Demystifying Credit Scores: Pt 5 Rebuilding Your Credit

This is the last of our series on Demystifying Credit Scores.

Please be sure and read through the other posts, too. 

Start here:  http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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So, your credit score needs a little work?  Okay.  Here are some tips on improving your credit score.

1. Start by knowing what your credit score is.  Go to http://www.myfico.com/ and checking your scores.  You can no longer get your Experian score, but you can get those from TransUnion and Equifax.  These are your base lines.  For mortgages, it will be hard to get a loan if your score is less than 620, and quite honestly, you want it to be over 700 ideally.  If it's over 800, you're done!  Congratulations it probably can not get any higher, so don't sweat it.
2. Next review full copies of your credit report from each of the agencies. (Experian, TransUnion and Equifax).  You can get a free copy from many sites, including http://www.annualcreditreport.com/ and http://www.freecreditreport.com/.
3. Challenge every negative piece of information on any of these reports.... even if it is accurate.
4. Wait for responses.  Do your best to argue why any derogatory information should be removed.
5. Once you've gotten the reports corrected, look at what your most negative things are, like public records and collections.  When were they?  Most negative things fall off your credit report in seven years.  Let's say that 6 years and 9 months ago a collection was placed on your account for $500.  If you want to buy a house next year and are doing this credit repair process in preparation, the WORST thing you can do at this point is to pay it without an outside agreement.  Why?  Well, the reporting period is 7 years from the last date of recorded activity.  If you pay it now, it stays on your credit report for another 7 years starting now.... if you leave it alone, it disappears from your report in six more months.
6. Remember that, outside of public records and collections, it is your most recent activity that is most heavily weighted.  Make sure you are paying as agreed on every active account.  No exceptions.
7. Pay down your balances as best you can.  Part of your credit score is calculated by the balance of all of your accounts compared to the credit limits you have.  If you have $10,000 of credit, but are only using $2,000 of it, that is rated favorably, as it is indicative of someone who has responsible spending habits.
8. It is best to have a mix of types of accounts - Revolving credit (credit cards), and Installment loans (like student loans and car loans). 
9. If you are having trouble getting a credit card, get a secured credit card - put $500 in a bank and get a $500 credit card.  Use it (otherwise it won't be rated) and then pay it off, regularly.  In time, you will be able to have a credit increase and get unsecured credit lines.  But, from a credit rating standpoint, secured accounts are rated exactly the same as unsecured accounts.
10. After taking these actions, check your credit score again in six months.  Then, send me an email and let me know how much your credit score improved!

Congratulations on caring enough to start putting yourself back on the right track toward a healthy credit rating.  Remember, no matter what happened to ruin your credit, you can recover.  Time heals all wounds, including credit score wounds.