Your low credit score could be costing you thousands of dollars a year, maybe even more. FICO and other credit-scoring systems are used by creditors to determine how much you can borrow, the interest rates you pay, the cost of life insurance — even, in some cases, whether you can rent an apartment.
If late payments, bounced checks, or bankruptcy have ravaged your credit, here are five steps to restoring your financial health:
Get a secured credit card. If you have a spotty credit history, one of the best ways to repair your credit is to get a secured credit card. These cards require an initial cash deposit as collateral. If you deposit, say, $500, you can charge up to that amount on the card. Making payments on time and in full will help you build better credit.
Visit BankRate.com for a list of lenders offering secured credit cards. Tip: Search for a card with no application fee and low annual charges.
Monitor your "debt-to-income" ratio. Your debt, not including your mortgage, shouldn't exceed 15 percent of your take-home pay, says SmartAboutMoney.org, a nonprofit financial education service.
For example, if you earn $2,500 a month, the amount you owe on credit cards, car payments and other debts should never top $375.
If you're paying more, it may be time to cut back. Pay more than the minimum and read the fine print. About 7 percent of Americans pay only the required minimum on their credit cards, reports Bankrate.com. The bulk of these payments go toward interest on your debt and bank fees. The higher your payment, the more of it goes toward your principal balance. To determine when your APR may be increased and keep interest rates from creeping up on you unexpectedly, read the fine print of your credit card agreement.
Check your credit report annually. Many consumers are paying higher interest rates than they should, because they've failed to correct errors on their credit reports. Get in the habit of checking your report at least once a year to ensure that all of the information is accurate. For information on getting your free credit report, go to FTC.gov.
Hang in there. Negative information on your credit report can typically be reported for seven years. But the more time passes, the less damaging the information becomes. After 10 years everything from late payments to bankruptcy is expunged from your credit report and you effectively start from scratch.
Copyright (c) 2007 MarketWatch, Inc.