Improving a bad credit rating

The radio ad had an unsettling tone: If you are a homeowner, the announcer said, you can get a loan for any purpose. Your credit history, no matter how bad, ``doesn't matter.'' Credit histories do matter, of course, and people who have had trouble paying off debts, whether through their own negligence or circumstances beyond their control, know what a burden a bad credit record can be. Rebuilding a good credit history is a methodical and time-consuming process, and while there are some shortcuts, this one aimed at homeowners should be approached with particular caution.

``We are generally concerned about this kind of practice,'' said Phoebe Morse, director of the Boston office of the Federal Trade Commission. ``People are taking out a second mortgage, and they often don't know what they're getting into.

``What they're doing is putting a lien on their house, and if they're having trouble paying their bills to start with, they may continue to have trouble and lose their house to boot.''

It is, of course, better to avoid a bad credit history in the first place. That is not as difficult as many think, Ms. Morse notes.

``You're in better shape if all you do is send in $5 a month, even if you owe $150,'' she says. ``This at least gives the impression that you're not a deadbeat.''

So while your credit record may show you are behind in your payments, it won't show you not making any payments.

It is possible, however, that your credit record is incorrect. You are entitled by law to correct any inaccurate information in your record.

If a lender rejects your application because of a bad report from a credit rating agency, you should be able to see that information free of charge. If you're just curious, the look-up only costs about $5 or $10.

If the information on that report is just plain wrong, see that it's corrected. On the other hand, the information may be correct but lacking an explanation of extenuating circumstances. You can add that explanation, making it part of the credit bureau report.

If all that negative information in the report is correct, though, and there are no extenuating circumstances, the best remedy is time.

Credit bureaus can report bankruptcies for 10 years and other negative information for seven years. So until this time is up, there's nothing you can do to remove it.

Ads aimed at people with bad credit records or promises to ``clean up'' a credit history are probably misleading.

The best way to improve your credit history in less than seven years is to do it in small bits, Morse recommends.

``To the extent that you still have any use of your bank card, go out and charge $200 on your Visa and pay it off in a few months,'' she says. ``Or, to the extent you can still use a department store charge card, go out and charge something for $15 and pay it off the next month.''

These are small but significant steps that can show the beginning of improved borrowing habits.

If your credit rating crashed during a particularly bad time, like being out of a job, but you have since paid off your debts, you may be able to get a loan anyway by sitting down with a loan officer at your bank and showing what you've done. This shows both a willingness and an ability to pay, two of the most important criteria in getting a loan.

Other than a small personal loan, the most common type of debt is probably the car loan. In some cases, it is even possible for people with bad credit histories to get an auto loan, if they can show that past problems were not the result of a bad attitude toward debts and that they have the ability to pay.

Should this fail, try the direct route with the car dealer. Many of them arrange financing for their own customers (though the interest rate may be two to four percentage points higher than local banks and thrifts are charging) and they may be willing to go to bat for you with their banks, particularly if it's a high-volume dealer who has brought a lot of good credit risks to the bank. The dealer probably won't act as a co-signer for you, but the effect will be the same.

Speaking of co-signers, Morse says this can be another, though usually last, resort. If you have a good friend or friendly relative who is willing and financially able to guarantee payment of a debt should you default, you may be able to get the relative to co-sign the loan for you. Assuming you pay off the loan on time and in full, the good marks will go on your credit record.

``This is a very delicate matter,'' she says of using a co-signer. ``But if you've gotten into difficulty, it's probably the most effective way to get out.'' Seeking higher income

I am a retired teacher with $20,000 invested in an insured money market acount at the bank I deal with. The current yield has dropped to about 6.8 percent. I can use extra income and am considering a mutual fund whose assets are in Ginnie Mae and Treasury securities. It appears to be safe and is yielding about 11 percent, though it is not insured. Is this a realistic investment for maximum income and minimum risk?

``It's not a bad trade-off,'' says Sheldon Jacobs, editor and publisher of The No-Load Fund Investor, a newsletter. The securities behind Ginnie Mae and Treasury funds are all guaranteed by the US government, and the funds themselves keep a diverse portfolio that minimizes the effect of any one security slipping in value.

Before investing, ask the fund for the average maturity on the Treasury securities, Mr. Jacobs recommends. If the average maturity is too long, you may not get the best yield, should interest rates start up again.

The fund you're interested in sounds like the AARP GNMA and US Treasury Fund, which just started last year. That should not be a worry, though, since the fund is managed by the Scudder Group in Boston, which manages several other funds for the AARP (American Association of Retired Persons).

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.