Credit Crunched? Here's How to Fix It

Most people know that credit cards, like the force, can be used for good or ill.

Used properly, they help manage cash flow and cover families in an emergency situation (such as an unexpected car repair. They also let attentive folks put all their bills in one place (on the card), earn rewards (like airline miles) and then pay it all off with only one check per month. But that isn't how most people use credit cards. Most families (60 percent per the last government survey) carry a balance each month on their credit cards. Those balances add up, cost interest payments that can be as high as 30 percent, and lower credit scores of millions of Americans every day. Those lower credit scores cost Americans, with higher interest rates on car or home loans — if they can even get approved at all. How much debt Americans owe to various credit card lenders depends on how you go about calculating it. If you factor in all American households, the average American household has almost $7500 in credit card debt. But that does not factor in folks who have no debt from credit cards. If you look solely at people who have cards, the average United States household owes $15,799 in credit card debt. Let's assume for a minute that you're one of the unfortunate ones who finds yourself trapped in a credit crunch: you want to take advantage of low rates and prices to buy a home, but can't get approved for a loan because of a low credit score. How do you fix that? The government, via the Federal Reserve, offers five tips on how to improve your credit score.

Despite what you might hear on television about free credit reports, there is only one source for a truly free credit report:

. By law, that website will provide you with one credit report per year from each of the three major credit reporting agencies. Any other website that offers a similar service is almost certainly a scam or is signing you up for another service in exchange for the credit report. Stick to

to be safe. You can also call 877-322-8228 or complete the

and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Once you get the report, look over it carefully. Make sure that each item on their is an account you own. Make sure that closed accounts show up as closed, and that there are no past due items. Uncovering, and fixing, a mistake can save you thousands in interest charges on a home or car.

Believe it or not, it isn't just credit cards and auto loans that show up on your credit report. That cable bill you refuse to pay? It shows up as a delinquent account. Same for the gym membership you never paid, or the cell phone contract you never fulfilled. Just about any bill that's unpaid can be reported to a credit agency, which will lower your score significantly.

How your credit score is calculated might change how you go about fixing it. It's sort of like when you were in school, and you had to figure out how to improve your grades. Does the instructor measure mostly attendance and homework? Is it exams? Essays? Knowing how you're graded goes a long way toward figuring out how to get graded more highly. To that end, there are five items that factor in to your credit score.

The Federal Trade Commission offers a free publication (

) that goes through the steps on how to correct errors or fraud on your credit report. Use it to fix any screwups, which will improve your score.

Some credit-repair agencies are a ripoff or a scam, and it can be hard to know which ones are reputable and which ones are not. For the most part, you can navigate the credit-report waters by yourself if you stick to official sources and government documents. I've done it before, and it's really not that hard. If you are going to use a service, utilize this publication

to help determine if you're setting yourself up to be scammed.