The 9 Steps to Financial Freedom (28 page)

The remaining 20 percent of your score comes down to how many new credit card accounts you are applying for and the mix of debt you have. To help your FICO score, you don’t want to open a lot of new cards at once. As for the “mix” issue, lenders like to see how you handle different types of debt. So if you have a credit card, a retail credit card (such as a department store), as well as an installment loan like a car loan, you have a broad mix of debt.

If your FICO score is below 760, paying attention to any of these five factors can improve your score. You can learn more about boosting your FICO score at
www.myfico.com
.

So where does FICO get all the information about you that it uses to compute your FICO score? There are three major credit bureaus that track and keep records of all sorts of your financial transactions. Based on the information that each of the three credit bureaus supply to FICO, you are then assigned three FICO scores.

The three credit bureaus are Equifax, Experian, and TransUnion.

You need to make sure that the information in each of your three credit reports is correct. You would be amazed how many reports contain incorrect information, from misspelled names and addresses to old accounts that you closed down years ago
but that are still showing up on your report as active. There’s also a huge problem with identity theft; when someone steals enough of your private data—typically a Social Security number and name is enough—to open accounts in your name (that then show up on your credit report), or simply gets access to your credit card number and makes unauthorized charges on your account. Any wrong information is going to pull down your FICO score, so that’s why you need to make sure your credit reports are clean and up-to-date.

You can now receive one free credit report from each of the credit bureaus every year. Be very careful how you go about getting your free report. Plenty of businesses pretend to offer it for free, but then sneakily get you to pay for other services. You should never ever have to share your credit card information to get your credit report. Simply go to
www.annualcreditreport.com
to get your report.

I recommend getting one report every four months. For example, you might start with Equifax and then four months later get your Experian report, and four months after that your TransUnion report. By using this system, you have created your own ongoing checking system. For free. I think that’s a lot smarter than paying money to any of the credit bureaus for one of their “monitoring” services.

If you do uncover a basic problem such as an incorrect address, you need to contact just that credit bureau; it is then required to forward your corrected information to the two other bureaus.

You can contact the bureaus at:

But that said, getting problems corrected can be a big hassle. If you need to challenge information in your report—such as a loan you paid off that is showing up as delinquent—you will need to file a dispute with the credit bureau. It then has thirty days to check into your claim and get back to you. With any luck, you will get the matter resolved quickly, but I won’t lie; it can take a lot of time and perseverance to prove your case to the credit bureaus.

And when identity theft is involved, it can be a truly difficult experience to straighten out your record. Here’s your plan of attack for identity theft:

When you suspect identity theft is involved, contact one credit bureau and request a fraud alert be placed on your account. That credit bureau is required to send the alert to the two other bureaus. You can contact the fraud divisions at Equifax (800-525-6285); Experian (888-397-3742); and TransUnion (800-680-7289). This alert will require all creditors (card companies, department stores, etc.) to contact you directly before granting any new credit. It will also inform anyone taking a look at your credit report (such as a mortgage lender) that there may be a fraud problem here that could help explain a low score. The standard fraud alert lasts for ninety days.

You will also want to contact your local police department and ask to file a criminal complaint. Some police departments don’t like doing this because these are such hard cases to crack. But just be politely persistent that you need the report; it is going to help you clean up your record. Next, you need to fill out the Federal Trade Commission’s Fraud Affidavit form and submit it to all creditors where you have an identity theft dispute. You can get the form at
www.consumer.gov/idtheft/pdf/affidavit.pdf
. Having both the police report and the fraud affidavit will help
you deal with the credit bureaus and the company whose charges you are disputing. Both will have a formal “dispute” report/process for you to complete.

Credit cards can be as addictive and destructive as hard drugs, with the same ability to create a false sense of euphoria, give you a quick fix by satisfying temporary desires. Drugs are different in one respect, though. In most cases you have to seek out the drug dealer. Credit card companies seek you out. The more you use the cards, the more new cards, with enticing offers and promises, will come your way. In fact, all you have to do now is answer the phone. Credit card companies have taken to the phone lines to call you directly to see if they can get you addicted to what they have to offer.

One of the best ways for you to steer clear of the temptations and high cost of credit cards is to use a debit card instead. There are two basic types of debit cards. You can have a debit card linked to your checking account or you can have a prepaid debit card. The key aspect of both types of cards is that your spending is basically limited to the amount of money you have in your checking account (assuming you turn down overdraft protection, which you should), or the amount of money you load onto a prepaid debit card. That is, there is really no way you can be tempted into spending more than you have and then be faced with a big balance you can’t pay back at a ridiculously high interest rate.

Debit cards, especially prepaid debit cards, have become
very popular in the past few years, and I expect they will become even more widespread in the future. As with all financial products, there is a wide range of cards to choose from, and if you’re not careful you can end up paying very high fees. You need to make sure a prepaid card is a good deal. Key elements to keep an eye out for: