Credit Busters.

Your credit report won't have a ghost of a chance unless you avoid these 10 foul-ups

JUDITH E. DAVIS HAD TOP-NOTCH CREDIT UNTIL SHE HITCHED HERSELF AND her credit to her former fiance. The decision initiated a host of credit foul-ups that almost ruined her life. "Having great credit meant I was able to do whatever I wanted. I wasn't wealthy, but I had access to [things] if I needed [them]," she says. It was 1998. Davis, 35, was an office manager at Carr America Realty Corp. in Washington, D.C. Her fiance was an audit manager at an advertising firm. Eight months into their courtship, he lost his job.

He soon fell behind in making his car payments, and "he said he couldn't catch up. He told me he talked to the people at Toyota [about getting a new car because the `repo man' was coming for his old one]," says Davis, who is a screenwriter now living in New York. To make a long story short, Davis bought him a new $30,000 SUV on her credit, thinking there wouldn't be a problem since their finances would soon become one.

Again, he missed payments. "I even deferred payment on my own car note one month to pay his," she declares. Despite her best efforts to keep both car notes afloat, her credit suffered.

Unfortunately, love is sometimes blind, so Davis continued to cover her former beau's expenses at the cost of her own--and her credit rating. "He told me that in college he had a friend who gave him [insider-trading] information about a stock deal. And now he had to pay the money back or he would go to jail," she explains. "I helped him because he was going through a rough time. Most of the time, I would help him just to shut him up."

After almost two years, having helped him "with $5,000 here, $1,500 there," the money she gave (and lent) him totaled $30,000. She soon figured him for a swindler (and a court in Massachusetts verified that he had done this to another woman). She took him to court in Virginia in September 1999 and will receive $12,500 in restitution when he is released from prison. "My lawyer said these cases are hard to prove, so I accepted the judgment," she says. So she's out some money, but her satisfaction is the 18-month jail term he is currently serving. "At the time, I felt so frantic," she says, especially since her father was ill. "But life isn't about regrets. Things work out for good people eventually." Currently, she is rebuilding her credit and says she will think twice before lending her credit to anyone else.

Despite the conundrum Davis found herself in, she could have saved herself a degree of heartache had she not commingled her credit (see foul-up No. 3) with someone else. Unfortunately, Davis' poor judgment is more common than we'd like to believe, since all of us know someone (it may even be ourselves) who has failed to properly safeguard his or her credit. Still, you can avoid such a calamity happening to you (again?) by protecting your financial future against these 10 credit busters:

1. Failing to get your credit report. "Get your credit report each year from each [of the major] credit bureaus," offers Greg McBride, a financial analyst with Bankrate Inc. (www.bankrate.com) in North Palm Beach, Florida. Confirm that all of the accounts in your file are up-to-date and correct. "It's important to actively monitor your credit report. Credit reports are often used for more than credit purposes," says McBride, "Often employers and landlords have access to them." Contact Transunion (www.transunion.com, 800-916-8800); Experian (www.experian.com, 888-397-3742); and Equifax (www.equifax.com, 800-685-111) for your credit file.

2. Failing to establish your own line of credit (i.e., married people who didn't have credit previously). Getting credit in your own name is essential and could be critical if you're planning to divorce. If you are an authorized user on your spouse's account, you may lose your privileges once the divorce is final, unless your spouse continues the agreement.

3. Commingling your credit with someone who is a bad credit risk (i.e., a spouse, a co-signer, or an authorized user who you know has bad credit). When you cosign, you should know that you are responsible for the account if the other person defaults on the loan. Davis got an American Express Gold card for her former fiance; she was sideswiped with nearly $6,000 in debt thanks to his spending sprees.

4. Neglecting to provide the same identifying information each time you apply for credit (i.e., using your full name one time and leaving out your middle name the next). "It helps to make sure the process is completely accurate," says Jeffrey Junkas, public relations specialist for Transunion in Chicago. "If you make sure you have your name, phone number, Social Security number, etc., the same way all the time, you're going to reduce the chances that another file could be created."

5. Paying late or failing to pay at all. Tiffany Warren got trapped in a credit snare when she was in college. She didn't think she'd have to repay a retail store credit card with a $250 credit limit. "I was so fresh and so new," she says of getting her first credit card in 1992. "I would get these bills stating $15 payments, but I didn't understand what the minimum meant against the balance," says Warren, 28, manager of diversity programs for a major advertising association in New York. "I would pay the minimum, but my balance wasn't going down, so I became frustrated and made a choice to put it aside. By my junior year, I couldn't get [credit]." She eventually paid off the card in 1997. Between interest and late fees, it cost her $600. "No matter how small the balance, if you don't pay it, it completely affects your world," she adds. Remember to mail your payment five to seven days before the due date, or pay online or over the phone.

6. Paying the minimum. The only person who benefits from minimum payments is the creditor. It can cost you loads of interest and time, and take money away from other investments. For example, if you have a credit card balance of $5,500, a 14.99% interest rate, and pay a $100 minimum per month, it will take you seven years, nine months to pay it off. However, if you take the same scenario and pay $200 per month, it will only take two years, 10 months to pay it off. That's almost five years of interest saved!

Carrying hefty credit card balances can be downright detrimental if hard times should hit. Take Lenny Woods, for instance. His plight with credit card debt began in 1988, when he lost his job and fell three months behind in his payments. His first wife was unable to help make ends meet because "she was here [in the United States] on a visitor's Visa, became pregnant, and couldn't work," says Woods, 37. "I went to the welfare [department] and received a lump sum check for $800 for my hardship," says Woods. The Marine Corps retiree also got $1,500 from the Department of Veterans Affairs.

To get back on his feet, Woods became a Burger King manager, and immediately negotiated a repayment plan with Rent-A-Center, a store that allows you to rent-to-own furniture, appliances, electronics, and computers. The store charged him a steep 24% interest on top of the 12% interest that he had been paying on his Mastercard stemming from a $2,000 purchase. He also had a car note for a Nissan Sentra worth $9,700. It took him three years to get out of debt.

Woods vividly remembers the rough times when he rented a room for $75 a week and had to prepare his meals on a hot plate. Now, remarried and enjoying a new career as a financial advisor at J.P. Morgan Chase & Co., the Florida resident says he knows the hardships of living above your means and the importance of preparing for a rainy day. He advises all: "Don't get credit cards, get a stable job, invest wisely, and save."

7. Racking up too many credit cards. Enter Diane Smith, program manager for the U.S. Postal Service in Washington, D.C. Smith, 37, had more than 20 credit cards in her youth. "In my 20s, I had no discipline and lived on my credit cards, even though I was making $60,000" working as a mail flow controller, she says. "At that time, [credit] gave me a false sense of achievement, but I hadn't achieved anything except debt." She accrued $25,000 in debt over five years. She woke up when five creditors, among them American Express and Visa, garnished her wages: $5,000 over six months. She walked through the fire of debt and is now able to breathe after paying $1,000 a month for two years to creditors. Now debt-free, Smith owns a home, and says she uses her credit cards for emergencies only.

8. Failing to establish credit earlier in life. Having a steady income, a nice place to live, and a sense of stability is fine as you get older, but applying for credit for the first time could be difficult. If you can't get credit, try a secured credit card. Typically you have to open a bank account with the creditor, say with a $500 deposit, then that becomes your spending limit. Make sure the lender notifies the credit reporting bureaus about your account status. Check out www.bankrate.com for the latest rates on secured cards.

9. Assuming your credit report is accurate. "Not only does the consumer have to put accurate information on [an application for credit], you have to make sure the credit granter inputs that information and that everything is written clearly," says Junkas. Therefore, "keep all documents--your check, receipts [or any proof of payment for items under contract]," adds Brenda J. Freeman, educational specialist of community affairs for Consumer Credit Counseling Service, a division of Money Management International (www.cccsintl.org; 800-873-2227). Watch out for incorrect balances and paid-off or closed accounts reported as open. If errors still appear, "you have the right to add a 100-word statement to your credit report," she says. (To fix mistakes on your credit report, see "Creeping Credit Errors," September 2001.)

10. Naming your children after you, as with father/son names (i.e., Sr. or Jr. or I, II, or III). You have to make sure that the information for either of you is not intermingled. If it is, contact the credit reporting agencies immediately. Arm yourself with documentation to prove who you are. Be mindful that this can also happen when someone in your family tries to use your credit because theirs is in arrears.

What's the bottom line? Take care of your credit and it will take care of you. "Treat your credit like it's your first-born child. It's the most important investment you can make," says Warren. "Credit affects the quality of your life. Understand the responsibility that you're getting into when you do get it. It's not free money."

Conquering Credit Myths

* Credit reports are available only to creditors. That's untrue. You can get a copy of your credit report for a fee (or free depending on your state) by writing the three credit bureaus. You can also obtain one for free if you are unemployed, a victim of fraud, or have been denied credit on the basis of your report.

* Late payments don't show up on your credit report. Not so. Any time your payment is more than 30 days late, your creditor can report the delinquency to a credit bureau. Late payments can impact your ability to get a favorable interest rate or future credit.

* You can pay less than the minimum payment without penalty. Unfortunately not. You must send in the minimum amount required by the due date or the creditor may consider your payment late and charge additional fees. The creditor may also report it to a credit bureau.

* You're only liable for debts on cosigned or joint accounts that are related to your purchases. This is incorrect. You're financially responsible for any debt that is incurred on accounts that you hold jointly or as a co-signer.

* Your creditor will overlook a missed payment if you offer a good excuse. Although you should call your creditor to let them know you're having a crisis (e.g., unemployment or illness), there's no guarantee that the creditor won't report your delinquencies to the credit bureau(s). Your creditor may grant you an extension or offer other payment terms in special instances, but that's a courtesy and not required by law.

* Bad debts disappear from your credit report once they are paid in full. Absolutely not. Credit reports include everything from charge-offs, bad debts, and late payments for a seven-year period.

* Credit report scores take seven years to improve. False! Recent entries on your credit report carry more weight than earlier ones, so start improving your credit today.

Source: Freddie Mac