If you think you are a victim of fraud, contact the police right away. Also contact your bank and other account providers to ask about your options. These may include freezing or closing your accounts.
You should also request a free copy of your credit report. To learn how to get the report and what to do if you suspect fraud, read Your Credit Report.
Improving Your Credit Score
Filing for bankruptcy or not paying your debts on time can lower your credit score. If your credit score is low, lenders may be unwilling to offer you credit, or they may charge you a higher interest rate because they consider you a bad credit risk.
If the information on your credit report is correct, but your credit score is low, only time and a debt repayment plan will raise your credit score. Many companies advertise “credit repair” services for a fee, but there is no quick fix for a bad credit score. Only time can repair bad credit.
Correct, negative information will not be listed on your credit report forever. To learn more about what information is reported and how long it stays on your credit report, read Your Credit Report.
There are some things you can do to raise your credit score:
Pay all your bills on time
Keep low balances on your credit cards
Avoid opening new lines of credit until you have your current debt under control
If your credit score is low because your credit report contains wrong information, you have the right to dispute those mistakes. Read Your Credit Report to learn more.
Dealing with Debt
If you’re missing payments because you have too much debt and not enough income, you may benefit from debt counseling services. Consider contacting a nonprofit counseling organization for help budgeting money, paying bills, and managing debt and credit. Visit Organizations and Courts to learn more.
Be wary of any service that offers to negotiate lower payments with your creditors for a fee. This service may include their making payments for you using money you send them each month. It’s not necessary to pay a company to take these steps on your behalf. You can contact your creditors directly and try to negotiate. You can also make the payments yourself, without paying a fee to a middleman.
If you are behind on your debts, read Dealing with Debt before Court to learn more.