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While it's possible to get by without credit, having good credit is often essential for buying a home, financing a car, starting phone service, getting a credit card or obtaining a job. The good news is that it's never too late to clean up your credit and start to build a positive credit history. What's more, once your credit record is on track, you'll have access to some of the opportunities and the financial safety net that good credit provides.
According to Evelyn Chase, a Denver-based CPA and personal finance consultant, as with any type of problem or illness, the first step toward implementing a cure is identifying and/or accepting the fact that there is a problem. If your credit problems are a result of something beyond your control, such as catastrophic illness, job loss, etc, there may be nothing to admit - you will simply have to take the steps necessary to pick yourself up off the ground to start over. If instead, your damaged credit is a result of compulsive behavior, you may need to seek counseling. For those who have jammed themselves up due to undisciplined behavior, lack of caring or bad record keeping, the first step is taking responsibility for your actions.
Whatever the reason for your bad credit, and depending on how serious your past and present credit problems are, it will take time and patience to establish good credit. If you have a slightly damaged credit history, with only a few late payments, you may be able to bring your accounts up to date and improve your credit in just a few months.
On the other hand, issues such as judgments, bankruptcies, foreclosures, etc., are likely to remain on your credit file for years to come (seven to 10 years in most cases). Despite that fact, you can begin to negate their impact and within a few short years see your history much improved and your credit scores rise considerably.
The next step is to obtain and review your credit report from each of the three national credit bureaus - Experian, Equifax and TransUnion - and determine if the information contained is accurate. Any information that is not accurate should be immediately reported to the national bureau reporting the inaccurate information.
Next, you want to focus on the negative information you believe probably should be on your report to ensure it is completely accurate. "Negative information will hurt your report one way or another, but it still needs to be accurate," says Chase. "What you want to focus on here is making sure that a paid charge-off or other such debt that you paid off is so noted - if not, the 'paid' status needs to be updated to accurately reflect where the account stands currently."
According the Chase, you may find that some of the information, while accurate, is dated and legally should not appear on the report. Whatever you do or don't find, she suggests you exercise your right to add a 100-word explanation for any problem account listed in your report, ensuring that those people requesting your credit report will also get a copy of your statement.
"Even after that is done, you'll probably still be looking at a damaged credit report that accurately details items such as late- or non-payments, charge offs, bankruptcies, foreclosures, court judgments, etc.," notes Chase. "Unfortunately, accurate information cannot be disputed or removed. The only thing the individual can do is create a pattern of 'on time' payments and meeting obligations. Over time, this type of 'more-recent' behavior will begin to compensate for any delinquent behavior in the distant past."
Now comes the hard part - dedicating yourself to the plan, tightening the belt and exercising patience. The first step in this phase requires either paying off or paying down outstanding debt, especially any debt that is reported as a write-off or past due. Unpaid debts are among the most damaging items on your credit report, so this is an important step in the rebuilding process.
Start by deciding on a realistic payment schedule that will allow you to begin repaying delinquent debt while continuing to maintain a positive status with those creditors with whom you are still in good standing. You'll find that most lenders and collection agencies will work with you to set up a reasonable payment plan. Once you set up your plan, do everything possible to make all payments on time - doing so will demonstrate you are serious and will tell potential creditors you can be trusted. Keep in mind that whether you plan calls for repayment over several months or several years, this is the most critical aspect of rebuilding your credit, so you have to remain patient and diligent during this period.
Once you are on tract with your payments, you'll want to eventually open one to a couple new accounts to help in the rebuilding process. To do so you will probably need to apply for a credit card and/or small loan from your bank, credit union or a local department store. Explain that you have had credit problems, but that you are serious about improving your credit history.
If you're rejected, move on to Plan B, which is to apply for a secured card (generally requires a deposit that acts as your credit line). Using a secured card on a regular basis and paying it off monthly "in full" can lead to a traditional line of credit. Once the bank or credit union sees that you are capable of maintaining your secured account, they may extend an offer to you with a fair interest rate.
Another alternative is to ask a relative or friend with good credit to co-sign for a credit card or small loan. Whether you go the secured route or use a co-signer, you should recheck your credit report somewhere between a year and 18 months after establishing the new accounts. This will ensure all information is correct and up to date. At that point, you might want to go ahead and apply for a non-secured card or a loan on your own if you were previously denied.
From that point forward, you can continue to improve your credit report by limiting the amount of credit you request, limiting the amount of available credit you use and always paying your bills on time.
Ultimately, there are no tricks or quick remedies when it comes to rebuilding your credit, despite what many credit repair agencies claim. The reality is that it simply takes time, dedication and discipline. After a relatively short period of time demonstrating that you take your debts seriously and can be trusted, potential creditors will begin to take notice of you once again.
Where to go to obtain your credit report and to report errors within your files: