It's important to regularly check your credit report

It's important to regularly check your credit report for errors and to ensure that you have not become the victim of identity theft. Thanks to the federal Fair Credit Reporting Act, it is relatively easy to do (see right-hand box for details).

Eligibility for Free Credit Reports

The three nationwide credit reporting companies process consumer requests for free annual credit reports. Under an amendment to the Fair Credit Reporting Act, the credit bureaus are each required to provide consumers, upon request, a free copy of their credit report once every 12 months. There is one central Web site, toll-free phone number, and mailing address to obtain free annual reports. To order, go to www.annualcreditreport.com, call 877-322-8228 or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can order reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The Federal Trade Commission notes: "Because nationwide consumer reporting companies get their information from different sources, the information in your report from one company may not reflect all, or the same, information in your reports from the other two companies."

To help you understand how credit reports are compiled, here are some answers to frequently-asked questions:

Q.

What makes a credit report good or bad?

A.

Your credit rating is based on a "FICO score." FICO is the acronym for the Fair Isaac Corporation, the company that developed the scoring model used by the three major credit bureaus, Trans Union, Equifax, and Experian.

For example, when you apply for a loan, the lender checks your score to determine whether you are creditworthy. Standards vary by loans and lenders. It's basically a tool that allows lenders to make decisions quickly.

Q.

What factors influence my score?

A.

Here's the breakdown:

Payment history (35 percent) - This portion is based on how diligent you've been at making timely payments in the past. Late payments mean a lower score. Also included in payment history are public record events such as bankruptcy and foreclosure.

Outstanding debt (30 percent) - This is based on your level of current debt, compared to the original balances on the loans. In other words, a person who uses 75 percent or more of his or her available credit would pose a greater risk of defaulting than a person who has the same amount of available credit but uses only 25 percent.

Credit life (10 percent) - How long have you had credit and how often do you use it?

Requests for credit (10 percent) - Another factor involves how often you apply for credit. Requesting several accounts in a short period of time may be seen as a sign of overextending yourself. When young people first get credit, they sometimes apply for new cards wherever they can. Although they are building credit, they risk incurring the rejection of other lenders when they want to make bigger purchases for homes or cars.

Types of credit (15 percent) -

This portion is determined by the credit you have. For example, a person with several secured credit cards may be a greater risk than a person with one unsecured loan who is paying on time.

Q.

What's a good score?

A.

A high credit score is a good indicator of a low credit risk. FICO scores range from 300 to 850. One mortgage lender looks at scores this way: A score of 660 is acceptable, 620 to 660 is uncertain, and a score below 620 is high risk. If people with high risk scores are able to get credit, the interest rate they're charged and the credit limit will reflect the risk. On the other side of the spectrum, a score above 720 or higher can bring better interest rates and fewer add-on fees.

So, let's say someone has a FICO score of 800 and applies for a loan. Based on the high score, the applicant will probably be approved, right? Not necessarily. Even with a great credit score, the person may not have sufficient income, a large enough down payment, or adequate time on the job to be a good risk. The score is only one of the factors used to make credit decisions.

Q.

What if my credit report contains errors?

A.

It's up to you to monitor your credit report and make sure it's error-free. It's not uncommon for a black mark on your credit to remain for years. Make a regular practice -- perhaps yearly -- of reviewing your credit report. If you find errors, complain in writing to the credit bureau, and include whatever documentation you have to prove your claim. If there are strikes against you that have been cleared up but are still appearing on your report, you can also contact creditors and ask them to remove the erroneous items from your record.

Q.

Besides lenders, can anyone else get a copy of my credit report?

A.

In addition to lenders, here are other parties that can obtain credit reports:

Landlords - Some people can't buy a home based on their credit, so they plan to rent until their credit improves. But many landlords want to see evidence of responsibility before they rent. People with bad credit can find themselves limited in terms of desirable neighborhoods.

Insurers - Insurance companies sometimes look at a poor credit history as an indication of future losses. Again, choices might be limited only to insurers that charge exorbitant premiums.

Prospective employers - Under the law, credits bureaus can provide reports to employers. Some companies use them to evaluate financial honesty, especially with applicants in cash-handling positions. If a person is not hired and the decision was based - even in part - on a poor credit rating, the law requires the employer to notify the applicant of that fact.

Q.

What about ads claiming to fix credit?

A.

If you've got bad credit, you might want to seek reputable professional help. But don't fall for a credit repair scheme. The Federal Trade Commission reports that some 2 million Americans have been victimized by unscrupulous companies that charge fees while promising to restore credit ratings, make bad credit histories disappear, provide new lines of credit and even create new credit identities. However, the agency warns: "Only time, a conscious effort, and a personal debt repayment plan will improve your credit report."

The bottom line: Your credit history can be a key to the future. A good report can open doors while a poor one can quickly slam them shut.