Getting a Credit Card Early Can Save You Money Later On

Getting a credit card relatively early in life, and then using it responsibly, can help you build a solid credit history. This relatively simple move can provide you with a respectable credit score that can translate into major savings. On the flip side, it can cost you significantly over the course of your life to have a bad credit score, or not have a credit score at all.

Consumers should be aware that their credit score is a major factor when qualifying for a loan, renting an apartment, or even getting hired for a job. Additionally, a credit score impacts how much consumers pay in interest charges, for insurance, and even for cell phone contracts.

There are a number of groups you will encounter during your lifetime that will pay close attention to your credit score. Making a good impression through consistent, conscientious use of your credit cards will build a credit history that they will find impressive and will help you save money.

Lenders make up the primary group who look at credit scores. For lenders, a good credit score can translate into the best rates on a credit card, mortgage, car loan, or small business loan. Meanwhile, without a credit score, qualifying for a loan or credit card might be impossible.

Insurers will also consider you credit score -- among them the majority of auto insurers as well as home insurers. According to a recent Consumer Reports survey of eight popular auto insurers, it was shown that drivers with the highest credit scores could pay as much as 31% less on their premiums than if credit scoring wasn't considered, while drivers with low scores would pay up to 143% more than if credit scoring wasn't considered.

Meanwhile, landlords are increasingly deciding whether to rent out apartments based on the applicant's credit score, since they see a credit rating as a way to determine whether you pay your bills on time. Without a credit score, or with a low credit score, you could end up needing to find a co-signer for your lease. Alternately, you might end up being asked for a higher rent or security deposit.

Job applicants may find that their potential employers give them notice of plans to look over their credit report, with the Society for Human Resource Management reporting that 35% of employers pull credit reports on potential hires. Employers may consider bad credit to signal irresponsibility, or they may worry that employees with financial problems will be distracted while on the job.

Nowadays, even your cell phone provider may use a look at your credit report to guarantee your reliability when it comes to bill paying. With a poor credit history, that could mean you do not qualify for the best cell phone rates. Separately, you might have to pay a deposit, or you could get refused a contract.

So what's a consumer to do in order to build the best possible credit history? Students may want to apply for a student, using the credit card to occasionally make purchases, then paying off the balance every month. It is often easier to qualify for a credit card while in school than after graduation, since credit card issuers assume that parents can lend a hand if their child gets into too much debt.

For those adults who are not in school or are wary of applying for a full-fledged credit card, a secured credit card like the New Millennium Bank Secured Platinum Visa or MasterCard can help them begin building a credit history. After a year of on time payments with a secured credit card, you should have enough credit history to get an unsecured credit card and get your deposit on the unsecured card returned.

There are a number of credit cards for people with bad credit that can also help you to start building or improving your credit history.

Even if you do intend on applying for a loan, renting an apartment, or getting an insurance policy sometime soon, by building a solid credit score now, you have it when the time comes that you need it.

After all, someone who starts their credit history early and makes payments on time, never maxes out their credit cards, and pays more than the minimum balance each month can end up paying thousands of dollars less down the road than a similar consumer who is irresponsible with their credit.

Your Credit Card May Protect You from Rental Car Damage

As anyone without plastic knows, it can be tough to rent a car without a major credit card. However, the benefit of renting a car with plastic is that you may be able to pass on the collision protection the rental agency tries to sell you, since your credit card may automatically provide this coverage.

The protection sold by the car rental agency is generally known as collision damage waiver (CDW), and is an agreement under which you are not liable for loss or damage provided you follow certain conditions. But at $15 to $25 a day, you may prefer to forego this option.

Luckily, you often can. Even if your regular auto insurance doesn't cover your rental car, your credit card may provide ample protection. Many credit cards offer collision protection, at no additional cost, when you pay with plastic. And, if your credit card covers collision damage, it will also include loss-of-use and towing charges.

For American Express, the rules are similar, with a credit card that covers CDW also covering loss of use. A MasterCard may or may not cover CDW depending on the bank issuer. However, a MasterCard that covers CDW will also cover loss of use.

If you rent a car in your home country, most credit card CDW is secondary, paying only what your regular auto insurance won't cover after you file a claim. When you rent abroad, the credit card CDW is primary (the credit card pays your entire claim), so there is no need to ever involve your other insurance. However, be aware that some countries you drive in may require you to purchase CDW from the rental agency, even if your credit card offers coverage, and that not all rental companies accept credit card CDW.

For cardholders that carry one of a few specially negotiated credit cards from American Express, Visa, and MasterCard, primary CDW is provided on all rentals, including those in the U.S.

Consumers who use a personal AMEX credit card but want primary coverage when renting with their plastic can opt for "Premium Car Rental Protection," which provides primary CDW, as well as accidental death and dismemberment insurance and secondary medical and personal property insurance.

Premiums begin at $19.95 per rental, regardless of length, with higher-coverage options available at a higher cost. Enrollment is free and coverage will apply automatically every time you rent. This offering from AmEx can be a good choice is you usually rent cars for two days or more.

If you plan to rent a car, find out if your credit card issuer provides CDW, if it applies in the countries you will be driving your rental car, exactly what is covered (personal injury or personal property may not be included), if there are any restrictions and limitations that apply, the maximum number of rental days CDW will cover, the types of vehicles covered, and how the claim procedure works.

You may want to discuss the worst-case scenario with your credit card issuer. Additionally, you may want to request a copy of the credit card issuer's insurance policy. That way, you have in writing exactly what is and is not covered before you decline CDW from the car rental agency.

By accepting coverage from the car rental agency, you automatically forgo any coverage supplied by your credit card. Conversely, when you decide to use the CDW offered by your credit card, you will need to decline the rental agency's protection. As a result, some rental companies may view you as technically liable for the entire deductible, which may equal the cost of the rental car.

Therefore, these agencies could put a hold on your credit for the value of the car, essentially freezing part of your line of credit. Find out how much any hold will total and when it will be removed. To keep from tying up your credit, you can use one credit card for car rentals and hotels, and another credit card for making daily purchases. If you don't have enough credit left on your card to cover the value of the car, you may have to buy CDW insurance.

Minimum Payments Are Not Your Friend

If you are like most Americans, it is not uncommon to have spent a bit more on your credit card each month than you have coming in your paycheck. That has simply become a fact of life in our consumer culture. The instant gratification habit has overwhelmed our better judgment when it comes to managing our personal finances.

And, it can be equally common for Americans to rely on the ubiquitous "minimum payments" option to keep the credit card companies at bay for another month. That credit card minimum payment is now averaging 4%, by the way, up from the old industry standard of 2% of outstanding balances. This change was foisted on the banking industry by a congress that was nervous of the financial and political impact of an indebted credit card constituency.

But, even with a doubling of the minimum payment rate, it can still take many, many years before a debt is paid down at that rate. It is simply imperative to begin aggressively attacking the principal of the debt and not just service the interest payments. Otherwise you will be on a perpetual treadmill of credit card debt.

The tried and true credit card debt elimination strategies still hold true, even in today's fast paced world. They are to simply stop adding fuel to the fire and begin chipping away at the core problem. For example, if you have $9,000 of outstanding credit card debt at 14% interest (the national average by the way), the best approach is to stop using your credit cards for new purchases and transfer the balances to a low interest credit card. Then, begin aggressively paying down that new credit card (which you will not use for new purchases, either). Without the burden of interest payments, coupled with a little financial self-discipline, you will be amazed at how quickly you will find yourself coming up for fresh air and becoming debt free.

But what if you think you really need all those existing credit cards to get through life? Well, it's probably okay to keep one in a drawer for emergencies, but having a wallet full of high interest credit cards is not a good idea for anyone. And, it's especially not a good idea for someone in serious credit card debt. Simply put yourself on a credit card diet and begin paying for things with a debit card, check or cash.

And, concerning how to approach financial self-discipline, a good first step is to try writing down everything you spend for 30 days. This can be a very illuminating exercise because it will show you how much money you (like most of us) waste each month on unnecessary purchases. By simply eliminating just a portion of these daily expenditures (whether it is skipping the $3 Starbucks double latte or deciding to eat lunch at your desk instead of going out), you can save an amazing amount of cash each month. And, if you can further discipline yourself to apply these savings to your credit card debt, which by now you have wisely transferred to a 0% APR credit card, you can become debt free in record time.

How To Compare Credit Card Options For Those With Bad Credit

Comparing credit card options may seem like a difficult exercise for those with bad or less than perfect credit. It seems like all the major Visa and MasterCard issuers along with Discover Card and American Express prefer to only cater to those with good credit. While the major banks and credit card companies definitely feel comfortable dealing with those with the best credit many offer credit alternatives to those with less credit history or less than perfect credit.

The spectrum of options runs from standard unsecured credit cards with relatively low interest rates to those with higher risk-adjusted rates to secured credit cards and finally to prepaid debit cards. How to determine what is right for you? It's probably best to determine how you plan to use a credit card and then start looking at your product options. If you only need a card for emergencies or to book travel arrangements that require a credit card perhaps a prepaid debit card is the best option. Our section on Prepaid Debit Cards provides a comprehensive listing of leading issuers of these cards.

If you need to use the card as a short-term borrowing vehicle then a standard credit card would best meet those needs. But if your credit isn't the best you might end up paying a fairly high interest rate for that privilege. Make sure the cost of those borrowed funds is worth the expense in the long run because if you revolve a balance for very long and only make minimum payments whatever you purchase on the card will be very expensive. Usually borrowing for discretionary items like clothes, vacations or home electronics doesn't meet the "needs" criteria.

Some banks offer incentives like rewards, cash back or airline miles on their credit cards. Many banks will charge an annual fee for higher risk accounts along with a higher interest rate. If you don't carry a balance and don't incur the high finance charges this type of credit card can be a good option since the rewards you earn will offset the annual fee expense.

Finally, secured credit cards can be a good option if you want a credit card and are willing to make an initial deposit as collateral against the assigned credit line. Once you have established a good payment history the credit card issuer will begin to extend credit so that it turns into a true credit line. And, since your funds on deposit earn interest you are putting your money to work at the same time. Secured credit cards are a good way to initially build or rebuild credit since it is a low risk proposition for the bank and gets you started in the process of making timely payments which are reported to the credit bureaus.

Good Credit vs. Bad Credit: Why Is This Important?

There are a lot of misconceptions, even outright lies, regarding credit, especially in terms of what determines good and bad credit. Currently, television is full of commercials for debt consolidation companies and credit counselors. Daytime talk shows abound whose premise surrounds people who have gone bankrupt by using credit cards. Many of these stories are extreme examples of what can happen to people with bad credit, but they still do not answer the million-dollar question: What is the difference between good vs. bad credit and how does this relate to getting a decent credit card deal?

Good Credit

Credit, especially good credit, is very important. It affects almost every major buying decision in our lives. Good credit can help us get a good rate on a credit card, car loan or home mortgage. It can also help us when it comes time to sign an apartment lease agreement or maybe even get a new job. But how do you get good credit?

Getting Good Credit - This may sound odd, but to get good credit, you have to have credit. This is not as confusing as it seems. Good credit ratings are gained when you borrow money from a financial group, such as a bank or credit card company, and pay it back on time and for the full amount. For example, let’s say you have a credit card from a gas station that you use only for gas because you don’t carry a lot of cash around. Each time you go to the station, you use your card to fill up your car. In so doing, you are promising to pay the credit card company back when you get their statement. When the statement arrives each month, you pay off the amount owed on time. The gas company that issued your card then reports to a credit bureau that you have paid on time and for the right amount. The more good reports that go to the credit bureau, the better your credit.

Benefits of Good Credit - Having a good credit report enables you to borrow more money at better interest rates. Why? Because the banks know that based on your credit history you are a responsible person. Many potential employers also look at credit reports as a way to judge a person’s responsibility. Hence, your good credit may even help you land a new job.

Bad Credit

There is nothing good about bad credit. It is the exact opposite of good credit. While good credit helps you qualify for car and home mortgage loans, bad credit could keep you from being able to buy these large-dollar items. It will also keep you from qualifying for credit cards and may possibly hinder your ability to rent a house or apartment.

Getting Bad Credit - It is very easy to get bad credit. Bad credit ratings happen when a person does not pay back money borrowed on time or when that person simply doesn’t pay it back at all. There are varying degrees of bad credit. A person is not automatically given a bad credit rating if he misses a payment or is late a time or two. However, if a person is continually late or he does not make a payment for several months, his credit rating will be affected and could possible hurt him in the future.

Fixing Bad Credit - Credit ratings, even bad ones, can be improved and fixed. Depending on the situation, with responsible credit usage and prompt payments, bad credit can turn into good credit over time. The first step is to understand what your credit rating is by pulling your credit report. Credit reports are available through one of the three major US credit bureaus: Experian, Equifax, and TransUnion. Understanding your credit report will help you determine if there are errors. It will also make you aware of what steps you need to take to improve your credit. Credit is a necessary part of our society. While good credit will help a person improve his quality of life, bad credit can hinder his ability to do so. If you have concerns about understanding your specific credit situation, talk to a financial or tax advisor to help you take the next step and work towards getting and keeping good credit.

How to Dispute Credit Report Errors

Credit Report Basics

Your credit report contains information about where you work and live and how you pay your bills (especially credit card bills). It also may show whether you've been sued or arrested or have filed for bankruptcy. Companies called consumer reporting agencies (CRAs) or credit bureaus compile and sell your credit report to businesses. Because businesses use this information to evaluate your applications for credit, insurance, employment, and other purposes allowed by the Fair Credit Reporting Act (FCRA), it's important that the information in your report is complete and accurate.

Some financial advisors suggest that you periodically review your credit report for inaccuracies or omissions. This could be especially important if you're considering making a major purchase, such as buying a home. Checking in advance on the accuracy of information in your credit file could speed the credit-granting process.

Getting Your Credit Report

If you've been denied credit, insurance, or employment because of information supplied by a CRA, the FCRA says the company you applied to must give you the CRA's name, address, and telephone number. If you contact the agency for a copy of your report within 60 days of receiving a denial notice, the report is free. In addition, you're entitled to one free copy of your report a year if you certify in writing that (1) you're unemployed and plan to look for a job within 60 days, (2) you're on welfare, or (3) your report is inaccurate because of fraud. Otherwise, a CRA may charge you up to $9.00 for a copy of your report.

If you simply want a copy of your report, call the CRAs listed in the Yellow Pages under "credit" or "credit rating and reporting." Call each credit bureau listed since more than one agency may have a file on you, some with different information. The three major national credit bureaus are:

Equifax, P.O. Box 740241, Atlanta, GA 30374-0241; (800) 685-1111.

Experian , P.O. Box 2002, Allen, TX 75013; (888) EXPERIAN (397-3742).

Trans Union, P.O. Box 1000, Chester, PA 19022; (800) 916-8800.

Correcting Credit Report Errors

Under the FCRA, both the CRA and the organization that provided the information to the CRA, such as a bank or credit card company, have responsibilities for correcting inaccurate or incomplete information in your report. To protect all your rights under the law, contact both the CRA and the information provider.

First, tell the CRA in writing what information you believe is inaccurate. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request deletion or correction. You may want to enclose a copy of your report with the items in question circled. Your letter may look something like the sample below. Send your letter by certified mail, return receipt requested, so you can document what the CRA received. Keep copies of your dispute letter and enclosures.

CRAs must reinvestigate the items in question--usually within 30 days--unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so they can correct this information in your file. l Disputed information that cannot be verified must be deleted from your file.

If your report contains erroneous information, the CRA must correct it.

If an item is incomplete, the CRA must complete it. For example, if your file showed that you were late making payments, but failed to show that you were no longer delinquent, the CRA must show that you're current. If your file shows an account that belongs only to another person, the CRA must delete it. When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider.

Also, if you request, the CRA must send notices of corrections to anyone who received your report in the past six months. Job applicants can have a corrected copy of their report sent to anyone who received a copy during the past two years for employment purposes. If a reinvestigation does not resolve your dispute, ask the CRA to include your statement of the dispute in your file and in future reports.

Second, in addition to writing to the CRA, tell the creditor or other information provider in writing that you dispute an item. Again, include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct-that is, if the disputed information is not accurate-the information provider may not use it again. Accurate Negative Information When negative information in your report is accurate, only the passage of time can assure its removal. Accurate negative information can generally stay on your report for 7 years. There are certain exceptions:

Information about criminal convictions may be reported without any time limitation. Bankruptcy information may be reported for 10 years. Credit information reported in response to an application for a job with a salary of more than $75,000 has no time limit. Credit information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit. Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. Criminal convictions can be reported without any time limit.

Adding Accounts to Your File

Your credit file may not reflect all your credit accounts. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to CRAs: Some travel, entertainment, gasoline card companies, local retailers, and credit unions are among those creditors that don't. If you've been told you were denied credit because of an "insufficient credit file" or no credit file" and you have accounts with creditors that don't appear in your credit file, ask the CRA to add this information to future reports. Although they are not required to do so, many CRAs will add verifiable accounts for a fee. You should, however, understand that if these creditors do not report to the CRA on a regular basis, these added items will not be updated in your file.

Sample Credit Dispute Letter

Following is a sample letter that could be used to dispute a an inaccurate credit report.

Date

Your Name

Your Address

Your City, State, Zip Code

Complaint Department

Name of Credit Reporting Agency

Address City, State, Zip Code

Dear Sir or Madam:

I am writing to dispute the following information in my file. The items I dispute are also encircled on the attached copy of the report I received.(Identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.)

This item is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.

Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.

Sincerely,

Your name

Enclosures: (List what you are enclosing)

Repairing Credit Card Debt

Having trouble paying your bills? Getting notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car? Repairing credit card debt isn't as hard as you may think.

You're not alone. Many people face financial crises at some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or simple overspending, it can seem overwhelming, but often can be overcome. The fact of the matter is that your financial situation doesn't have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Self Help

Developing a Budget: The first step toward taking control of your financial situation is to do a realistic assessment of how much money comes in and how much money you spend. Start by listing your income from all sources. Then, list your "fixed" expenses-those that are the same each month-such as your mortgage payments or your rent, car payments, or insurance premiums. Next, list the expenses that vary, such as entertainment, recreation, or clothing. Writing down all your expenses-even those that seem insignificant-is a helpful way to track your spending patterns, identify the expenses that are necessary, and prioritize the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Your public library has information about budgeting and money management techniques. Low cost budget counseling services that can help you analyze your income and expenses and develop budget and spending plans also are available in most communities. Check your Yellow Pages or contact your local bank or consumer protection office for information about them. In addition, many universities, military bases, credit unions, and housing authorities operate nonprofit counseling programs.

Contacting Your Creditors: Contact your creditors immediately if you are having trouble making ends meet. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don't wait until your accounts have been turned over to a debt collector. At that point, the creditors have given up on you.

Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. It states:

• A debt collector may not call you between 8 A.M. to 9 P.M.
• A debt collector may not call you at work if the collector knows that your employer doesn't approve of the calls.
• Collectors may not harass you, make false statements, or use unfair practices when they try to collect a debt.
• Debt collectors must honor a written request from you to cease further contact.

Credit Counseling

If you aren't disciplined enough to create a workable budget and stick to it, can't work out a repayment plan with your creditors, or can't keep track of mounting bills, consider contacting a credit counseling service. Your creditors may be willing to accept reduced payments if you enter a debt repayment plan with a reputable organization. In these plans, you deposit money each month with the credit counseling service. Your deposits are used to pay your creditors according to a payment schedule developed by the counselor. As part of the repayment plan, you may have to agree not to apply for-or use-any additional credit while you're participating in the program.

A successful repayment plan requires you to make regular, timely payments, and could take 48 months or longer to complete. Ask the credit counseling service for an estimate of the time it will take to complete the plan. Some credit counseling services charge little or nothing for managing the plan; others charge a monthly fee that could add up to a significant charge over time. Some credit counseling services are funded, in part, by contributions from creditors.

While a debt repayment plan can eliminate much of the stress that comes from dealing with creditors and overdue bills, it does not mean you can forget about your debts. You still are responsible for paying any creditors whose debts are not included in the plan. You are responsible for reviewing monthly statements from your creditors to make sure your payments have been received. If your repayment plan depends on your creditors agreeing to lower or eliminate interest and finance charges, or waive late fees, you are responsible for making sure these concessions are reflected on your statements.

A debt repayment plan does not erase your credit history. Under the Fair Credit Reporting Act, accurate information about your accounts can stay on your credit report for up to seven years. In addition, your creditors will continue to report information about accounts that are handled through a debt repayment plan. For example, creditors may report that an account is in financial counseling, that payments may have been late or missed altogether, or that there are write-offs or other concessions. A demonstrated pattern of timely payments will help you obtain credit in the future.

Auto and Home Loans: Debt repayment plans usually cover unsecured debt. Your auto and home loan, which are considered secured debt, may not be included. You must continue to make payments to these creditors directly.

Most automobile financing agreements allow a creditor to repossess your car any time you're in default. No notice is required. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. If you can't do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You would avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who's having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city, or county for help in finding a housing counseling agency near you.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Think carefully before taking this on. These loans require your home as collateral. If you can't make the payments-or if the payments are late-you could lose your home.

The costs of these consolidation loans can add up. In addition to interest on the loan, you pay "points." Typically, one point is equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Bankruptcy

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes get a job. However, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge-a court order that says they do not have to repay certain debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. The current fees for seeking bankruptcy relief are $160: a filing fee of $130 and an administrative fee of $30. Attorney fees are additional.

Chapter 13 allows persons with a steady income to keep property, like a mortgaged house or a car, that they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off a default during a three-to-five-year period, rather than surrender any property. After you have made all payments under the plan, you receive a discharge of your debts.

Known as straight bankruptcy, Chapter 7 involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools and basic household furnishings. Some of your property may be sold by a court-appointed official-a trustee-or turned over to your creditors. You can receive a discharge of your debts through Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

Damage Control

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. Be cautious. Before you do business with any company, check it out with your local consumer protection agency or the Better Business Bureau in the company's location.

Some businesses that offer debt counseling and reorganization plans may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing either to explain certain costs or to mention that you're signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a Chapter 13 bankruptcy, tell you everything that's involved, or help you through what can be a complex and lengthy legal process.

In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on advance-fee loan guarantees. They may be illegal. Many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that the consumer will get the loan-or even represent that it is likely. Under the federal Telemarketing Sales Rule, a seller or telemarketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or receive payment until you've received the loan.

You should also avoid credit repair clinics. Companies coast to coast appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. They don't deliver. What's more, they can't deliver: They can't do anything for you that you can't do for yourself. After you pay them hundreds-or even thousands-of dollars in up-front fees, they can do nothing to improve your credit report. Indeed, many simply vanish with your money. Only time and a conscientious effort to repay your debts will improve your credit report.

If you're thinking about getting help to stabilize your financial situation, be cautious. Find out what services the business provides and what it costs. Don't rely on oral promises. Get everything in writing. Check out any company with your local consumer protection office and the Better Business Bureau in the company's location. They may be able to tell you whether other consumers have registered complaints about the business.

Cleaning Up and Repairing Your Credit Rating

It can happen to anyone. You get a credit card and start spending beyond your reach, or someone gets a hold of your social security card or an old credit card and opens up new cards in your name. The question is not how this happened, but what you can do now to clean up and start repairing your credit rating.

As you start to clean and repair your credit rating, be aware that some companies may try to take advantage of you. They may offer programs and books that, for a fee, will "erase" your bad credit. These books and companies cannot efface your credit card debt. There is no one solution or service that will suddenly fix all your credit problems. Good credit comes from good credit practices over time - especially concerning credit card payments.

Cleaning Up Your Credit Rating – Check your credit history. There are three national credit bureaus from which you can obtain a copy of your credit history. This report will give you a complete picture of your current credit situation and will allow you to check for inaccuracies. Any inaccuracies you find should be corrected immediately by contacting the creditor with whom the error resides.

Don't apply for many credit cards over a short period of time – A lot of inquiries in a short period of time looks bad and can impact your credit rating. This doesn’t mean you can’t shop around for the best deal on car loans or other larger purchases, but you should minimize the number of credit cards for which you apply, such as store or other promotionally motivated cards. As long as your inquiries for an automobile or mortgage deal are all within a 30-day period, many credit scoring programs and creditors will disregard the multiple inquiries or consider them as a single inquiry.

Know how much you owe – You should always know exactly how much you owe on your credit cards. If you have several cards with balances close to their limit, creditors might worry that you are living beyond your means. In general, debt of 75% or more of your total available credit does not look good. If you are high on your balances, concentrate on paying them down before charging more.

Close inactive or old accounts – There is no reason to keep an account open that you don’t use anymore. Banks and credit companies look at your total debt potential when determining whether or not to approve you. An old open account could cause you problems; therefore, the fewer accounts you have open, the lower a risk you are to your potential creditors. See Do’s and Dont's of Closing Accounts for more information.

Repairing Your Credit Rating Open a gas or department store credit card – If you have some serious credit issues from the past, a gas or department store can help you start repairing your credit rating. By using the card regularly and making your payments on time, you will establish yourself as a careful credit user.

Pay down balances – Paying down your current credit card balances will go a long way toward repairing your credit rating. If these payments are beyond your means, contact the credit card company directly to discuss your options. It is better to be upfront and honest with them than to avoid payments altogether. Typically, once an account goes to a collection service, the credit card company will not be able to work with you. Instead, you will be causing more damage to your credit rating.

Be responsible – How good your credit rating is or is not depends on you. Be responsible with your spending habits and know when it is good and not good to use credit.

Discuss your options with a financial advisor – A financial advisor can help you determine a strategy for managing your debt. S/he can offer options on how best to repair your credit rating with your current financial resources.