Four Steps to Improving Your Credit

Good credit is something, that like a parachute, is seldom important until you need it --- and getting into situations where credit is needed is the quickest way to ruin it. But once you've decided that debt is an occasional tool for emergencies and situations on the road to financial freedom there are some simple steps you can take to fix your bad score and establish good credit for when you need it.

1. Get a copy of your credit report. You probably know that you're allowed one free copy of your credit report every year. What you may not know is that the best place to get it is from the agency's own website (experia.com, equifax.com, or transunion.com) or from annualcreditreport.com - and not from a supposedly free website that requires you to sign up for a practically useless "monitoring service." Also, you get one report from each agency per year, so unless you've got a surfeit of debt with obscure companies that you're afraid won't show up on all three, your best bargain is to stagger your requests to once every four months so you can always get a free report when you need one. Also, any time you're denied a loan based on your credit report or credit score, you'll receive a voucher for a free report that doesn't count towards your annual limit.
2. Settle or get current what you can. Fix any situation you can that's reported as anything worse than "PAYS AS AGREED." If anything on the report is inaccurate, dispute it two different ways; with the issues/holder of the debt, and with the credit agency itself. The debt holder is required by law to prove that the debt is valid; at the very least you'll be able to have an explanation in your own words added to your report. If you have any accounts that are past due, bring them current if you can afford to. If you have any old debt (say, five years since you've made a payment), contact the debt holders, from smallest amount to largest, and try to negotiate a settlement: an amount that you will pay immediately upon receipt of their promise in writing, to close the account and report it as "PAID IN FULL." Offer thirty to fifty percent of the amount due and be prepared to move to the next name on the list if you find anyone who won't deal. Again, this only works for old debt; if you're current or nearly so they'll see no reason to change their terms. Settling old accounts will not erase your dings but it will replace unflattering items with more benign ones.
3. Establish new credit. Many would agree that a new credit card is not a smart fix for someone who struggles with debt. However, there's no arguing that getting one will improve your credit score pretty fast, if you handle it right. Get a regular credit card if you qualify for one; otherwise get a secured credit card from a company like Capital One. (Make sure you're not getting a pre-paid card, which is similar to a secured card but does nothing for your credit.) You'll pay $300 to $500 to "secure" the card, which is a deposit. Use the card for one to two regular expenses every month, like a half-tank of gas or a few items at the grocery store, pay the account in full every month before the due date. This new, "good" credit will improve your score within a few months and continue to do so as your old (settled) "bad" credit drops off your report.
4. Wait. Unfortunately, bad credit does follow you for quite a while: five, seven, or even ten years from the date of last activity. (And "activity" could be little more than the debt holder reposting your account to keep it alive.) But once you've taken the necessary steps to put so-called "zombie-debt" to rest permanently, it will gradually fade away, leaving you with the foundation for future prosperity.