Good credit is a huge deal, the one sure way to get bigger loans and lower rates. And even if you've had a late payment every so often, you may have better credit than you think.

Credit reports are important because lenders like to avoid risk. If you have a history of full and timely payments, lenders will sleep better, fidget less and offer better terms. As a consumer, this is what you want.

But credit reports and the concepts behind them are fairly complex. An entire industry exists to do nothing but collect and process credit information, and a body of federal law has been erected to protect consumer rights -- or at least some consumer rights.

How do credit reports really work? Here's a brief list of common credit issues -- and a few answers.

Do I need perfect credit to get a mortgage?

No. Imagine if perfect credit was required. Few loans would be made and every lender in town would be bankrupt.

Several times in the past year I've sent in credit card payments close to the deadline and they arrived a few days late. Will these late payments show up on my credit report?

No. For credit report purposes only these are not "late" payments. Only payments delayed 30 days or more are regarded as "late."

A caution: Even though payments delayed "in the mail" or whatever are only a few days late, they are late and may entitle the creditor to collect additional fees, impose harder terms, and terminate your account. In fairness to creditors, and for your protection, it makes sense to schedule payments well before required.

Okay, how much credit imperfection is allowed?

Different loan programs have different credit standards. In general terms, lenders will focus on credit activities during the past two years, but especially the past 12 months. During this period they may accept several blemishes.

• A single payment 30 days overdue for an installment loan in the past year is unlikely to be a problem. Same for car loans.

• Two credit card payments 30 days late in the past year are unlikely to impact your credit standing.

• Payments delayed 30 days or more and relating to real estate -- rent or mortgage payments -- will cause problems if less than a year old.

For details, speak with local lenders or consult a reputable online site.

If I want to get real estate financing, how far in advance should I check my credit?

You want a lender to review your credit history for the purpose of finding data that is factually incorrect or out-of-date. If such items are on your credit report, you should then file a formal, written inquiry (sent by certified mail with a return receipt requested) to the credit agency that originated the report. They then have 30 days to either confirm the item or remove it.

Given the time required to schedule appointments with lenders and possibly the need to deal with credit bureaus, it's best to review credit reports two to three months before seeking a loan.

How long do items stay on a credit report?

Most items stay on a credit report for seven years, bankruptcies remain for 10 years.

If credit reporting agencies must remove items they cannot verify within 30 days, why not file dozens of complaints regarding negative references?

Nope, this strategy -- known as "cramming" -- won't work. Federal Trade Commission rules allow credit reporting agencies to ignore "frivolous" inquiries.

Moreover, the fact that a credit reporting agency cannot confirm a report item in 30 days does not mean they will stop trying. It may be that an item will be removed temporarily -- until it can be confirmed by the original creditor.

How can I contact the big credit agencies if I find a factual error or an outdated item?

Loan officers can help. Also, call the credit reporting agencies below. Ask what information you need to supply (name, address, and social security number, etc.) and the costs to obtain a report (if any).

• Equifax (https://www.econsumer.equifax.com)
  Equifax Credit Information Services, Inc.
  PO Box 740241
  Atlanta, GA 30374
  By phone, call 1-800-685-1111

• Experian (http://www.experian.com/product/consumer)
  Experian National Consumer Assistance Center
  P.O. Box 2104
  Allen, TX 75013-2104
  By phone, call 1-888-397- 3742

• Trans Union (http://www.transunion.com/CreditReport)
  Trans Union
  Post Office Box 2000
  Chester, PA 19022
  By phone, call 1-800-888-4213

Can I obtain a free credit report?

In some cases, yes. If you have been denied credit, insurance, employment, or rental housing because of a credit report; if you are a resident of certain states; if you are unemployed or on welfare; or if you believe data in your credit report is fraudulent. Speak with credit reporting agencies for details.

I had a late payment on a credit card three years ago according to my credit report and my lender wants me to write a letter explaining what happened. I have no idea. Now what?

The loan underwriter wants to develop a complete file in case any questions regarding the loan arise in the future. Answer truthfully and as best as you can. For example, you might say (if true) that "I'm not certain why the payment to Smith Industries for March, 1997 was late, or even if the item as noted in the credit report is correct. However, my credit report shows no late payments since then, and I still have an account in good standing with Smith Industries."

I have lousy credit. Is it true that I can get a new credit identity that will instantly erase all the bad stuff?

No. Credit reporting would make no sense if everyone could simply create a new and clean credit identity at will. Credit file segregation, as it's called, won't fool lenders for a minute -- and it's illegal.

The scam works this way: You get a federal "employer identification number," the type of identifier used by companies to report taxes and such. You then submit a mortgage loan application using the EIN. Lenders will see that you're not using your Social Security number and immediately "decline" your application.

I co-signed a car loan for my brother. Will this impact my credit report?

Yes. As a co-signer you are responsible for re-paying the entire debt. Lenders, however, will generally not count this liability against you if you can present them with checks for the past year showing that the debt was actually paid in full by your brother. Speak with lenders for details.

I'm divorced and get a monthly payment from my former spouse. Does this income help my credit situation?

Yes -- but you must be able to show that such money is actually being received and will continue. As it may be difficult to get copies of checks from your ex-spouse, make a practice of copying each payment check you receive before cashing them and deposit each one individually (not with other items). This way you have a dated record of deposits and can show individual checks. Speak with lenders for details.

I don't have a credit report. I pay by check for everything and I don't have any credit cards. How can I show I'm credit-worthy?

You may not use credit cards, but you buy things. In recent years lenders have become increasingly open to documentation from cash-only consumers. Keep payment checks for such items as rent, phone bills, auto payments, etc. If you make cash payments, always get signed and dated receipts.

I've been turned down for a loan because of bad credit. Now what?

In writing (certified mail with a return receipt) and within 60 days, contact the folks who turned you down and ask for a copy of your credit report -- you're entitled to a free copy.

How can I get better credit?

Pay bills in full and on time for at least a year, close accounts you do not use, review your credit report annually for accuracy, and reduce credit card balances.

Published: December 27, 2000

Use of this article without permission is a violation of federal copyright laws.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .