Credit and Debt - Special Report

Six Steps To Restoring Your Credit 

By Shelly K. Schwartz,|Special to

It doesn’t take much.

A few late payments to the mortgage company. A forgotten gas card bill and, suddenly, your once stellar credit rating is wallowing in the mud.


In today’s faltering economy, where jobless claims are up and home values are down, such scenarios are all too common as a growing number of consumers fall behind on their debt obligations.

Indeed, the number of personal bankruptcy filings hit 822,590 in 2007, up 38 percent over the 598,000 filed in 2006, according to the Administrative Office of the U.S. Courts.

"People are really getting squeezed right now," says Clare Stenstrom, a certified financial planner with New York-based Bourne Stenstrom Lent Asset Management. "The price of food, gas and everything else is way up and too many people think that their credit limit on their cards is their money. It’s not. It’s borrowed money that you have to pay back with interest."

Even a few missed payments can reduce your credit score substantially, making it harder to borrow money from lenders.

Keeping Score

"People don’t always understand the importance of their credit score," says Jeff Blyskal, senior editor for Consumer Reports. "It raises the cost of credit and can keep you from getting loans."

So what’s a credit score?

Your credit score is a three-digit number generated by analyzing your payment history and debt profile.

Banks and credit card companies use credit scores to determine whether to qualify applicants for a loan and, if so, what rate to charge them. The lower your score, the higher your interest rate.

Many landlords these days also use credit scores to determine whether prospective tenants are eligible to sign a lease.

And car and home insurance companies use them to determine what premium they should charge.

What difference does a few points make? Plenty. With the best credit score, you would generally qualify for the lowest interest rate available—say, 6.30 percent for a 30-year fixed rate mortgage. On a $300,000 loan, that would make your monthly payment $1,857.

By comparison, those with the lowest scores today would qualify for a rate closer to 7.90 percent with a monthly payment of $2,178. Over the life of the loan, that's $115,560 more.

Six Steps To Respectability

Luckily, if your credit rating is less than worthy, there are steps you can take to redeem yourself.

First and foremost, start making payments on time. "Paying on time is the most important thing you can do," says Stenstrom, noting payment history constitutes 35 percent of your total credit score.

Another tip: If you don’t have money for a minimum payment by the due date, but will the following week, pay it next week. "Don’t just double up your payment the next month, which a lot of people do," says Stenstrom. "That makes you 30 days late and that will drop your credit score."

Check Your Report For Errors

You are entitled to a free copy of your credit report every 12 months from each of the leading consumer reporting agencies –

Equifax, Experian
and TransUnion.Don't Borrow Money You Don't Need

Call Your Creditors