Repair bad credit rating to avoid nasty surprises

Many people are so accustomed to frequent credit offers that when an application is denied, they’re shocked. Damaging credit report information or overextended borrowing are usually the culprits. Warning signals for debt problems may include:

• Making only minimum credit card payments or missing payment deadlines.
• Reaching credit limits on one or more cards.
• Frequent credit card cash advances.
• Monthly charges exceeding card payments.
• Tapping savings or a 401(k) to pay day-to-day bills.

If these scenarios sound familiar, you should take steps to repair your credit rating and get back on the right financial track. Here are a few tips:

Budgeting. Add up your monthly expenses. If more goes out than comes in, you either need to reduce expenses or increase income. Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc. (www.practicalmoneyskills.com/budgeting), shows how to set and follow a budget and contains interactive tools to help track expenses.

View your credit reports. Lenders determine your credit worthiness by viewing your credit score (often called “FICO” – for Fair Isaac Corporation – the most common score). It’s based on information in credit reports and individual credit scores from three major credit bureaus: Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.transunion.com). You are allowed one free report a year from each bureau that shows the credit history on which your score was based. (Order through www.annualcreditreport.com, otherwise you’ll pay a small fee.) They are required by law to investigate any disputed item and correct inaccuracies.

Pay on time. Late payments on credit cards and other bills can be expensive ($30 late fees aren’t uncommon) and can trigger higher interest rates, sometimes approaching 30 percent. Also, ask how long a grace period you have before interest begins accruing on new purchases.

Accelerate your payments. It can take years to erase a debt by paying only the minimum amount due – an extra $50 a month can make a significant dent in the payoff time and interest paid. Try bringing your lunch to work, avoiding impulse buys and saving gas by planning errands more carefully – you’ll be surprised how it adds up.

Talk to your creditors. Call your creditors before you miss a payment and they resort to credit collection. They’d much rather work with you directly and may be willing to work out a suitable repayment plan or even lower your interest rate to match other offers. For competitive loan rates, go to www.bankrate.com.

Be smart about balance transfers. Consolidating debt from several cards into a new account or with a home equity loan may lower your interest rate, but read the fine print carefully for limited introductory rate periods, higher rates for new purchases, early payment penalties and other fees.

Consider credit counseling. The National Foundation for Credit Counseling (www.nfcc.org) is a national non-profit counseling network whose members help people deal with stressful financial situations. The Federal Trade Commission (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm) also offers instructions on how to repair your credit, as well as scams to avoid such as so-called credit-repair clinics.

Repairing your credit won’t happen overnight – you need to establish a history of sound financial behavior first. But the sooner you start, the sooner you can fix what’s broken.