The early warning signs of financial trouble can be as obvious as a lost job, a layoff, or a huge medical bill, or as secretive as an addiction. In either case, you and your partner (if you have a partner) should remain on the lookout for these warning signs and work together to build a strong financial foundation that can protect you from foreclosure:

Budget

Make sure you have at least as much money coming in as is flowing out each month. If you have a partner, you and your loved one should agree, upfront, on how much to spend and what to spend it on. When partners are off spending money on their own pet luxuries, problems often arise.

Pay Your Bills

When the bills arrive, prioritize them and pay them as soon as possible, so they don’t stack up. If you have a partner, pay your bills together. Blaming your spouse for overspending is easy when you don’t know how much it costs to heat your house or feed your family. You both need to be aware of where the money’s going, so you can hold yourselves, and one another, accountable.

Audit Your Books

Add up all the money you spend each week on nonessentials and try to trim the fat. If you’re teaming up with a partner, determine how much you’re responsible for and how much your partner is responsible for. This shouldn’t be a blame game, but it can open your eyes to any potential spending problems that could leave the checkbook short when it comes time to make the mortgage payment.

Watch for Addictive Behavior

Any addiction can be a problem, including alcohol, drugs, or the Internet. Anything that takes time, energy, and resources away from a paying job and your family (if you’re supporting a family) could cause financial problems. Identify addictions early and nip them in the bud.

If you and your partner can’t have an honest discussion about household finances and troublesome behaviors, then your entire relationship is in jeopardy. Communication is key to avoiding the problem in the first place and recovering from it if avoidance isn’t possible.

Although bankruptcy may be that miracle cure you sought for your financial woes, you may encounter some unpleasant side effects. The disadvantages of filing bankruptcy are:

You can lose assets. Depending on how much your home is worth and where you live, it is possible, but unlikely, that you’ll lose it by filing bankruptcy. In most bankruptcies, debtors don’t have to give up any of their belongings, but…

Bankruptcy is a matter of public record. As more and more records are stored on computers and accessible on the Internet, searching that data becomes easier and easier for anyone who’s interested. In other words, if your nosey neighbor wants to know whether you filed bankruptcy, how much you owe, and who you owe it to, the information may be just a few mouse clicks away,

Bankruptcy affects your credit rating. Bankruptcy may have a negative effect on your credit rating, but that fact may well fall into the “So what?” category for you. Even with a bankruptcy on your record, your odds of obtaining credit are very good. With a little work and perseverance, you can reestablish credit almost immediately. Some credit-card companies actually target folks right after bankruptcy because they know that these people are free of all their existing debts and probably won’t be eligible to file another bankruptcy any time soon.

For a few years after bankruptcy, you may have to pay higher interest rates on new credit, but this result will ease over time, even if your credit report still shows a bankruptcy. So, don’t pay too much attention to the horror stories bill collectors tell you about the disastrous effect bankruptcy has your credit.

Friends and relatives can be forced to give back money or property. If you repaid loans to friends or relatives or gave them anything within the past year, they can be forced to repay a trustee the money they received, if you don’t know what to watch out for. You can usually avoid these kinds of problems by carefully timing your bankruptcy filing.

Bankruptcy can strain relations with loved ones, especially parents who were raised in a different era.

A stigma may still be attached to filing bankruptcy. This drawback is especially true in small communities, but is much less likely to be a problem in cities, where newspapers rarely bother printing the names of non-business bankruptcies.

Bankruptcy may cause more problems than it solves when you’ve transferred assets to keep them away from creditors.

You can suffer some discrimination. Although governmental agencies and employers aren’t supposed to discriminate against you for filing bankruptcy, they may still do so in a roundabout way. Prospective employers may also refuse to hire you.

Right now, when you’re smothered by debt, you may not be able to think about improving your credit history — you’ve got too many other immediate concerns. But tuck this topic into the back of your mind because when you’ve had money troubles, rebuilding your credit history should be one of your first goals. Having a positive credit history is essential to getting new credit with attractive terms.

The credit rebuilding process is quite simple: You get small amounts of new credit and repay the debt on time. For example, you get a MasterCard or Visa card, use it to purchase some goods or services you need, and pay off your card balance according to your agreement with the card issuer. You should also borrow a small amount of money from a bank and pay off the loan according to the terms of your agreement with the lender.

As you do these things, you add new positive information to your credit history. Meanwhile, the negative information in your credit history gradually begins to disappear because, with a few exceptions, most damaging credit record information can be reported for only seven years and six months. As time passes, your credit history will gradually contain more positive than negative information, assuming that you manage your finances responsibly.

Why is rebuilding your credit history so crucial? First, if you have a negative credit report, you won’t qualify for a credit card with a low interest rate, and you’ll have trouble borrowing a significant amount of money from a bank. Here are some other potential consequences of a negative credit history:

• Potential employers who review your credit record as part of the job application process may not hire you. You could also be denied a promotion with your current employer if it checks your credit report as part of the process.
• Life insurance companies may penalize you by charging you a higher premium or not selling you as much insurance as you would like.
• Landlords may not want to rent to you.
• You may not be able to get a security clearance or certain types of professional licenses.

Avoid companies that promise to rebuild your credit or promise to presto chango make all the negatives in your credit history disappear. Not only are you wasting your money, but (depending on the tactics a credit repair firm uses) you also may violate federal law if you do what the firm tells you to do.

Your credit score is based on a collection of factors in your credit reports. The more you know about how your credit repair works, the more steps you can take to keep your score high.

Old is Good

Credit cards have much greater longevity on your credit report than an installment loan. So, avoid closing your oldest credit-card account, even if you never use it.

Debt is Bad

Paying down card balances is one of the most effective ways to improve your credit score.

Timing is Everything

Pay off account balances three to four months before you apply for a loan. Try to keep balances low all the time.

Get Credit Where Due

If a creditor you pay regularly is missing from your credit report, its absence could suppress your score. Ask the non reporting lender to submit the data, which may raise your score.

Mind Your Mix

Credit-scoring models often give more points for responsible handling of national bank credit cards, such as Visa and MasterCard than, say, department-store cards. A mix of installment loans and one or two national bank credit cards will improve your score. Too many of the disapproved types of credit may hurt your score.

Watch Your Inquiries

Each time you apply for a loan, the lender pulls your credit report, which generates what credit bureaus call a “hard inquiry.” Those are the ones that can affect your score. If you’re loan shopping, do so within a 14- to 30-day period to minimize multiple hard inquiries.

Be Careful Online

Avoid regularly applying for loans online just to test what rate you qualify for. Such online activity also generates multiple hard inquiries. Apply for credit only when you need it and intend to open an account.

Choose Good Sources

If you need to open new credit accounts to re-establish your credit rating, make sure you borrow from lenders that report thoroughly and fully to credit bureaus.

While we tend to think that a credit card is a credit card, there are actually three different kinds of cards available today. They are a card offered by a bank, a travel and entertainment card, and a “house card.”

You’ve probably noticed that thousands of banks offer credit cards. And all of those credit cards carry the Visa or MasterCard logo, along with the bank’s name. Visa and MasterCard do not offer credit cards directly to consumers.

Visa is a privately held membership association. It’s owned by 21,000 member financial institutions around the world, and virtually all of those members offer Visa credit cards. Likewise, MasterCard has approximately 25,000 MasterCard, Cirrus and Maestro members worldwide.

These types of credit cards are “revolving” credit accounts. You can pay all or part of your balance each month, pay off the card, run up the balance again and so on. However, your account will come with a preset credit limit, which can be as low as $100, as high as $40,000 — or even higher.

Travel and entertainment cards are different. They are not offered by banks. Instead, they are offered directly by American Express and Diners Club. No matter where you apply for an AmEx or Diners Club card, you will get the same terms and conditions. What’s more, both American Express and Diners Club cards come with no preset spending limit.

In most cases, you will have to pay your balance in full each month on an American Express card. Diners Club is similar, but it gives you two months to pay without incurring penalties (which is designed to appeal to travelers who take long trips).

Both travel card providers also offer many of their customers year-end summaries of their charges, which can be useful at tax time, when tallying travel and entertainment expenses.

Unlike bank cards and travel and entertainment cards, which can be used in a variety of businesses and locations, house cards can be used only at a specific chain of stores. Major issuers of house cards include:

• department stores (Sears is the biggest issuer of house cards, overall),
• oil and gasoline companies, and
• telephone companies.

And then there are specialty cards, like the one you can get at your local tire center.

Like travel and entertainment cards, most house cards come with the same terms and conditions, regardless of where you apply. Like bank cards, most house cards are revolving accounts, so you do not have to pay your bill in full each month.

Now, how money flows to a company when you use your bank or travel/entertainment credit card to purchase a product or service?

First, the company that sells you the product or service has to have a merchant card services account. This account enables the company to accept credit cards.

This is how a basic, retail credit card transaction works: After you or the cashier swipes your credit card through a reader, software at the point-of-sale (POS) terminal dials a telephone number (using a modem or Internet connection) to call an acquirer or processing company.

The acquirer is an organization that collects credit authentication requests from merchants and provides the merchants with a payment guarantee. When the acquirer gets the credit card authentication request, it checks the transaction for validity and the record on the magnetic strip for:

• merchant ID,
• valid card number,
• expiration date,
• credit-card limit, and
• card usage.

Once these items have confirmed, the processing company approves the charge. It is then responsible for making sure the proper bank accounts are debited and credited. And it takes responsibility for resolving errors or fraudulent charges. The processing company doesn’t do this for free. It makes money on every single credit card transaction.

In most cases, the processing company gets both a per-transaction fee and a percentage of each sale (also known as the discount rate). So, to fill in some numbers, when you spent $100 at the flower shop, the processor may have received $0.25 as a transaction fee, plus a small portion of the sale — in this example, $0.022. Of the $100 you paid, the credit card processor got $0.272.

After the transaction has been processed and the money has been allocated to the processor, the $99.728 due to the florist is deposited into the company’s bank account. Some processors also enjoy a “float” period — often one, two or three days during which they hang onto the merchant’s money before depositing it into the bank account.

Some merchants get more favorable terms than others when it comes to accepting credit cards, but the above numbers are fairly common. And for large purchases, the discount rate can take a pretty good bite out of the merchant’s revenue. The reduced income from accepting credit cards does explain why some companies will encourage you to pay them in cash or with a check.

Plus, whenever you use a credit card, there is a risk that you will “charge back” the amount of your purchase — i.e., dispute it with the credit card issuer. The issuer then will go back to the merchant to get a refund, along with a penalty fee (often in the neighborhood of $25).