The ABCs of 529 Plans

If you're already saving for college, you've probably heard about 529 plans. 529 plans are revolutionizing the way parents and grandparents save for college, similar to the way 401(k) plans revolutionized retirement savings. Americans are pouring billions of dollars into 529 plans, and contributions are expected to increase dramatically in the coming decade. Where did these plans come from, and what makes them so attractive?

The history of 529 plans

Congress created Section 529 plans in 1996 in a piece of legislation that had little to do with saving for college--the Small Business Job Protection Act. The law on 529 plans was later refined in 1997 by the Taxpayer Relief Act, in 2001 by the Economic Growth and Tax Relief Reconciliation Act, and in 2006 by the Pension Protection Act. In this short period, 529 plans have emerged as one of the top ways to save for college.

Section 529 plans are officially known as qualified tuition programs under federal law. The reason "529 plan" is commonly used is because 529 is the section of the Internal Revenue Code that governs their operation.

What exactly is a 529 plan?

A 529 plan is a college savings vehicle that has federal tax advantages. There are two types of 529 plans: college savings plans and prepaid tuition plans. Though college savings plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them.

College savings plans

College savings plans let you save money for college in an individual investment account. These plans are run by the states, which typically designate an experienced financial institution to manage their plan. To open an account, you fill out an application, choose a beneficiary, and start contributing money. However, you can't hand pick your own investments as you would with a Coverdell ESA, custodial account, or trust. Instead, you typically choose one or more portfolios offered by the plan--the underlying investments of which are exclusively chosen and managed by the plan's professional money manager. After this, you simply decide when, and how much, to contribute.

With early college savings plans, plan managers commonly invested your money based only on the age of your beneficiary (known as an age-based portfolio). Under this model, when a child is young, most of the portfolio's assets are allocated to aggressive investments. Then, as a child grows, the portfolio's assets are gradually and automatically shifted to less volatile investments to preserve principal. The idea is to take advantage of the stock market's potential for high returns when a child is still many years away from college, while recognizing the need to lessen the risk of these investments in later years.

Though the age-based portfolio model is certainly logical (indeed, many parents were already trying to invest this way on their own), offering only this type of portfolio made college savings plans seem a bit inflexible. After all, with other college savings options like Coverdell ESAs, custodial accounts, mutual funds, and trusts, you can invest in practically anything (thereby taking into account your risk tolerance), and you have complete freedom to sell an investment that's performing poorly (though in some cases the proceeds must still be used for education purposes, or for the child's benefit in general).

Now, college savings plans are older and wiser. Today, more plans offer a wide array of portfolio choices. So, in addition to choosing an age-based portfolio, you may also be able to direct your 529 plan contributions to one or more "static portfolios," where the asset allocation in each portfolio remains the same over time. These static portfolios usually range from aggressive to conservative, so you can match your risk tolerance. But keep in mind that college savings plans don't guarantee your return. If the portfolio doesn't perform as well as you expected, you may lose money.

When it's time for college, the beneficiary of your account can use the funds at any college in this country and abroad (as long as the school is accredited by the U.S. Department of Education).

Prepaid tuition plans

Prepaid tuition plans let you save money for college, too. But prepaid tuition plans work differently than college savings plans. Prepaid tuition plans may be sponsored by states (on behalf of public colleges) or by private colleges.

A prepaid tuition plan lets you prepay tuition expenses now for use in the future. The plan's money manager pools your contributions with those from other investors into one general fund. The fund assets are then invested to meet the plan's future obligations (some plans may guarantee you a minimum rate of return). At a minimum, the plan hopes to earn an annual return at least equal to the annual rate of college inflation for the most expensive college in the plan.

The most common type of prepaid tuition plan is a contract plan. With a contract plan, in exchange for your up-front cash payment (or series of payments), the plan promises to cover a predetermined amount of future tuition expenses at a particular college in the plan. For example, if your up-front cash payment buys you three years' worth of tuition expenses at College ABC today, the plan might promise to cover two and a half years of tuition expenses in the future when your beneficiary goes to college. Plans have different criteria for determining how much they'll pay out in the future. And if your beneficiary attends a school that isn't in the prepaid plan, you'll typically receive a lesser amount according to a predetermined formula.

The other type of prepaid tuition plan is a unit plan. Here, you purchase units or credits that represent a percentage (typically 1 percent) of the average yearly tuition costs at the plan's participating colleges. Instead of having a predetermined value, these units or credits fluctuate in value each year according to the average tuition increases for that year. You then redeem your units or credits in the future to pay tuition costs; many plans also let you use them for room and board, books, and other supplies.

A final note to keep in mind: Make sure you understand what will happen if a plan's investment returns can't keep pace with tuition increases at the colleges participating in the plan. Will your tuition guarantee be in jeopardy? Will your future purchases be limited or more expensive?

What's so special about 529 plans?

Section 529 plans--both college savings plans and prepaid tuition plans--offer a combination of features that have made them attractive to college investors:

  • Federal and state tax-deferred growth: The money you contribute to a 529 plan grows tax deferred each year.
  • Federal tax-free earnings if the money is used for college: If you withdraw money to pay for college (known under federal law as a qualified withdrawal), the earnings are not subject to federal income tax, similar to the treatment of Coverdell ESA earnings.
  • Favorable federal gift tax treatment: Contributions to a 529 plan are considered completed, present-interest gifts for gift tax purposes. This means that contributions qualify for the $13,000 annual gift tax exclusion. And with a special election, you can contribute a lump sum of $65,000 to a 529 plan, treat the gift as if it were made over a five-year period, and completely avoid gift tax.
  • Favorable federal estate tax treatment: Your plan contributions aren't considered part of your estate for federal tax purposes. You still retain control of the account as the account owner but you don't pay a federal estate tax on the value of the account. But if you spread today's gift over five years and you die within the five years, a portion of the gift will be included in your estate.
  • State tax advantages: States can also add their own tax advantages to 529 plans. For example, some states exempt qualified withdrawals from income tax or offer an annual tax deduction for your contributions. A few states even provide matching scholarships or matching contributions.
  • Availability: Section 529 plans are open to anyone, regardless of income level. And you don't need to be a parent to set up an account. By contrast, your income must be below a certain level if you want to contribute to a Coverdell ESA or qualify for tax-exempt interest on U.S. education savings bonds (Series EE bonds, which may also be called Patriot bonds, and Series I bonds).
  • High contribution limits: The total amount you can contribute to a 529 plan is generally high. Most plans have limits of $300,000 and up. Coupled with the tax-deferred growth of your principal and the income tax-free treatment of qualified withdrawals, it's easy to see how valuable your money can be in a 529 plan.
  • Professional money management: For college investors who are too busy, too inexperienced, or too reluctant to choose their own investments, 529 plans offer professional money management.
  • College savings plan variety: In many cases, you're not limited to the college savings plan in your own state. You can shop around for the plan with the best money manager, performance record, investment options, fees, state tax benefits, and customer service. (You can't generally shop around with prepaid tuition plans, though.)
  • Rollovers: You can take an existing 529 plan account (college savings plan or prepaid tuition plan) and roll it over to a new 529 plan once every 12 months without paying a penalty. This lets you leave a plan that's performing poorly and join a plan with a better track record or more investment options (assuming the new plan allows nonresidents to join).
  • Simplicity: It's relatively easy to open a 529 account, and most plans offer automatic payroll deduction or electronic funds transfer from your bank account to make saving for college even easier.
  • Innovation: Section 529 plans are a creature of federal law, but the states are the ones that interpret and execute them. As Congress periodically revises the law on 529 plans, states will continue to refine and enhance their plans (and their tax laws) in order to make them as attractive as possible to college investors from all over the country.

What are the drawbacks of 529 plans?

No college savings option is perfect, and 529 plans aren't, either. Here are some of the drawbacks:

  • Investment options: 529 plans offer little control over your specific investments. With a college savings plan, you may be able to choose among a variety of investment portfolios when you open your account, but you can't direct the portfolio's underlying investments. With a prepaid tuition plan, you don't pick anything--the plan's money manager is responsible for investing your contributions.
  • Investment guarantees: College savings plans don't guarantee your investment return. You can lose some or all of the money you have contributed. And even though prepaid tuition plans typically guarantee your investment return, some plans sometimes announce modifications to the benefits they'll pay out due to projected actuarial deficits.
  • Investment flexibility: If you're unhappy with your portfolio's investment performance in your college savings plan, you typically can direct future contributions to a new portfolio (assuming your plan allows it), but it may be more difficult to redirect your existing contributions. Some plans may allow you to make changes to your existing investment portfolio once per calendar year or upon a change in the beneficiary. (For 2009 only, states may permit 529 college savings plan investors to change the investment options for their existing contributions twice per year instead of once per year.) But in either case, it depends on the rules of the plan. However, you do have one option that's allowed by federal law and not subject to plan rules. You can do a "same beneficiary" rollover (a rollover without a change of beneficiary) to another 529 plan (a college savings plan or a prepaid tuition plan) once every 12 months, without penalty. This gives you the opportunity to shop around for the investment options you prefer.
  •  Nonqualified withdrawals: If you want to use the money in your 529 plan for something other than college, it'll cost you. With a college savings plan, you'll pay a 10 percent federal penalty on the earnings part of any withdrawal that is not used for college expenses (a state penalty may also apply). You'll pay income taxes on the earnings, too. With a prepaid tuition plan, you must either cancel your contract to get a refund or take whatever predetermined amount the plan will give you for a nonqualified withdrawal (some plans may make you forfeit your earnings entirely; others may give you a nominal amount of interest).
  • Fees and expenses: There are typically fees and expenses associated with 529 plans. College savings plans may charge an annual maintenance fee, administrative fees, and an investment fee based on a percentage of your account's total value. Prepaid tuition plans may charge an enrollment fee and various administrative fees.

This article was provided by Forefield and distributed by Lawrence Sprung.

IRS Allows Additional Time to Roll Over 2009 RMDs from IRAs and Employer-Sponsored Plans

On December 23, 2008, President Bush signed The Worker, Retiree, and Employer Recovery Act of 2008 into law. The law waived required minimum distributions (RMDs) for 2009 from IRAs and employer sponsored defined contribution plans (including 401(k), profit-sharing, stock bonus, 403(b), and 457(b) plans).

In many cases, because the law was passed so late in 2008, and because many inpiduals and plan sponsors were confused about how to comply with the new rules, IRA owners and plan participants received RMDs they weren't required to take, and which they didn't want. Inpiduals who received such RMDs were allowed to roll them into an IRA or eligible retirement plan (even though RMDs aren't usually eligible to be rolled over). Some inpiduals failed to complete their rollovers within 60 days, or weren't aware of their ability to roll over the funds. In some cases, employees who received RMDs as part of substantially equal periodic payments, which are also generally ineligible for rollover, were uncertain whether a rollover was allowed.

In Notice 2009-82, the IRS provides relief to plan participants and IRA owners who have already received an unwanted 2009 RMD, and for whom the 60-day rollover period has expired. Under the Notice, these inpiduals will generally have until November 30, 2009, to complete a rollover. This relief applies to IRA owners, plan participants, and spouse beneficiaries. (Note: this special rule does not apply to RMDs received in 2009 for 2008.) For employer-sponsored plans, the relief applies to any payment that is equal to the 2009 RMD, and to any substantially equal periodic payments the employee received during 2009 that included RMDs.

The Notice cautions that the one-rollover-per-year rule still applies to IRAs. Under this rule, which applies separately to each IRA, only one rollover from a particular IRA can be made to any other IRA in a 12-month period. Roth conversions do not count as a rollover for purposes of this rule.

The Notice also provides additional guidance to taxpayers and plan sponsors in the form of Q&As, including the following:

The deadline for an employee or a beneficiary that had until the end of 2009 to choose between receiving RMDs under the 5-year or the life expectancy rule is extended until the end of 2010.

In plans that permit a nonspouse beneficiary to directly roll over a deceased participant's account balance, the nonspouse designated beneficiary has until the end of 2010 to make the direct rollover and use the life expectancy rule with respect to an employee who died in 2008.
In general, the rollover can be back to the same plan that made the distribution (if the plan permits such rollovers).

The 2009 RMD waiver does not apply to substantially equal periodic payments taken in order to avoid the 10 percent early distribution tax on distributions prior to age 59½, even if the inpidual is using the "RMD method" to calculate those payments.

You can find a copy of Notice 2009-82 here.

This article was provided by Forefield and distributed by Lawrence Sprung.

Taking Advantage of Employer-Sponsored Retirement Plans

Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. If your employer offers such a plan and you're not participating in it, you should be. Once you're participating in a plan, try to take full advantage of it.

Understand your employer-sponsored plan

Before you can take advantage of your employer's plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer's benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

  • Your employer automatically deducts your contributions from your paycheck. You may never even miss the money--out of sight, out of mind.
  • You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year.
  • With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pretax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
  • Your 401(k) or 403(b) plan may let you make after-tax Roth contributions--there's no up-front tax benefit but qualified distributions are entirely tax free.
  • Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
  • Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.
  • You'll pay income taxes and possibly an early withdrawal penalty if you withdraw your money from the plan.
  • You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
  • Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit. If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer's plan instead of somewhere else? One reason is that your pretax contributions to your employer's plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan--a big advantage if you're in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you'll pay income taxes on $90,000 instead of $100,000. (Roth contributions don't lower your current taxable income but qualified distributions of your contributions and earnings--that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die--are tax free.)

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren't taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer's plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, you participate in your employer's tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 8 percent per year. You're in the 28 percent tax bracket and contribute $10,000 to each account at the end of every year. You pay the yearly income taxes on Account B's earnings using funds from that same account. At the end of 30 years, Account A is worth $1,132,832, while Account B is worth only $757,970. That's a difference of over $370,000. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can't max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you're vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer's match, you'll be surprised how much faster your balance grows. If you don't take advantage of your employer's generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6 percent of your salary. Each year, you contribute 6 percent of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer's plan could be one of your keys to a comfortable retirement. That's because over the long term, varying rates of return can make a big difference in the size of your balance.

Research the investments available to you. How have they performed over the long term? Have they held their own during down markets? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Finally, you may be able to change your investment allocations or move money between the plan's investments on specific dates during the year (e.g., at the start of every month or every quarter).

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer's retirement plan is yours to keep. You have several options at that point, including:

  • ·Taking a lump-sum distribution. This is often a bad idea, because you'll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you're giving up continued tax-deferred growth.
  • Leaving your funds in the old plan, growing tax deferred (your old plan may not permit this if your balance is less than $5,000, or if you've reached the plan's normal retirement age--typically age 65). This may be a good idea if you're happy with the plan's investments or you need time to decide what to do with your money.
  • Rolling your funds over to an IRA or a new employer's plan if the plan accepts rollovers.

This is often a smart move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20 percent for income taxes if you receive the funds before rolling them over). Plus, your funds will keep growing tax deferred in the IRA or new plan.

This article was provided by Forefield and distributed by Lawrence Sprung.

Group Term Life Insurance

Group term life insurance is simply term insurance issued to people who belong to a group that has a common interest or association, such as an employer, a trade, or a school affiliation. Premiums increase annually or in "bands" of three- or five-year periods. Group term life insurance offers pure financial protection against premature death (there is no cash value component with term insurance, as there is with permanent insurance). For an employer, group term life insurance is a convenient way to offer employees easy-to-buy, affordable life insurance coverage.
Employers often provide a flat amount of coverage, such as $10,000 per employee. Many employers offer coverage that is a multiple of an employee's earnings, such as two times his or her annual salary.

Eligibility information

As an employer, you can choose to include all of your employees in a group term life insurance plan, or select only a class of employees, such as managers. You can also exclude certain employees from coverage. For instance, you could require employees to work a minimum number of hours per week, such as 20, before they would qualify for coverage. You could also exclude employees based on the number of months worked per year, such as requiring at least five months of work in order to obtain coverage. Or, employees may have to have been employed for a certain period of time before they are eligible to participate.

A business can start group coverage with as few as 2 employees, though most employers begin thinking about offering coverage when they have 10 or more employees. The number of employees may determine whether an insurer will offer immediate coverage without evidence of insurability. Plans that limit coverage to $50,000 or less usually skip any medical underwriting requirements; amounts over $50,000 may require individuals to answer medical questions and satisfy underwriting standards to be accepted.

Bells and whistles

Some group term policies may offer supplemental coverage (for a spouse) or dependent coverage (for children). These coverage amounts often carry limitations. For instance, the spousal coverage may be limited to 50 percent of the employee's amount, while dependent coverage may be a flat amount, such as $2,000.
Some policies also offer an accelerated death benefit that allows an employee with a terminal illness to collect a percentage of his or her coverage in advance. When employees leave your firm or retire, they may also be able to keep the coverage as personally owned term insurance, or convert the group term to permanent life insurance. Available options vary among insurers, so be sure to ask about features that are important for your business needs and for your employees.

What's in it for the employees?

Essentially, group term coverage can represent free life insurance for an employee. But because many employers limit group term coverage to $50,000, employees should often think of this coverage as supplemental to their own personal life insurance plans, not as their main source of protection.

Employers often stop at $50,000 of coverage for tax reasons. The cost to provide coverage of up to the $50,000 limit is deductible by the employer but not includable in the income of the employee. Also, an employee's beneficiary will not pay federal income taxes on the death benefits. A state may, however, require income taxes on the death benefits.

Employers that pay for more than $50,000 of group term coverage must include the "economic value" of the cost of the excess insurance as taxable income to the employee (reported on their W-2s as "additional compensation"). One way around these limitations is for an employer to pay for the first $50,000 of coverage and allow employees to pay for any optional coverage in excess of this amount.

What's in it for the employer?

As the employer, you can offer different coverage amounts for different classes of employees. For example, you might buy $50,000 of coverage for your customer service personnel, but buy coverage for your engineers equal to three times their annual salaries. The downside is that if you do "discriminate" among different classes of employees, the economic value of the cost of the first $50,000 of coverage may be taxable to your key employees (i.e., certain officers, highly compensated individuals, and owners with 5 percent or more ownership).

As mentioned, you may pay all or part of the cost of group life coverage, and many employers pass on the costs of any additional features to their employees. The good news, from a federal income tax standpoint, is that group term life premiums paid by an employer are tax deductible by the business, even if your plan is discriminatory.
Also note that the way your business is organized will affect your business tax benefits. Owners of more than 2 percent of an S corporation, partners, and sole proprietors are not considered employees, so premiums paid for their group term insurance are generally not tax deductible. In a corporation that is not an S corporation, premiums paid for all employees (including owner-employees) are generally tax deductible.

Cost concerns

Typically, you can expect to pay a set amount per $1,000 of coverage per employee (e.g., $.10 per $1,000 per month). Premium costs depend on the coverage amounts you want to provide and whether medical underwriting is required. Premium costs will also depend on the number of employees, their ages, their genders, and the type of business you operate. For instance, a commercial fishing fleet will probably pay more in premiums than a bookstore.

For any type of business, though, you can expect costs to rise as your employee population ages. In general, the larger the group of employees, the lower the premium charged. And just like many group health plans, an insurer may also charge higher life insurance premiums for smokers than for nonsmokers.

This article was provided by Forefield and distributed by Lawrence Sprung.

Understanding Your Credit Report

Your credit report contains information about your past and present credit transactions. It's used primarily by potential lenders to evaluate your creditworthiness. So if you're about to apply for credit, especially for something significant like a mortgage, you'll want to get and review a copy of your credit report.

You can see what they see: getting a copy of your credit report

Every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances:

  • A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)
  • You're unemployed and plan to look for a job within the next 60 days
  • You're on welfare
  • Your report is inaccurate because of fraud, including identity theft

You can order your free annual report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Alternatively, you can contact each of the three credit bureaus:

  • Experian National Consumer Assistance Center, www.experian.com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742
  • Trans Union LLC, Consumer Disclosure Center, www.transunion.com, 1000, Chester, PA 19022, (800) 916-8800
  • Equifax, Inc., www.equifax.com, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111

If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.

What's it all about?

Your credit report usually starts off with your personal information: your name, address, Social Security number, telephone number, employer, past address and past employer, and (if applicable) your spouse's name. Check this information for accuracy; if any of it is wrong, correct it with the credit bureau that issued the report.

The bulk of the information in your credit report is account information. For each creditor, you'll find the lender's name, account number, and type of account; the opening date, high balance, present balance, loan terms, and your payment history; and the current status of the account. You'll also see status indicators that provide information about your payment performance over the past 12 to 24 months. They'll show whether the account is or has been past due, and if past due, they'll show how far (e.g., 30 days, 60 days). They'll also indicate charge-offs or repossessions. Because credit bureaus collect information from courthouse and registry records, you may find notations of bankruptcies, tax liens, judgments, or even criminal proceedings in your file.

At the end of your credit report, you'll find notations on who has requested your information in the past 24 months. When you apply for credit, the lender requests your credit report--that will show up as an inquiry. Other inquiries indicate that your name has been included in a creditor's prescreen program. If so, you'll probably get a credit card offer in the mail.

You may be surprised at how many accounts show up on your report. If you find inactive accounts (e.g., a retailer you no longer do business with), you should contact the credit card company, close the account, and ask for a letter confirming that the account was closed at the customer's request.

Basing the future on the past

What all this information means in terms of your creditworthiness depends on the lender's criteria. Generally speaking, a lender feels safer assuming that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. A history of late payments or bad debts will hurt you. Based on your track record, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate if your credit report indicates that you are a poor risk.

Too many inquiries on your credit report in a short time can also make lenders suspicious. Loan officers may assume that you're being turned down repeatedly for credit or that you're up to something--going on a shopping spree, financing a bad habit, or borrowing to pay off other debts. Either way, the lenders may not want to take a chance on you.

Your credit report may also indicate that you have good credit, but not enough of it. For instance, if you're applying for a car loan, the lender may be reviewing your credit report to determine if you're capable of handling monthly payments over a period of years. The lender sees that you've always paid your charge cards on time, but your total balances due and monthly payments have been small. Because the lender can't predict from this information whether you'll be able to handle a regular car payment, your loan is approved only on the condition that you supply an acceptable cosigner.

Correcting errors on your credit report

Under federal and some state laws, you have a right to dispute incorrect or misleading information on your credit report. Typically, you'll receive with your report either a form to complete or a telephone number to call about the information that you wish to dispute. Once the credit bureau receives your request, it generally has 30 days to complete a reinvestigation by checking any item you dispute with the party that submitted it. One of four things should then happen:

  • The credit bureau reinvestigates, the party submitting the information agrees it's incorrect, and the information is corrected
  • The credit bureau reinvestigates, the party submitting the information maintains it's correct, and your credit report goes unchanged
  • The credit bureau doesn't reinvestigate, and so the disputed information must be removed from your report
  • The credit bureau reinvestigates, but the party submitting the information doesn't respond, and so the disputed information must be removed from your report

You should be provided with a report on the reinvestigation within five days of its conclusion. If the reinvestigation resulted in a change to your credit report, you should also get an updated copy.

You have the right to add to your credit report a statement of 100 words or less that explains your side of the story with respect to any disputed but unchanged information. A summary of your statement will go out with every copy of your credit report in the future, and you can have the statement sent to anyone who has gotten your credit report in the past six months. Unfortunately, though, this may not help you much--creditors often ignore or dismiss these statements.

This article was provided by Forefield and distributed by Lawrence Sprung.

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