Protect yourself from the credit crunch

As the economy continues to falter, many people find themselves trapped in financial limbo: unable to cover their bills (such as adjustable rate mortgages) and not qualified for more favorable interest rates that could help because of lenders' tightening credit standards. Compare that to a few years ago, when just about anyone could secure a mortgage or car loan.

Maintaining a strong credit score has become more important than ever, since anything less could greatly increase interest rates you pay – or even prevent you from obtaining credit in the first place. It could even impact your ability to rent an apartment or purchase a car.

Here are a few tips for strengthening your credit score:

Understand how credit scores work. The three major credit bureaus (Equifax, Experian and TransUnion) track your credit history and activity and use that information to create a three–digit credit score – commonly referred to as a FICO score, after Fair Isaac Corporation (FICO), which developed the proprietary software.

Your FICO score is determined by such factors as your on–time payment record, overall debt amount, credit history duration, ratio of debt to available credit, number of accounts and types of credit used (credit cards, auto loans, mortgages, etc.) Creditors use your score to determine the level of risk involved in lending money to you and set credit limits and interest rates accordingly.

Warning flags that might lower your credit score include:

• Late or insufficient payments for credit cards, loans, utilities and other bills.
• Too many accounts. Think twice before opening unneeded new accounts.
• Maintaining high individual account balances and making frequent balance transfers.
• Closing old accounts. Closing older, unused accounts can backfire because your available credit amount is lowered, thereby increasing your "credit utilization ratio" – the portion of your available credit limit you're actually using.
• Not using existing accounts. Many financial experts recommend occasionally using all open accounts to keep them active (paying off balances right away, of course).
• Unpaid fines or penalties. However miniscule, unpaid library fines, traffic tickets and other civic penalties could show up on your credit report.

Here are several actions that can establish or improve your credit:

• Always pay – on time – at least the minimum due on all bills. Consider signing up for automatic payments if this is a recurring problem.
• Although using lower interest–rate accounts makes sense, don't overburden any particular card or use more than 30 percent of the available credit.
• Open a secured credit card, which is backed by a deposit account you open with the issuing financial institution. Often, you can convert a secured card to an unsecured (regular) card after you've made several on–time payments.
• Carefully review your credit reports. You can order one free credit report a year from each of the three bureaus at www.annualcreditreport.com. Look for errors, omissions and fraudulent activities that could lower your score.
• Consult a financial professional to help resolve your particular situation.

You can purchase copies of your credit scores from each of the three credit bureaus for about $15 each at their websites (www.equifax.com, www.experian.com and www.transunion.com).

Or, if you'd rather just estimate your score, use the free FICO Score Estimator at What's My Score, a financial literacy program run by Visa Inc. (www.whatsmyscore.org/estimator.) The site also features tips on repairing damaged or unestablished credit scores.

Don't let a poor credit score ruin your chances for future financial security.

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