Study shows importance of checking your credit report

St. Louis Post-Dispatch (MCT) - Nearly every financial expert recommends that you check your credit report at least once a year to make sure it's accurate.

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But how many of us do it? It's easy to postpone, and some of us don't want to bother with the hassle of asking credit bureaus to make corrections.

A recent study conducted under a contract with the Federal Trade Commission found that there are enough mistakes to make checking and correcting reports worthwhile.

"We found that there was a fairly sizable amount of inaccurate information," said researcher Thomas H. Eyssell, associate dean and director of graduate studies at University of Missouri-St. Louis. About 12 percent of credit reports they checked had material errors such as wrong birthdates, ages or addresses.

Eyssell said the errors included mixing the information from a father and son with the same or similar names. That could be harmful to the one with a good credit history if the other had problems paying bills, for example. Some errors were related to timing issues. Some lenders send reports to credit bureaus on varying schedules, for example.

In most cases, it was impossible to determine how the errors occurred, Eyssell said.

The good news is that it isn't all that hard to get the errors corrected, he said. You have to do it in writing and follow directions given by the bureaus. Go to the bureaus' Web sites (www.experian.com, www.equifax.com or www.transunion.com) and look for a link to "disputes."

In the research project, errors on study participants' reports were corrected, and then researchers asked bureaus to update the credit scores. The scores increased by up to 40 points, enough to help participants qualify for better interest rates or loan terms, Eyssell said.

Higher credit scores can help you with more than borrowing costs. Eyssell said scores are factors in hiring, insurance underwriting and qualifying for student loans. Credit scores generally range from 300 to 850, with scores above 760 considered excellent.

Fair Isaac Corp., the company that computes most credit scores, won't reveal the algorithm it uses to compute scores. But it's pretty upfront about what's important.

Barry Paperno, consumer operations manager for Fair Isaac, said three things are vital to maintaining a good score:

_ Paying bills on time.

_ Keeping balances as low as possible.

_ Applying for new credit only when you really need it.

On-time payment is the most important factor in your score, accounting for a hefty 35 percent, Paperno said.

"I'm not sure people realize the importance of something that simple," Eyssell said.

The amount of money you owe in relation to your available credit is almost as important, making up 30 percent of the score.

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For that reason, it may not always be a good idea to close credit card accounts you don't use, Eyssell said.

If you have five credit cards, each with a $10,000 limit, you have the ability to run up $50,000 in debt. If you owe $20,000, you're using 40 percent of your debt capacity.

But if you eliminate one card, Eyssell noted, you're down to $40,000 in debt capacity, and you're using 50 percent of your available credit.

"You need to weigh that when you're considering closing accounts," Eyssell said.

Rather than close accounts, Paperno said it's a good idea to have some activity on older cards to maintain a lengthier credit history, which counts for 15 percent of the score. People with a history of borrowing and repaying their debt on time usually score higher than those who have only had credit for a few years or those who borrow infrequently.

Good scores also reflect a mix of revolving credit like credit cards along with loans paid in installments, such as mortgages or car loans. Consumers who have shown that they can handle both types of credit are considered better credit risks.

However, Paperno said the mix is the least important factor, and he doesn't recommend taking out a loan you don't need just to improve the mix.

The number of new credit applications also is a factor, but mainly if you are constantly applying for new cards or you've had problems paying in the past.

Although some advisers say people need to have credit in their own names, Paperno says that people who only have joint accounts do have their own credit report and credit score.

It still can be a good idea to establish credit in your own name, whether you're single, married, widowed or divorced. Women who lose their spouses may have trouble getting credit if they lack their own history.

Paperno said people who lack a credit history or who haven't used credit recently may apply for a secured credit card if they can't get a regular account. The applicant puts money down with the issuer to act as collateral. The applicant uses the card like any other credit card, charging purchases and paying off the balance every month.

Once you've established a record of on-time payments, the card issuer may convert the card to an unsecured account and refund your initial deposit.

"You can get a very decent score with only one account on your credit report," Paperno said.

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Current economic conditions are depressing credit scores, Paperno said.

"We are seeing higher risk among consumers as we see foreclosures increasing, as we see consumer debt increasing and as we see delinquencies on consumer debt," he said.

"It points to an increased level of risk. For that reason, many lenders are raising their requirements in terms of scores."

Tighter credit should be reason enough to check your report and correct any errors. Go to annualcreditreport.com to request reports, call 1-877-322-8228, or complete the Annual Credit Report Request Form on the FTC's Web site and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Ga. 30348-5281.

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© 2008, St. Louis Post-Dispatch.