Weird stuff that hurts your credit

There's no easy solution if you haven't got the money to pay your bills. Filing for bankruptcy is an option, although it's likely to have a far more devastating effect on your credit than a settled account or two. You also might investigate a debt-repayment plan through a legitimate credit-counseling agency.

Read "The consumer's guide to credit counseling" and "Is there a statute of limitations on debt?" for more information.

The limits on 'limitless' cards

For years, Capital One declined to report its customers' credit limits to the three major credit bureaus. Instead, the bureaus used the highest balance a customer had charged as a proxy for the limit.

As a result, the customers' credit utilization ratios could appear artificially high, potentially depressing their credit scores. That's what happened to accountant John Johnson of Springdale, Ark., who painstakingly rebuilt his credit after some business reversals several years ago.

Making on-time payments to Capital One cards over the years initially helped Johnson rebuild his credit scores, but then the company's policy on credit limits started to hurt him. Capital One's practice makes Johnson appear to be using more than 60% of his credit limit, when in fact he's using less than 40%. He tried disputing the issue with the credit bureaus, to no avail.

"I got pretty hostile after a while," Johnson admitted. "I just don't understand why they (Capital One) would do that."

Capital One said only that it was policy to keep the information secret. Consumer advocates speculated the company was trying to keep competitors from spotting and targeting its most creditworthy customers.

After years of pressure, though, Capital One finally caved and agreed in August 2007 to start reporting limits.

That doesn't solve the issue of missing or incorrect limits, though. You don't need to worry that much if your card actually doesn't have a limit; many American Express cards and some high-end MasterCards and Visas don't. To get and keep these cards, you must have pretty good credit, which means the lack of a limit is unlikely to hurt you as much as someone whose credit is troubled or young.

But sometimes issuers report an outdated or simply erroneous limit to the credit bureaus. You can, and should, check which number your lenders are using by viewing copies of your credit reports. Video: Fight the credit bureaus and win

By federal law, you can get one copy free annually from each bureau; the only free site is AnnualCreditReport.com.

If your limits aren't being reported accurately, you have a few options:

• Fight. If your card has a limit, ask your issuer to report it correctly, and follow up with a dispute to the credit bureaus if it fails to act.

• Reset. If your lender reports the highest balance charged instead of an actual limit, you can reset the number reported to the bureaus by running up a big balance one month. Just make sure you can pay this hefty number off in full when the bill comes to avoid unnecessary finance charges. And don't do this when you're in the market for a loan, since you could sustain some short-term damage to your credit scores.

• Switch. Use cards that properly report your limits to the credit bureaus.

Are you a library and parking scofflaw?

I wrote about this issue a few years ago in "New threats to your credit score," and the trend has gained momentum since then. Local governments are determined to recoup some of the billions in unpaid debts consumers owe, including unpaid library fines, parking tickets and traffic penalties. So these governments increasingly turn to private collection agencies, which typically report the unpaid amounts to the credit bureaus as part of their efforts to pressure consumers into paying the fines. The collectors may add late fees or other charges that increase the balance.

The bottom line:

• Pay your fines promptly. Don't wait for follow-up notices because they can easily go astray. Many libraries allow you to review your library record, including unpaid fines, online, and municipalities typically have a Web site or a phone number allowing you to check for traffic or parking fines.

• Don't let a dispute fall through the cracks. If you're disputing a traffic or parking ticket, note the applicable deadlines on your calendar and make sure the issue has been resolved.

• Don't move away from a problem. If you plan to move and believe you may have unpaid fines, contact the relevant municipality or library and make sure you've squared your account with them. Don't expect a government agency to spend much energy tracking you down; it's much easier to turn a delinquent account over to a collection agency, and once that's happened, your credit is at risk.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Updated March 11, 2009

< previous |  1 | 2 |