Ask Liz Weston

Get smart with your money

Credit Scoring

Q&A: Are credit checks a scam?

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Dear Liz: In July last year, I accessed the website for my free credit report before applying for a car loan. I have also been in recovery from cancer treatment and haven’t been great about checking my Visa statement until now. For the past year, my credit card has been charged $19.95 each month for some kind of “credit check” service. I never authorized this, nor did I request this service. I contacted the site, and they will refund me only one month of billing. Is this some kind of scam? How do they get away with this, and what can I do?

Answer: It may not technically be a scam, but the site’s business model profits from people’s confusion about how to get free credit reports.

The site you used is not the federally mandated site for free credit reports. It’s likely one that you found by typing “free credit reports” into a search engine and then clicking on one of the first results, which was probably an ad. To find the real site, you need to type www.annualcreditreport.com into your browser. You won’t need to give your credit card number to get your reports.

You may be able to get another month’s fee refunded by contacting your credit-card issuer and disputing the charge. By federal law, you’re supposed to make such disputes within 60 days after the statement containing the disputed charge was sent to you. Write to the issuer at its address for billing inquiries (not the address where you send your payments) and send it certified mail, return receipt requested.

Q&A: Helping a friend build credit

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Dear Liz: I am selling my car to an old friend with no credit history. (The used car salesman wanted to charge her 6.5% interest.) Is there a way that I can report her timely payments to the credit reporting services to help her build her credit?

Answer: It’s not really practical for individuals to report payments, since subscribing to credit bureaus is expensive.

The rate your friend was quoted actually isn’t bad given her lack of credit history. If she kept the loan term relatively short (four years or less), she might be able to build up enough equity and credit history to refinance it to a lower rate in a year or two.

If she’d prefer not to take that route, you might suggest she explore credit builder loans. These loans, offered by credit unions, banks and some online lenders, are designed to help establish credit histories at the bureaus. The lenders typically put the borrowers monthly payments, minus a small interest charge, into a certificate of deposit that is the borrowers to keep after the final payment.

Secured credit cards are another good way to build credit scores. Borrowers make a refundable deposit with the issuing bank and get a credit line that’s typical equal to that deposit.

Q&A: Taking out a loan to boost credit scores

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Dear Liz: I have little to no information — good or bad — in my credit reports. I am considering obtaining a secured loan from my credit union to establish better credit. Does it make any difference to my credit score if the credit union reports the loan as “secured”?

Answer: Credit scores don’t treat installment loans differently based on whether they’re unsecured, with just your promise to repay, or secured, which means backed by an asset such as an amount on deposit with the credit union.

What matters is how you pay off the loan (every payment should be on time) and whether the account will be reported to all three credit bureaus, so that you’re building scores at all three. Call and ask, because not all credit unions report to all three bureaus.

You also might want to consider a secured credit card, because having both types of credit accounts — installment and revolving — can boost your scores. Again, it’s important that you pay on time and that the card is reported to all three bureaus. You should use the card lightly but regularly and pay the balance in full each month for best results.

Q&A: Cosigning a loan

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Dear Liz: Our son graduated from college last year and was recently hired as a permanent employee for a company he was contracted with for the past year. He wants to buy a new car but has limited credit history.

He has a credit card he has had since starting college. He uses it lightly and pays the balance off every month. If we are asked to cosign a loan, will paying for the car positively impact his credit scores?

Answer: Yes, an auto loan if paid on time should help his credit scores, but you shouldn’t cosign for it.

Many people who cosign loans somehow miss the important point that they are putting their good credit into someone else’s hands — and that one missed payment can trash that good credit, knocking 100 points or more from their scores.

Your son may be the most responsible 20-something on the planet, but he could still make a mistake. The only time that it makes sense to cosign a loan is when you are going to make all the payments on the debt.

He shouldn’t assume that his credit history is insufficient to get a loan. He can get his FICO scores, including the auto scores most often used by lenders, for about $20 apiece at MyFico.com. He should then take those scores to his local credit union to see what interest rate he would be offered on a car loan.

If it turns out his credit isn’t quite up to snuff, the credit union may have some kind of “credit builder” personal loan that can help improve it. (Credit unions are owned by their members and tend to have better rates and terms than many other lenders.)

Since he hasn’t had an auto loan before, discuss with him how easy it is to overspend on a car when you aren’t paying cash.

The costs of insuring, maintaining and repairing a car, plus the depreciation, can be as much as the monthly payment. In other words, the vehicle is likely to cost him twice what he thinks it will.

Once he sees how much of his paycheck is eaten up by car costs, he might be willing to consider buying a used car instead of a new one or saving up to pay cash.

If he does go ahead, make sure he understands the dangers of being “upside down” on a loan. Owing more than a car is worth leaves you vulnerable if the car is stolen or totaled, since you won’t get enough from the insurer to pay off the loan.

You can buy extra coverage for the gap, but a better approach is to make a large down payment and limit the loan term to three or four years.

Q&A: Free credit report

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Dear Liz: I was trying to get my free credit report as you suggested in a recent column. I was asked to pay $1, which made me very uneasy. Why do they do this?

Answer: The fact that you were asked to pay for your free credit report — even a nominal amount such as $1 — shows that you went to the wrong site.

That can happen if you typed the correct site, www.annualcreditreport.com, into a search engine, rather than into your browser address bar, and didn’t carefully review the options before you clicked.

These look-alike sites are supposed to disclose that they’re not the real thing, but sometimes those disclosures are easy to miss.

The real site notes that it’s the only site for free credit reports and is authorized by federal law. You don’t need to provide a debit or credit card to get your reports, although you will have to provide identifying information such as your Social Security number.

Q&A: Paying for credit repair

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Dear Liz: I’m seeking help in reviewing my credit report and how to fix any issues. I am not financially distressed, but have FICO scores in the 675 range. Could you recommend someone I can hire to assist as I need to refinance a house I bought for cash?

Answer: There’s so much fraud in the credit repair industry that you’re likely better off doing it yourself rather than exposing yourself to rip-offs.

Credit repair companies aren’t supposed to take money upfront or promise things they can’t deliver, but many do.

One of the scammers’ most common ploys is to flood the credit bureau with disputes and to take credit for any negative information that temporarily disappears. By the time the negative information pops back up on the file, the scam artists have disappeared with your money.

Another approach they recommend is starting over with a “clean” slate, sometimes using borrowed or stolen identification numbers. That’s fraud, and even if it works, you’ll often find yourself worse off with no credit history than with a flawed history.

The Federal Trade Commission has some helpful advice on do-it-yourself credit repair.

You’ll need to first get copies of your credit reports from each of the three credit bureaus, which you can do once a year for free at www.annualcreditreport.com. Dispute any inaccurate information, such as collection accounts that aren’t yours or late payments that you made on time.

Follow up with any creditors that persist in reporting bogus information.

One relatively fast way to improve your scores is to pay down any credit card debt to 10% or less of the accounts’ credit limits. Don’t close any accounts while trying to improve your scores, since that won’t help your score and could hurt.

Opening new accounts can ding your scores as well, but it can be worth it to add another credit card to the mix if you only have one or two.