How to make sure your credit report is squeaky clean.

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We’ve covered the benefits of maintaining a good credit report before , but the very essence is that your major financial goals either won’t happen or will be very difficult to achieve unless your credit report can stand up to scrutiny.

At its basic level, your Credit Report and Score signals to potential creditors – banks, mortgage companies, credit card purveyors – how risky it is to loan you money or extend you credit. Banks want to know – will we get paid back?

An important piece to this dynamic is avoiding negative items that can drag down your credit profile. The lower your credit score (the three-digit number that functions as a shorthand your full report), the harder and more expensive it is to get loans, a mortgage, or even open a business.

Your credit score is formulated using five factors: payment history, current debts, credit history, new credit applications, and types of credit. Ideally, your behavior within each of these baskets doesn’t raise red flags for potential creditors.

The following items are missteps that can tarnish your credit report. Avoid these!

Late payments.

This is a biggie – your credit payment history makes up more than one-third of your credit score. If you tend to be late with your payments, you’re walking a fine line.

How late is late?

The real risk comes 30 days past due, when your creditor can report the lateness to credit reporting agencies. As you might suspect, the later your payment, the bigger the potential hit to your credit report. A payment that is 90 days late is worse than one that’s 30 days late. There’s also a recency factor: a late payment from last week has more of an impact than a late payment from three years ago.

To make matters worse, a negative mark like this can stay on your credit report for up to seven years.

Chargeoffs.

At some point, a late payment might become a no-payment – at least as far as a creditor is concerned. Without word or payment from you, a creditor is inclined to believe that the debt will never be repaid.

A creditor’s typical response, usually after 180 days of nonpayment, is to “charge off” a debt, meaning it’s written off the books as uncollectable. But you’re not off the hook – the chargeoff will appear on your credit report for seven years. And in some circumstances, paying off the debt won’t even help raise your score.

Collections.

Another path for creditors with delinquent accounts is referring or selling the debt to a collection agency. This, too, results in a seven-year stay on your credit report. It’s never great to reach this stage, but paying off the debt can have advantages – like preventing a lawsuit against you – even if you’re credit score will be affected for years.

Foreclosure or repossession.

Some property that you buy with credit can be re-taken by creditors if you fail to pay off your debt. Foreclosure refers to the seizure of homes, while repossession often means other property, like autos or high-end appliances. Both types of events will stay on your credit report for seven years.

Bankruptcy.

Declaring bankruptcy is often a last resort, as well as one of the biggest negatives to your credit score.

The two main types of bankruptcy – Chapter 7 and Chapter 13 – have different effects on your credit report: a Chapter 7 bankruptcy stays on your report for 10 years, while a Chapter 13 filing lasts seven years. In a Chapter 13 bankruptcy, also called a wage earner’s plan, you formulate a plan to repay all or part of your debt over three to five years.

The chief advantages of Chapter 13 are that creditors are forbidden from collection efforts during the bankruptcy period, and individuals are afforded an opportunity to save their homes from foreclosure.

Too much credit.

While it’s true that you want to build a credit history by using your available debt, a problem can arise when you get too close to your credit limits, since you’re at risk for being overwhelmed by debt. In technical terms, this is called your credit utilization rate and the lower yours is, the better. Some experts advise trying to keep your outstanding debt below 30% of your limit. Better yet – pay off any credit debt monthly.

Applying for too much credit.

When you apply for credit, you trigger what’s called a “hard check” on your report, allowing a potential creditor to check your report to judge your creditworthiness. Applications for credit will stay on your report for about two years, but any dip in your scores will probably fade after six months, so the hit to your scores is temporary. If your score is down from recent credit applications (remember: checking your own score doesn’t affect your score), wait for it to climb again before seeking more credit.

Narrow credit mix.

This doesn’t sound like a big deal, but types of current credit you hold makes up 10% of your credit score. Having a mix of credit instruments, like a mortgage, a car loan, and one or two credit cards is considered better than having only a dozen or so credit cards. Creditors like to see that you have successfully navigated staying on top of different kinds of debt.

Keep in mind.

One recent report showed that more than half of US citizens have a negative credit report. In many cases, the reason for this is that people don't even know what created their bad score, and don't have the tools to fix it. Also, sometimes the information in your report is just flat out wrong.

Check for errors.

Make sure all your credit report info is true and if it isn't, you can dispute errors directly with the credit unions. They are quite responsive and will investigate and clear up errors rather quickly.

If you can keep the above list from affecting your credit report, you can prevent dings to your report and stay on financial track.

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