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Debt Management Guide 2008
How credit works
It's tough to manage debt if you don't know how credit works. Learn about good credit and living with no credit.
How credit works
Make sure your good credit gets recorded

Rebuilding bad credit is like climbing a ladder: Take it one step at a time, and don't look down.

One of the most effective methods for repairing credit is racking up a good payment history. If you already have a mortgage or credit cards, you should keep making those timely payments and reducing those balances.

If you don't have any credit, you might take out a card or small loan to show you can handle the payments. But there's a potential glitch: Not every lender reports to the credit bureaus.

"There is a recognition that the credit score is becoming the number that is the key to all kinds of things," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. These days, whether you're trying to get a loan, a job or a security clearance, chances are someone will be viewing your credit score.

"But all of this is built on a system where no one is required to report your payment history," she says.

Checking up on lenders is one good reason to pull a free copy of your credit reportd, says Lewis Mandell, professor of finance and managerial economics at the State University of New York, Buffalo. Besides looking for mistakes, consumers can also note "underreporting by creditors with whom they have a pretty good record."

When you're loan shopping and already comparing APRs and who has the better deal on points and fees, a lender's reporting practice can seem pretty insignificant.

But it's one more detail that can save you a lot of money.

"It's a real thing," says Matthew Lee, editor in chief of Inner City Press/Fair Finance Watch, a consumer, community and civil rights organization. "It's something they need to ask the lender."

Does your lender report?
Credit reporting is strictly voluntary.

"It seems like basic fairness that if you pay on time, it should go into your credit history," Lee says.

But no lender is required to report a transaction to any of the credit bureaus. And some will choose to report to one or two, rather than to all three.

If you get your loan from a major brand-name lender, the odds are good they will report it, says Lee.

But there are some subprime lenders who don't report, says Norma Garcia, senior attorney with Consumers Union.

"We've talked to numerous consumers who have said they've paid on time, but it never appears," she says. "As long as the person doesn't have a positive payment history to bring up the score, they're always going to be subprime."

"It's gotten better in some portions of the industry," says Lee. But many times smaller lenders "fly under the radar," he says.

-- Updated: June 16, 2008
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