How to Get Great Credit

How To Get

GREAT CREDIT!
Easily get the credit you need
to get everything you want!

JOHN MICHAEL JANNEY
A M E R I C A ’ S #1 F I N A N C I A L A W A R E N E S S E X P E R T

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Table of Contents
Introduction
Disclaimer

3
3

Chapter 1: Crash Course in Credit
The 5 Cs of the Credit Puzzle
The 5 Components of Credit Scores
The Cost of Bad Credit
Credit Reporting Laws

5
6
8
12
15

Chapter 2: Repairing Credit
Beware of Credit Repair Scams
Credit Repair Organizations Act
3 Steps to Repairing Credit
Credit Repair Don’ts

17
17
18
20
33

Chapter 3: Rebuilding Credit
The Path to Plastic
Things to Consider When Shopping Around for Credit
Things to Keep in Mind after Approval
A Simple Strategy for Positive Payments
Credit Card Offer Comparison Websites
Beyond Plastic
Monitor Your Progress
Other Credit-Building Tips

34
34
36
37
37
38
38
39
40

Chapter 4: Safeguarding Your Credit
Budgeting
Frugality
Extra Income
The 5 Ps of Responsible Credit Use
Stay in Control

42
42
43
36
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48

Closing Comments: You Can Do It!
Links to over 200 Pages of FREE information about important credit laws

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Introduction
Thank you for purchasing How To Get GREAT CREDIT! We put a lot of effort into making sure
this book provides you with the information you need to understand how credit reporting and
scoring works and how to repair, rebuild and safeguard your credit. We were careful not to get
lost in some of the overly-technical details of the credit industry so we could keep this
publication short while still providing you with valuable information.

We wrote this book with mainly one type of consumer in mind: the newly debt free. This
includes those who are fresh out of a bankruptcy, debt settlement program, debt management
plan (consumer credit counseling) or who struggled on their own to overcome debt. We
structured the information for people who fall within this category because they are in the most
need for this information. We are assuming you belong to this group of people and are at a stage
in your life where you successfully resolved your debt problems and are now ready for a fresh
start. However, just like you needed some guidance to resolve your debt problems, you will need
some guidance to resolve credit problems.

As a member of the newly debt free, you are at a stage in your life when debt no longer hinders
your ability to pay bills on time or properly manage your money in other ways. However, this
does not mean that the information on the following pages does not apply to someone still in
debt. Yes, sometimes you may need to sacrifice your credit to get relief from overwhelming debt.
But this book will still serve as a guide for when you are able to pull yourself out of debt and are
ready to start recovering from past credit mishaps.

Disclaimer
While every effort was made to ensure the accuracy of the information provided in this book,
credit laws and regulations are subject to change. Therefore, the author(s) and publisher give no
warranty, expressed or implied, as to quality, content, accuracy, reliability or completeness; and

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do not assume responsibility for the same. If you have any questions about information contained
in this book, please consult a credit bureau or an attorney knowledgeable in credit issues.

While this book contains information on credit laws and other such information, you should not
misconstrue this information as legal advice. Nothing in this book should be considered legal
advice. If you require legal advice, please consult an attorney. You can find an attorney by
visiting the following website: http://www.findlaw.com. This website also has a guide for
finding, evaluating and hiring an attorney at the following location:

http://public.findlaw.com/library/hiring-lawyer/index.html

By providing information on credit, the author(s) and publisher are not guaranteeing specific
results. Results will vary depending on numerous factors. You are solely responsible for your
credit activities, spending behaviors and your other personal financial matters.

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Chapter 1:
Crash Course in Credit
Before we can delve into the important topic of repairing or rebuilding damaged credit, we need
to make sure you have a firm grasp of some basic credit concepts. You probably learned a lot
about credit during your struggle to get out of debt, but many misconceptions circulate the
internet and are even promoted by self-described credit experts. So, we will review the basics of
how the system works while not getting too bogged down in the details.

Credit is essentially the practice of merchants allowing customers to purchase products or
services and then pay for the items at a later date or over time through installments. Banks grease
the gears of commerce by providing merchants with the money they would otherwise have to
wait for in a traditional credit scenario. With this relatively new credit model, customers owe the
bank the money for purchasing products or services from merchants so that the banks, not the
merchant, become the creditor.

While this scenario may seem like a win-win situation for customers and merchants, there are
some problems. First, the most prevalent form of credit in our society is currently credit cards
and credit card banks have managed to structure the credit agreement (cardholder agreement) in
ways that give them the ability to change interest rates, fees and other terms and conditions
practically at will. At the same time, these agreements give you virtually no power to do
anything about it.

You most likely experienced the effects of this practice while you were in the midst of your
financial difficulties. It probably felt like the creditors were simply kicking you while you were
down. One credit misstep, such as one late payment, and your creditor hiked your 9.99% APR to
a 39.99% APR and slapped you with a $39 penalty fee. With the higher interest rate and finances

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getting tighter, your balances seemed to remain at a stand-still – no matter how much you
struggled to keep up with your monthly payments and be a “good cardholder.”

You don’t need me to tell you about how credit card debt can quickly spiral out of control. It can
become so overwhelming that it consumes your life and starts to cause all sorts of other
problems. Debt stress leads to personal stress, domestic friction and the inability to afford food,
new clothes or medicine because every extra penny you have is spent trying to avoid more of
those expensive penalty fees. University researchers even found direct links between debt stress
and depression as well as other health problems.

The second problem is that credit card companies issue credit cards to just about anyone. On the
surface, this seems like an equalizing practice that enables people with little or no credit history
to enjoy the benefits of credit that only well-established consumers previously enjoyed. But the
dark side of this trend is that there is virtually no credit use education to help new cardholders
properly manage their newfound credit. Cardholders start using credit to purchase just about
anything, from a new computer to a value meal at the local fast food restaurant. The debt piles up
and the monthly debt payment grows until, one day, that infamous late payment makes its way
into their lives. The new penalty interest rate and fees spin that manageable monthly payment
into something that overwhelms and cripples them financially.

There are many other problems with how credit card companies structure their contracts and treat
their customers. You received your own crash course from the school of hard credit knocks when
you fell on hard times. So, we will now turn to the issue of just how the credit industry works.

The 5 Cs of the Credit Puzzle
The credit puzzle has the following core pieces:

Consumers: These are individuals who purchase goods and services and sometimes borrow
money to make these purchases. Consumers make payments to creditors based on a credit
agreement. You are a consumer.

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Creditors: These are businesses that sell goods and services on credit or lend money to
consumers to enable them to purchase goods and services. Creditors report credit activity
(payments, late payments, credit balances, credit limits, etc.) to credit bureaus.

Credit Bureaus: These are businesses that receive reports from creditors on consumer credit
activity and maintain these collections of reports in individual credit files. Credit bureaus are also
called “credit reporting agencies,” but we will use the term “credit bureaus” because it is less of a
mouth full and the term “agency” gives the false impression that these companies are
government entities – they are not. Credit bureaus are huge for-profit corporations. The three
major credit bureaus are Equifax, Experian and TransUnion. Not all creditors report activities to
all three credit bureaus, which is one reason credit reports and credit scores often vary between
credit bureaus.

Credit Reports: The individual credit files maintained by credit bureaus are known as credit
reports. These contain all the current information on credit accounts and account activities.
Credit information can remain on a credit report for up to seven years and a bankruptcy can stay
on a credit report for up to ten years. A credit report is sometimes referred to as a credit file.
However, you can think of the credit file as the raw information stored in the credit bureaus’
databases while the credit report as the nicely formatted and organized presentation of the
information stored in your credit file.

Credit Scores: A credit score is a three-digit number between 300 and 850 that credit bureaus
calculate based on the credit information stored in your credit report. It is not part of your credit
report, but the items on your credit report directly affect your credit score. For example, if you
make a late payment to a creditor who reports this incident to a credit bureau, then your credit
score will suffer.

Each piece of the credit puzzle above was described in chronological order. First, you are a
consumer who seeks credit. The creditor contacts a credit bureau to check your credit report and
credit score, which will be the basis for the terms of the credit contract. The creditor reports the

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new account and subsequent account activities to the credit bureaus. The credit bureaus maintain
these records in a credit file that is used to generate a credit report. The credit bureaus use a
mathematical formula to calculate your credit score based on the information stored in your
credit file.

The 5 Components of Credit Scores
You may have seen the term “FICO score” when reading about credit scores. FICO is short for
Fair Isaacs Corporation, which is the company that developed the software for calculating credit
scores. All three credit bureaus calculate credit scores based on the FICO formula, but each
credit bureau calls its credit score by a different name. Equifax calls its credit score a BEACON
score, Experian calls its credit score the Experian/Fair Isaac Risk Model score and TransUnion
calls its credit score an EMPIRICA score.

Regardless of the name, all FICO-based credit scores follow a basic formula for weighing
different aspects of a credit file to derive a credit score. Below are the five components of this
FICO formula and the breakdown of how much each component affects your FICO score.

Credit Component

Percentage of Credit Score

Payment History

35%

Amounts Owed

30%

Length of Credit History

15%

New Credit

10%

Types of Credit Used

10%

Payment History (35%)

Do you pay your bills on time or do you pay late? If you pay on time, do you pay more than the
minimum, do you pay off the balance completely or do you pay the minimum? If you pay late,
how late are you, do you completely miss payments for months or are you just a few days late?

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Creditors report payment information to credit bureaus so other creditors will know if you pay
your bills on time or if you occasionally or routinely pay late. Late payments signal to creditors
that a credit applicant is a higher risk of not repaying the loan or that there is a good chance the
applicant will make several late payments. A spotless record of on-time payments and possibly
several “paid more than the minimum” payments signals to creditors that the credit applicant is a
low-risk borrower.

In addition to listing late payments and indicating how overdue the payments are or were,
payment history includes the amount past due. Your payment history also includes any accounts
sent to or currently in collections and if an account was “charged off” by a creditor because of
non-payment beyond 120 days. The types of payments recorded on your credit report are: Pays
or Paid as Agreed, 30 Days Past Due, 60 Days Past Due, 90 Days Past Due, 120 Days Past Due,
Payment Plan, Repossession or Foreclosure, Charged Off or Bad Debt and Not Reported.

Payment history does not end with basic payment trends. The payment history portion of your
credit score also includes credit-related public records. These public records include
bankruptcies, wage garnishments, property liens and other judgments.

The FICO score calculations consider how much time has passed since a creditor reported a late
payment or sent your account to collections. How much time has passed since the last date of a
public record is also taken into consideration when the formula calculates your credit score. So,
as time puts more distance between you and any negative items on your credit report, your credit
score should improve (all other things remaining the same).

How many past due items reported by creditors and how many “pays or paid as agreed” items
creditors report also have an impact on your credit score (as part of your payment history).

Payment history accounts for 35% of your credit score – the greatest share of all credit score
components. Creditors, as well as the FICO scoring model, put a lot of emphasis on how
consistent you are with paying on time or paying late. However, how much debt you have also
weighs heavily on your FICO score.

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Amounts Owed (30%)

Just like with payment history, the label “amounts owed” doesn’t tell the full story behind this
credit scoring component. Yes, how much debt is on your record is part of the FICO score
calculations, but how much debt on what types of credit accounts is also a factor. The number of
accounts on which you are carrying a balance also impacts your credit score.

The FICO formula considers the amount of your balances versus the amount of available credit
on revolving accounts and the amount of the remaining balance versus the loan amount for
installment accounts. This part of the “amounts owed” component is often referred to as the
“debt-to-available-credit ratio” because it compares how much debt you are carrying on your
accounts against how much of the account’s credit limit is available. For example, if you have a
credit card account with a $1,000 credit limit and carry a balance of $600, your available credit
remaining in your credit limit is $400. So, you now have more debt than you do available credit.
Ideally, you should keep the balance on any credit card account below 30% of the account’s
credit limit (for example, a $300 balance with a $1,000 credit limit).

You should also spread debt across multiple accounts rather than have all debt weighing down
one account. This goes against the idea of consolidating debt onto a single, low-interest account.
However, the “amounts owed” portion of the credit formula looks at the debt-to-available-credit
ratio for each account. So, spreading out debt typically improves this ratio.

Before we go any further, we should address one credit myth that often arises from
misunderstanding this aspect of the “amounts owed” component of credit scoring. I often hear
so-called credit experts telling consumers that their debt-to-income ratio affects their FICO
score. This is not true. Of the many things recorded on your credit report, your income is not one
of them. So, there is no way the FICO formula could include your income in any calculation.
However, some lenders may consider your debt-to-income ratio in addition to your credit report
and credit score when you apply for credit to purchase certain big-ticket items, such as a home,
car or large appliance. But, your debt-to-income ratio has no direct impact on your credit score.

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Length of Credit History (15%)

The length of your credit history accounts for 15% of your credit score. This includes how long
ago you opened your oldest, open account and the age of the various types of accounts you have
open. The amount of time since your last account activity is also a factor, which means that you
must occasionally (as well as responsibly) use credit to build your credit score. If you open credit
accounts and then never use them, the FICO formula has no way to calculate the probability that
you will pay your bills on time. This does not mean you must carry a balance or charge large
purchases to your credit card. But using credit and paying on time, paying off balances in full or
paying more than the minimum will reflect positively on credit reports. Non-activity does not.

New Credit (10%)

New credit, which accounts for 10% of your credit score, includes recently opened credit
accounts and their types, as well as the time since you opened those accounts. This component of
your credit score also includes your reestablishment of a positive payment history following a
negative payment history. So, if you have a history of late payments, there is still hope.

New credit also includes the number of recent credit inquiries and the amount of time since any
credit inquiries. However, not all inquiries are created equal. Hard inquiries, which are what the
FICO formula looks for, are those inquiries made by a creditor when you apply for credit. Soft
inquiries, which do not affect your credit score, come in three flavors. These flavors are
consumer-initiated inquiries (when you obtain your credit report), promotional inquiries (when
businesses, like credit card issuers and insurance companies, look at your credit to offer preapproved credit offers) and administrative inquiries (when one of your creditors monitors your
credit). You will not lower your credit score by simply obtaining your credit report (this is
considered a consumer-initiated soft inquiry). In fact, you should get your credit report at least
once per year to make sure all the information it contains is accurate.

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As with anything in your financial life, you should plan your credit usage. This includes opening
any type of credit account. The FICO formula treats mortgage and automobile loan hard
inquiries made within a 14 day period as one inquiry. This shows that you are shopping around
for the best offers, which is a responsible trait. However, if you initiate hard inquires on whims
(like when a checkout clerk offers you a $15 coupon in exchange for a credit application), then
this will reflect poor credit planning and could negatively impact your credit score. As a general
rule, you should not apply for more than one credit card account within a six month period.

Types of Credit Used (10%)

The final component of your credit history is fairly straight forward. The FICO formula
measures the number of different types of accounts to determine if you have a good mix of credit
accounts. You can have too many credit accounts or not enough of the right types of credit
accounts. For example, if all you have are revolving accounts (like credit cards) and no
installment accounts (like car loans), then your credit score may not be as high as it could be if
you have some installment accounts to balance your credit mix.

Facts Not Calculated into FICO Scores

As mentioned above, your income (and therefore your debt-to-income ratio) is not part of your
FICO score. Other facts not factored into your credit score include your race, religion, ethnicity,
national origin, gender, marital status, age, occupation, employer, employment history, soft
inquiries, child support payments and rental agreements. While the type, balance and credit limit
of a credit account is part of the FICO formula, the interest rate on that account is not.

The Cost of Bad Credit
Your credit score is used by lenders to determine how much credit to issue, what interest rates to
charge and other credit terms. Lenders charge higher interest rates for borrowers with low credit
scores while borrowers with high credit scores typically receive lower interest rates. Credit card
issuers also set credit limits based on credit scores and monthly income.

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Interest rates and credit limits are not the only terms set based on credit scores. Insurance
providers are beginning to set premiums based on credit scores. Property managers set rental
deposits based on credit scores. Service providers, such as residential and mobile phone
companies, approve accounts and set deposits based on credit scores.

FICO scores range from 300 to 850, with 850 being the best possible score. The average credit
score is 675 and the median credit score is 725. Typically, any credit score over 720 is eligible
for favorable credit terms, like a low interest rate, while credit scores below 660 usually can only
qualify for expensive, high-interest “subprime” credit.

The average American has about $10,000 in credit card debt and the average annual percentage
rate (APR) is about 15% (1.25% monthly periodic rate). If this average American paid 2.5% of
the debt each month ($250), it would take 26 years to pay off the debt and cost $9,757.71 in
interest. So, this average American borrows $10,000 and pays back nearly $20,000.

Now, imagine two not-so-average Americans borrow the same amount on each cardholder’s
credit card account. One, we will call him Jack, has a 780 FICO score and the other, Jill, has a
600 FICO score. Jack was able to get a 9% APR while Jill’s credit card company gave her a 24%
APR. Using the same low monthly payment model as the average American with the 15% APR,
we can see how much bad credit can cost you.

Jack, with a 9% APR (0.75% monthly periodic rate), will pay $250 each month for 19 years and
four months to pay off the $10,000 balance and only pay $4,191.60 in interest. Jill, with her 24%
APR (2% monthly periodic rate), will have to pay $298 each month because of new regulations
requiring credit card companies to set minimum payments no lower than all interest and fees plus
1% of the account balance. This means that more of Jill’s monthly income ($48) is consumed
with minimum monthly credit card payments, but that’s not all. It will take Jill about 33 years
and five months to pay off the entire balance and she will pay $19,949.30 in interest – nearly
twice what she borrowed!

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Average American

Jack

Jill

Balance

$10,000

$10,000

$10,000

Credit Score

675

780

600

APR

15%

9%

24%

Monthly Payment

$250

$250

$298

Time to Pay Off

26 years

19 years, 4 months

33 years, 5 months

Interest Paid

$9,757.71

$4,191.60

$19,949.30

As you can see, bad credit is costly. It cost Jill an extra $15,757.70. Bad credit can cause
property managers to require hefty deposits (that’s assuming they approve your rental
application) and may even cost you an employment opportunity as some employers use credit
reports to screen potential hires – and let’s not forget about insurance premiums. But these are
only the immediate costs of bad credit. Jill also lost over 14 years and $48 of monthly cash flow
that she could have used to pay other bills and buy groceries.

The cost of bad credit stretches beyond what you pay in interest, deposits and higher insurance
premiums. There are the lost opportunities because so much of your hard-earned money is being
sunk down the bad credit drain. Your credit card payments equate to $250 you are not investing
each month into a 401k, ROTH IRA or other investment account. If Jill was able to contribute
$100 to her company’s 401k plan and her employer matched her $100 each month for 35 years,
she could retire with about $760,000 (assuming a 10% annual rate of return).

So, low credit scores cost us far more than interest payments and even more than the lost
opportunity to earn nearly one million dollars. Debt stress seeps over into our personal lives,
causing marital stress, personal stress and even health problems. But don’t let these facts get you
down. Use them to motivate you in your efforts to better your situation and put the gloomy days
of poor credit behind you.

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Credit Reporting Laws
Congress passed several laws protecting consumers in relation to credit transactions, including
credit reporting. You should have a general understanding of these laws to best protect your
credit standing from errors or abuses. Below is a summary of the key laws regulating credit.

The FCRA (Fair Credit Reporting Act) and the FACTA (Fair and Accurate Credit
Transactions Act, also known as “The FACT Act”)

The Fair Credit Reporting Act provides tools to ensure you, as a consumer, have access to your
credit report and can dispute errors you find on your credit report. The FCRA also gives you
access to your credit score, but not free access. You will still need to pay to get your credit score.

The FCRA also includes privacy provisions that restrict access to your credit report. Only you,
those you authorize and those with a valid need can access your credit report. Those with a valid
need include lenders, employers and insurance providers. The other privacy feature is your
ability to opt-out of prescreened offers that use the credit bureaus’ marketing lists.

There are two features of the FCRA that relate directly to repairing errors or outdated
information on your credit report: access to your credit report and the dispute procedure.

1. Access to Your Credit Report

Thanks to the FCRA, you can now purchase copies of your credit report whenever you want.
However, you can obtain free copies of your credit report under certain situations, namely if:
•

someone took “adverse action” against you because of information in your credit report
(for example, if a lender turned down your application for credit or if an insurer turned
down you application for coverage);

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you are an identity theft victim and place a fraud alert on your file (a fraud alert is a note
you can have attached to your credit file that alerts creditors that an identity thief may be
using your identity to commit fraudulent purchases or other criminal activities);

•

your credit report contains inaccurate information because of fraud;

•

you are on any form of public assistance;

•

or you are unemployed and intend to seek employment within 60 days.

2. Dispute Procedure

Imagine that a credit card issuer denies your application for credit. They include in their rejection
letter your right to a free credit report and instructions for obtaining it. You follow their
instructions and several days later you receive your credit report in the mail. You review it and
discover that someone else’s late payments are being reported on your credit report.

Fortunately, the FCRA gives you the right and defines the process to dispute inaccurate and
untimely information on your credit report. We’ll discuss how to rid your credit report of errors
in the next chapter.

The Fair and Accurate Credit Transactions Act is an amendment to the FCRA. The most wellknown provision of FACTA is that American consumers can now obtain a free credit report from
each of the three major credit bureaus (Equifax, Experian and TransUnion) once per year. The
reason behind this provision is to combat the epidemic of identity theft. By giving consumers
free annual access to their credit reports, they can more easily and quickly catch, dispute and
resolve the fraudulent credit accounts setup by identity thieves. We will explain how to obtain
your free annual credit report in the next chapter.

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Chapter 2:
Repairing Credit
Beware of Credit Repair Scams
Credit repair receives a lot of bad press because of credit repair scams. These scams are operated
by unethical entrepreneurs who only want to make a quick buck. They profit from consumers
who don’t understand the credit dispute process and advertise claims to be able to improve credit
scores practically overnight – no matter what. Some of these operations attempted to or advised
clients to dispute accurate information, illegally create another identity or commit fraud in the
pursuit of a cleaner credit file. Following such illegal advice can get you into big trouble.

Typically, these credit repair scams promise to clean credit reports by disputing either all
information on the report or all negative information on the report. While the information is
being disputed, the credit bureau must remove items in question until the reporting creditors
verify the validity of the reported items. The scam succeeds temporarily because during this
verification period, your credit score might experience a significant boost. However, once the
information is verified, your credit score will go back down and, if the scammer disputed all
information, your credit score could actually plummet to new lows because creditors may not
feel the need to verify positive items in dispute.

These types of scams do you no good and can cost you hundreds, if not thousands, of dollars in
fees and thousands of dollars in future high interest rates. In fact, disputing accurate negative
information may set in motion a series of events that end up resetting the statute of limitations
for a negative account. This resetting will give the debt collector more time to file a lawsuit and
may create new negative entries on your credit report – not good at all.

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The statute of limitations for a debt is different from the seven-year expiration for credit items on
your credit report. Each state regulates its statute of limitations (the amount of time a creditor has
to sue over an unpaid debt), so the amount of time a creditor can sue for a debt varies between
states. Also, certain activities can reset the statute of limitations. The most common activity that
resets a statute is a payment on a debt, so think about that before you make a payment to a very
old debt. Check www.HelpForDebtors.com for a list of state statutes of limitations.

Credit Repair Organizations Act
The deceptive claims and the unethical business practices of these scammers prompted enough
consumer complaints that Congress passed the Credit Repair Organizations Act. This law
requires credit repair companies to give full disclosure of fees, guarantees and other contractual
provisions. It also requires credit repair organizations to provide a “Consumer Credit File Rights
Under State and Federal Law” disclosure that explains consumers’ rights and ability to dispute
inaccurate, incomplete or untimely information in their credit reports directly with the credit
bureaus – without going through a credit repair company.

This required disclosure also points out that credit bureaus have a duty to maintain accurate
records of your credit activities. This includes activities that reflect well on your credit and
activities that reflect poorly. The fact that an item on your credit report is damaging to your
credit score is not good enough reason to demand its removal. If an item is accurate and timely
(less than seven years old or less than ten years old for bankruptcy), the credit bureau has no
obligation to remove it.

Here is the full text of the required disclosure:
Consumer Credit File Rights Under State and Federal Law
You have a right to dispute inaccurate information in your credit report by contacting the credit
bureau directly. However, neither you nor any ''credit repair'' company or credit repair
organization has the right to have accurate, current, and verifiable information removed from your

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credit report. The credit bureau must remove accurate, negative information from your report only
if it is over 7 years old. Bankruptcy information can be reported for 10 years.
You have a right to obtain a copy of your credit report from a credit bureau. You may be charged a
reasonable fee. There is no fee, however, if you have been turned down for credit, employment,
insurance, or a rental dwelling because of information in your credit report within the preceding 60
days. The credit bureau must provide someone to help you interpret the information in your credit
file. You are entitled to receive a free copy of your credit report if you are unemployed and intend
to apply for employment in the next 60 days, if you are a recipient of public welfare assistance, or
if you have reason to believe that there is inaccurate information in your credit report due to fraud.
You have a right to sue a credit repair organization that violates the Credit Repair Organization
Act. This law prohibits deceptive practices by credit repair organizations.
You have the right to cancel your contract with any credit repair organization for any reason
within 3 business days from the date you signed it.
Credit bureaus are required to follow reasonable procedures to ensure that the information they
report is accurate. However, mistakes may occur.
You may, on your own, notify a credit bureau in writing that you dispute the accuracy of
information in your credit file. The credit bureau must then reinvestigate and modify or remove
inaccurate or incomplete information. The credit bureau may not charge any fee for this service.
Any pertinent information and copies of all documents you have concerning an error should be
given to the credit bureau.
If the credit bureau's reinvestigation does not resolve the dispute to your satisfaction, you may
send a brief statement to the credit bureau, to be kept in your file, explaining why you think the
record is inaccurate. The credit bureau must include a summary of your statement about disputed
information with any report it issues about you.
The Federal Trade Commission regulates credit bureaus and credit repair organizations. For more
information contact:
The Public Reference Branch
Federal Trade Commission
Washington, D.C. 20580.

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The bottom line is that you can repair errors on your credit report yourself. You do not need to
hire a company or consultant to do it for you and doing so may actually damage your credit
score. If the credit repair operation is operating illegally by attempting to setup false identities to
hide credit histories or committing fraud, you could be liable for following the scammers’
instructions or advice. You should familiarize yourself with the credit reporting laws discussed in
the last chapter and the Credit Repair Organizations Act mentioned in this section. Doing so will
help you manage your own credit repair tasks and help you guard against unscrupulous credit
repair operations.

3 Steps to Repairing Credit
The three steps for repairing errors on your credit report are:

1. Obtain your credit reports from the three credit bureaus;
2. Review your credit reports for errors; and
3. Dispute errors you find.

Step 1: Obtain Your Credit Report

The FCRA grants you access to your credit report. Under normal circumstance, you must pay a
fee of no more than $8 for each credit report. However, under the conditions we listed in Chapter
1, you are entitled to a free copy of your credit report.

Perhaps the most common cause for granting a free copy of a credit report is when a creditor
rejects an application for credit. The rejecting creditor must notify you of the fact that you were
declined credit because of items on your credit report and that you have a right to a free credit
report within 60 days of receiving the notice. The notice will also include instructions for
obtaining your free credit report and, if you find yourself in this situation, you should follow
those instructions.

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Some experts argue that reviewing your credit report only once per year is not enough and that
consumers should take advantage of situations that grant free copies of credit reports in an effort
to not “use up” their free annual copies granted by FACTA. However, it is a very bad idea to
apply for credit just to get a free credit report due to your application being rejected. This is a
sure-fire way to damage your credit score, and an extra copy of your credit report is not worth it
– especially when you get free copies annually.

FACTA grants you free access to your credit report once per year. The easiest and quickest way
to obtain your free annual credit report is through the official website:

http://www.annualcreditreport.com/

When you arrive at this website, you will select your state from the list of states and click the
“Request Report” button. After you click the “Request Report” button, you will go to a secure
page that requests your personal information. This information includes your name, birth date
and Social Security Number. You will also need to enter your address and another address if you
lived in your current location for less than two years.

This information is required to make sure that the credit bureaus provide your credit report to
you, and only you. As you progress, the system will ask questions about information stored on
your credit file to further verify that you are the one requesting your credit report. For example,
if you have an installment loan, the system may ask you the lender’s name. You will need to go
through this exercise for each credit bureau report. Once your identity is verified, you will have
access to your credit report.

The system does not grant a 3-in-1 credit report. Instead, the system sends you to each credit
reporting agency’s system for retrieving free annual credit reports. Because of this one-at-a-time
approach, you will need to continue to the next credit bureau once you obtain your first credit
report. So, it is important to follow the system’s instructions to make sure you get all three credit
reports. However, before moving on to the next credit bureau’s system, be sure to print or save a
copy of your credit report and keep it in a safe place (you have the option of partially obscuring

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your social security number and credit account numbers to safeguard your personal information
on credit reports you print). After you close your session, you will not be able to access your
credit report for free except under specific situations (like being declined credit; see page 11).

Your credit score is not part of your free annual credit report, but the credit bureaus will try to
sell you access to your credit score during your free annual credit report session. You can
purchase access to your credit scores anytime and some credit accounts provide credit profiles,
including your credit score, from one or more credit bureaus. So, be aware that you do not need
to purchase your credit score as part of your free annual credit report session.

The other wrinkle in the system is that if information on your credit report is inaccurate or if
there are unauthorized credit accounts reported on your file due to identity theft for which you
are unaware, you may not be able to verify your identity through the online system. Imagine that
you start your free annual credit report session and the system asks you about a mortgage
account and you never owned a house. It could be that the system is just trying to verify your
identity by using a “trick question” or it could be that someone purchased a home using your
stolen identity. If your answer to this question does not match the credit bureau’s records, you
may need to seek alternative methods for obtaining your credit report – and you should consider
it a top priority to do so if you run into this problem.

To obtain your credit report by phone, call the following toll-free number:

1-877-322-8228

You will reach an automated system and you may run into the same problems with verifying
incorrect information on your credit file. In this case, you may need to request your credit reports
in writing by mailing your request to the following address:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

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Step 2: Review Your Credit Report for Errors

Once you have your credit reports, you need to review them to make sure everything in your file
is accurate, complete and timely. While each credit bureau presents information a little
differently, all three reports are easy to follow. If you run into difficulties, the credit bureaus
must help you understand the information on your credit report free of charge.

Accuracy

When checking for accuracy, you should check to make sure all the accounts on file are actually
accounts you opened. Often, a creditor will include a toll-free phone number with their account
entry. If you have any doubts about an account, you can call this number and verify whether or
not the account is a fraudulently opened account, someone else’s account that was mistakenly
reported to your credit file or an account you opened but do not recognize.

Not recognizing accounts is not unusual. There are many businesses that use billing services that
operate as lenders. For example, if you enroll your child into a martial arts school, the instructors
may have you make payments or automatic withdrawals to a billing company. In reality, you are
signing a credit agreement for the duration of the initial course (one year, two years or
sometimes three years). You may be intimately familiar with the school, but you forgot the name
of the billing company because the monthly payments are automated. So, when you see the
billing company’s name in your credit report, you may be unsure about the account. Making a
quick phone call will refresh your memory.

Even if the account is yours, you need to make sure the information reported is accurate. If the
creditor is reporting late payments, but you have records or believe that you never made any late
payments, then you should seek verification of these items and try to dig up records that show
you made the payments on time. If a creditor is reporting your account’s credit limit incorrectly,
you should dispute this inaccuracy so your debt-to-available-credit ratio is reflecting accurately
on your credit score – especially if the creditor is under-reporting your credit limit (most likely
this is the case, and most credit experts advise consumers to not dispute inflated credit limits).

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If you completed a bankruptcy and discharged your debts, make sure the debts are not being
reported as active debts. One of the common complaints about credit reporting errors is that a
creditor will sell a discharged debt to a debt purchaser who then reports the debt as an active,
past-due account. The same goes for debts that you settle through a debt negotiation program.

There are many errors that can appear on your credit report. The big errors would involve those
that have the greatest impact on your credit score, such as errors related to bankruptcies, late
payments, collections and charge-offs. They also include accounts that are not yours being
reported as yours. Focus on the most recent big errors first when disputing inaccuracies. Once
these items are corrected, you can move on to less recent issues that have less of an impact on
your credit score. Don’t focus your energies on correcting your address or other items that have
no impact on your credit score. You can update these items after fixing more important errors.

One area that you should focus on is the inquiries. Make sure that all hard inquiries reported to
your credit file are ones you initiated. Finding inquiries on your file that you did not initiate
could just be a glitch in the credit bureau’s system, but it could also be the sign of an identity
theft because hard inquiries are part of the credit application process. If someone is using your
identity to open credit accounts, this is where it will first show up.

Completeness

Your credit report may be accurate, but incomplete. One item that sometimes goes unreported is
the credit limit on an account, typically a credit card account. By not reporting your credit limit,
the FICO formula does not have all the required information to assess your debt-to-availablecredit ratio (amounts owed). Your debt load may appear larger than it should and your credit
score could be negatively impacted.

Review your payment history to make sure any collections accounts that you paid off are
reported as paid. Often times, a creditor will report the account as being sent to collections but
will not bother to report the payment of that account afterwards. Sometimes, the collections or

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charge-off item is reported to all three credit bureaus, but the payment of the account is only
reported to one or two. You can dispute the incompleteness of the report with the credit bureau
who did not receive the payment update from the creditor.

It’s not unusual for a creditor to not report information for a billing cycle or two. This may affect
the way your balances and payments impact your credit score. If you paid off a large portion of
your balances, then this should reflect positively on your credit reports (assuming all else
remains the same and you did not close any accounts or add a bunch of debt). Such payments
should be reported as “paid more than the minimum.”

Make sure your good credit activities are reported. Just be careful not to dispute positive items
because creditors rarely verify positive information, which could lead to disputed positive items
being deleted from your file. It may be safer to inform the creditor that you noticed missing items
on your credit report and ask them to update these items to reflect your positive activities.

When reviewing payment, collections and other reported items, make sure the dates are included
with the report. Failing to report the date of an item may complicate the expiration of that item.
This relates to the next type of error: timeliness.

Timeliness

Time heals all wounds is a popular axiom that also applies to credit. This is because credit
bureaus must remove any negative items that are seven years old from your credit file, except
bankruptcies. Bankruptcies can stay on your credit file for up to ten years. Older items also carry
less weight than newer items.

Make sure any reported late payments, charge-offs, collections or other negative items are not
lingering beyond the seven-year cut-off point. Make sure if you filed for bankruptcy over ten
years ago that it is not still hanging around on your credit report. Making sure these items do not
overstay their welcome can help your credit score recover from these previous credit mishaps.

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Follow the Formula

A good rule when reviewing your credit reports is to follow the logic of the FICO formula:
Payment History, Amount Owed, Length of Credit History, New Credit and Types of Credit. Go
from top to bottom of each credit report and ask whether or not the information on each account
is accurate, complete and timely. At first, focus on errors related to payment history more than
errors related to the other four credit score components.

Each credit bureau features credit dings differently. Experian lists “Potentially Negative Items”
and TransUnion lists “Adverse Accounts” first in their list of credit accounts. Equifax lists
“Accounts Currently Past Due” and “Negative Account History” at the bottom of their list of
credit accounts and “Collections” and “Public Records” after their list of inquiries. These are
areas that have the greatest negative impact on your credit score, so focus on them first.

Then, move on to the inquiries portion of your credit report and ask yourself if these are inquiries
you initiated, errors or possibly the early signs of an identity theft. You should also review the
current and previous addresses listed in your reports to make sure no one is living off of your
good name. Go to http://www.consumer.gov/idtheft/ for information about identity theft.

Step 3: Dispute Errors

The Dispute Process

Thanks to the FCRA, you have the right to dispute erroneous items directly with each credit
bureau. Credit bureaus must “reinvestigate” and resolve your dispute unless the dispute is
determined to be frivolous. If a credit bureau determines that your dispute is frivolous, they have
five business days to notify you and provide the reason for their ruling. This sometimes happens
when the person filing the dispute does not provide enough (or any) documents or other evidence
to support his or her claim.

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If your dispute is valid, the credit bureau must reinvestigate it. Once you initiate a dispute, the
credit bureau has five business days to notify the creditor who reported the item in dispute. The
credit bureau must also forward to the creditor all supporting documents you provided with your
dispute. The credit bureau has 30 to 45 days to reinvestigate and resolve the dispute.

Once the reinvestigation is complete, the credit bureau has five business days to provide you
with its findings. If they confirm that the information is correct, complete and timely, then they
have no obligation to remove the item. If they find that the item is an error, they must correct the
error. If they find that an item is incomplete, they must include the missing information; if they
find an item is untimely (older than 7 years or 10 years if it is a bankruptcy), then they must
remove the item from your credit file. If they cannot verify information, they must delete it.
But there is a catch. Just because a credit bureau removes an item does not rule out the
possibility that the creditor will reinsert the item onto your credit report. Items can be reinserted
onto your report at a later date if, upon further evidence provided by the creditor, the item is
determined to be accurate. If an item is deemed erroneous, the reporting creditor must correct or
delete the item from your file at each of the three major credit bureaus. If a deleted item is
reinserted into your file, the credit bureau must notify you of this fact within five business days.

Tips for Filing Your Dispute

When disputing errors on your credit report, you need to follow some basic guidelines to better
your chances of success. These guidelines are: limit disputes to three, prioritize your disputes,
file all disputes in writing and don’t forget the documents.

Limit Disputes to Three

Flooding a credit bureau with dozens of disputes will raise a red flag that you are using a credit
repair scam, especially if your disputes are not accompanied with documented evidence to back
up your claims. The only exception to this guideline is if the disputes involve the same account
or are related in other ways, such as if several accounts or public records reported to your file are
not yours. But a good rule of thumb is to dispute no more than three items at a time.

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Prioritize Your Disputes

You may only have one or two items to dispute; but if your credit report is full of errors, you will
need to prioritize which errors to dispute first. To do this, arrange your list of errors based on
their impact on the FICO formula. Put items that impact recent payment history on top with the
most severe dings, like collections or charge-offs, at the very top of your list. Dispute these items
and wait for the reinvestigation process to complete before initiating your next set of disputes.

File All Disputes in Writing

Submitting your dispute in writing does not always mean you need to send your dispute by postal
mail. Yes, you can submit your dispute this way, but the credit bureaus offer an online dispute
system that greatly simplifies and speeds up the process. However, if you choose to use an online
dispute system, be sure to print your dispute so you have a record of submitting it. Avoid
registering your complaint by phone because you cannot print your phone conversation.

Don’t Forget the Documents

While it might be impossible to provide documented evidence that an account reported to your
credit file does not belong to you, you should provide documented evidence of other types of
errors. For example, if you paid off a collections account and the creditor did not report this fact,
provide a copy of the canceled check (you can request this from your bank, but the bank may
only keep copies for a limited time period) or the statement from the creditor showing you paid
off the account. The same principal applies to other types of errors you want corrected or deleted.
Just be sure to send a copy – never send originals.

If you believe your identity was stolen and are disputing an account that you believe was opened
fraudulently, then you may need to submit an Identity Theft Affidavit and a police report to
support your claim. You should also place a fraud alert on your credit file to stop identity thieves
from opening up any more accounts in your name. The Federal Trade Commission dedicates a
portion of their website to providing consumers with helpful information about identity theft.

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The Federal Trade Commission’s Identity Theft website, which includes a downloadable Identity
Theft Affidavit, is located at:

http://www.consumer.gov/idtheft/

Writing Your Dispute Letter

Disputing an error on your credit report is not a difficult process. Most of the work is done by the
credit bureau and reporting creditor. You simply need to submit your letter explaining your
dispute as well as copies of documents supporting your claim. You should send your letter
certified mail or through a courier service, like FedEx, that will track delivery of the letter.

When writing your dispute letter, be sure to include the following information:
•

The date of your dispute letter;

•

The fact that you are writing to dispute an item on your credit report;

•

The account number, source (creditor, court, etc.) and type (account, collections, etc.);

•

Whether the account is inaccurate, incomplete or untimely;

•

What resolution you are seeking (deletion, correction, completion, update, etc.);

•

What documents you are including to support your claim;

•

Social Security Number (to make sure they correct your file and not someone else’s).

Whether or not you submit your dispute via postal mail or through the credit bureau’s online
dispute system, you should structure your complaint the same. You don’t need to write a long
letter. In fact, you should keep it brief and let your evidence do most of the talking. The recipient
of your dispute letter has to review thousands of disputes, so the shorter you can make your
letter, the better for all involved.

You also want to avoid including emotional consequences related to your dispute. The credit
bureau is only interested in corrected errors. They do not invent information on your credit

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report. They only receive and store information that creditors provide about your credit activities.
Errors are typically the result of a creditor mistake, so don’t lash out at the credit bureau or go on
tirades about the emotional distress the errors caused you or how embarrassed you felt when you
were turned down for credit. Stick to the facts and keep your letter short and simple.

Below is a sample letter you can use as a guide when writing your dispute letter.

Sample Dispute Letter
John Doe
123 Main Street
Dallas, TX 75001
If you know the name of the
appropriate contact person, use it
instead of a generic greeting.

Monday, October 09, 2006
Complaint Department
Name of Credit Bureau
Mailing Address
City, State and Zip Code
To Whom It May Concern:

I am writing to dispute the accuracy of the collections account reported on my credit file. I included a copy of my
[Name of Credit Bureau] credit report and I circled the erroneous collections item that was reported by Credit Corp.
This item is inaccurate because I settled this account in March of 2004 and this is not reflected on my credit report –
only that the account went into collections. I am requesting that you update my credit report to include the fact that I
settled this account and that this account is no longer in collections.
I enclosed copies of the settlement letter I received from Credit Corp, the canceled check used to pay the settlement
and the statement of receipt Credit Corp sent me after receiving and processing the settlement payment. Please
reinvestigate this matter and update my file as soon as possible.
Best regards,

John Doe
John Doe
SSN: 123-45-6789
Enclosures:
Copy of my [Name of Credit Bureau] credit report with disputed item circled
Copy of settlement letter sent by Credit Corp
Copy of canceled check used to pay settlement in full
Copy of Credit Corp’s statement of receipt of settlement payment

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Where to Send Your Dispute

If you want to submit your dispute online, you can easily find links to each credit bureau’s online
dispute system by visiting their websites:

Equifax

http://www.equifax.com

Experian

http://www.experian.com

TransUnion

http://www.transunion.com

However, if you prefer submitting your dispute via postal mail (certified or through a service
with delivery tracking), here is the address for each credit bureau’s dispute department:

Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374

Experian
ATTN: Dispute Department
P.O. Box 2002
Allen, TX 75013

TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19022-2000

Trouble Creditors

Sometimes, creditors can be stubborn and persist in reinserting disputed errors onto your credit
file. If you run into one of these types of creditors, you should consider speaking with an
attorney. The FCRA gives you the right to sue a creditor and/or a credit bureau for violations. A
handy website for locating attorneys in your local community is: http://www.findlaw.com

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This website also provides helpful information for finding, evaluating and hiring a lawyer:

http://public.findlaw.com/library/hiring-lawyer/hiring-lawyer.html

If the disputed item is a collections account, then the Fair Debt Collection Practices Act gives
you the right to ask the collection agency to validate the debt. When you ask a collection agency
to validate a debt, it must prove that you owe the money and that it has a legal right to collect the
debt. It must provide evidence, such as a copy of the signed credit agreement, from the original
creditor to validate the debt.

You should submit your validation request in writing. Similar to a dispute letter you would send
to a credit bureau, you should keep your validation request letter short and simple. Below is a
sample validation request letter you can use as a guide when writing your letter:

Sample Debt Validation Letter
John Doe
123 Main Street
Dallas, TX 75001

If you know the name of the
appropriate contact person, use it
instead of a generic greeting.

Monday, October 09, 2006
Name of Collection Agency
ATTN: Debt Validation Department
Mailing Address
City, State and Zip Code
Reference: Account # 1234-5678-9876-5432
To Whom It May Concern:

Please provide verification of your claim under the referenced account number.
I hereby request copies of the original account agreement, a record of all transactions on the account from inception,
and any other documentation that will support your claim.
Thank you for your consideration.
Sincerely,

John Doe
John Doe

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You may include the reason you are disputing the debt if you want, but it is not necessary. The
burden of proof is on the collection agency – not you. If you choose to include your reason for
seeking validation, keep it short. For example, simply state that you already paid the debt, it was
discharged in a bankruptcy or that the debt does not belong to you (whatever applies to your
situation).

Credit Repair Don’ts
Don’t fall for a credit repair scam. Avoid companies that ask you for payment before credit
repair services are rendered, advise you not to contact credit bureaus directly or advise you to
dispute all information in your credit reports – even accurate information. Also avoid companies
that refuse to tell you about your legal rights as required by the Credit Repair Organizations Act
(see the disclaimer in Chapter 1).

According to the Federal Trade Commission and Better Business Bureau, you may be liable for
following illegal advice from credit repair scams. For example, some scammers advise their
clients to create a new "credit identity" by registering for an Employer Identification Number
(EIN). In this credit repair scam, the scammer tells the clients to use their EIN instead of their
Social Security Number, which is illegal. As mentioned before, following such advice can get
you into big trouble.

Don’t dispute everything on your credit report. You might trigger a “frivolous” ruling by the
credit bureau and inadvertently get positive items removed from your report. Focus on the most
damaging errors first and dispute no more than three errors at a time. Dispute collection accounts
directly with the debt collection agency by requesting they validate the debt. If you find
incomplete information, try contacting the creditor directly and asking them to update your file
with each credit bureau.

During this process, don’t lose your temper. Be firm, but polite. Always be respectful and
remember that the person on the other side of the phone or mail correspondence is a human
being, just like you.

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Chapter 3:
Rebuilding Credit
Rebuilding credit is the process of establishing a positive credit history after a period of negative
credit dings. It differs from credit repair because repairing credit involves getting errors corrected
or removed from your credit file. Essentially, rebuilding credit is when you add good marks
while repairing credit is where you remove or correct damaging errors.

Unlike credit repair, rebuilding credit takes time before it has a significant impact on your credit
score. However, the sooner you start reestablishing your positive credit history, the sooner you
should realize an improved credit score (assuming you don’t create any new negative items).
Don’t expect miracles, but definitely expect results.

Keep the FICO formula in mind when planning your credit activities. You know that payment
history is the largest portion of the credit scoring pie, so focus on activities that establish a new
pattern of positive payments. A positive payment history shows that you can responsibly use,
manage and repay credit. However, don’t forget the other elements, such as amount owed, length
of credit history, new credit and types of credit accounts.

This means that you will need to use credit, which also means you will need to get a credit card
if you do not have one. You may also want to open an installment loan (like an auto loan). But if
you just finished a bankruptcy, debt settlement program or have other activities on file that are
damaging your credit score, you should tread your path to new plastic very carefully.

The Path to Plastic
Before venturing into the world of credit applications, you need to obtain your credit score. You
can purchase your credit score from each of the credit bureaus, all three credit scores from one of

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the bureaus or all three from MyFICO.com. Be careful when you purchase your credit scores
because you will run into “free” trial offers for other types of services that, if not canceled
according to their terms, will stick you with a hefty bill.

The reason you need your credit score is because you want to avoid getting turned down for
credit. Many credit card offers are only for people with moderate or high credit scores. However,
some credit card offers are tailored to people who have damaged credit and want to reestablish a
good credit history. Armed with your credit score, you can review the offer details to see if it
lists a minimum credit score or you can call the credit issuer and ask. If they won’t tell you, then
move on to the next application.

The last thing you want is to apply for credit and then get turned down. Your application for
credit will place a hard inquiry into your credit report and could shave points off your credit
score. You also want to avoid applying for credit card accounts more than once in a six month
period. So, call the credit issuer and get their requirements before submitting an application.

Secured Cards

Many people recovering from damaged credit open secured credit card accounts as an entry point
back into the credit world. These accounts require a deposit, usually equal to the account’s credit
limit. So, if your deposit is $200, then your credit limit is also $200. Some credit issuers may
require a deposit less than the credit limit, like a $100 deposit for a $500 credit limit, or may
increase your credit limit without raising your deposit. Your card can also be converted to a
general purpose unsecured credit card after you establish a good payment record on the account.

Typically, secured credit card accounts are not reported to your credit file. You can ask your
credit issuer to report your account (assuming it is in good standing). The credit issuer may start
reporting once the credit limit increases above your deposit or when the card is converted to a
general purpose, unsecured credit card. Regardless, you need to maintain a spotless payment
history with the account.

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Store Cards, Gas Cards

Store cards are another option for people recovering from damaged credit. They are usually
easier to qualify for than a general purpose credit card. Creditors are more likely to report store
or gas cards to the credit bureaus than a secured credit card. If you check with the credit issuer
and discover that you cannot qualify for a store or gas card, then you will need to start with a
secured card and work your way up to a store or gas card. As mentioned above, you should wait
at least six months before applying for another account.

General Purpose Credit Cards

It’s not impossible to get a general purpose credit card with damaged credit. You may be doing
yourself a favor by getting your feet wet with a secured card before jumping into the murky
waters of unsecured credit card use. But, if you know where to look, you can find credit card
offers that are tailored to people with damaged credit.

In fact, people fresh out of bankruptcy often find their mailboxes flooded with credit card offers
because banks know these people cannot file for Chapter 7 bankruptcy again for eight years.
Credit card banks who target risky consumers love to signup people fresh out of bankruptcy.
Consumers with debts freshly wiped away, a previous history of delinquency (potential profits
from penalty fees) and no near-future access to Chapter 7 bankruptcy make profitable customers.

Things to Consider When Shopping Around for Credit
Shop around for the best offer you can get. You might not be able to score a card with a low
APR or a travel rewards card, but you should still compare offers against each other. Just
because a credit card issuer advertises an offer as being tailored to people with damaged credit
does not mean it’s the best offer available. Shop around; compare APR, fees and other terms.

When you find the best offer, see if it lists the minimum credit score and income required for
approval. If you can’t find this information, call the credit card issuer and ask. The key is to

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apply for offers for which you are most likely to be approved. This will help you avoid unwanted
setbacks associated with hard inquiries that result in a credit application being declined.

Things to Keep in Mind after Approval
Once you start getting your store, gas or credit cards in the mail, be sure to only charge what you
can pay for in cash. Only use your cards for convenience – do not use your cards as an extension
of your income or to extend your “purchasing power.” This is a sure way to finding yourself
back in a difficult financial situation.

Payment history is the largest chunk of your credit score. Guard your payment history as if it was
one of your children. Always pay on time. Always pay off your balance as soon as the bill
arrives. If you are unable to fully pay off the balance, pay more than the minimum and never
miss a payment, make a late payment or pay less than the minimum payment. One late payment
can set you back as much as 100 points – and possibly more (depending on other factors).

The amount of debt you owe is the second biggest factor that affects your credit score. So, you
need to keep any balance you accrue to less than 30 percent of your credit limit. Do not make
large purchases on your new credit accounts. Small purchases that you immediately and fully
pay off will show that you can manage credit responsibly while not incurring credit headaches
caused by having too much debt on record. If you do carry some debt, spread it out over different
accounts so no one account appears to be carrying a lot of debt compared to available credit.

A Simple Strategy for Positive Payments
Credit cards make purchases so easy that it is tempting to use these plastic wonders frequently
for daily purchases. You should do everything you can to avoid falling into this habit. Don’t
carry your credit card with you. Instead, put it in a safe, secure location – preferably in a safe.

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Your credit score depends on credit activities being reported to your credit file. So, you still need
to use your credit cards. A good number of cards to have is three or four, but not more than that.
Use your cards to pay a few small monthly or yearly bills, such as your water bill, a magazine
subscription or an online DVD rental service. Fully pay off each credit card account as if you
were paying those bills to your service providers. This way, you are using your cards for
convenience and adding positive payment entries into your credit file.

Credit Card Offer Comparison Websites
Here is a list of the top credit card comparison websites. These sites have lots of information
about credit cards and provide you with direct links to online credit card applications. However,
be sure you thoroughly review different offers before settling on one, make sure you qualify
before applying and only apply for one card within a six month period.
•

http://www.cardratings.com/

•

http://www.creditcards.com/

•

http://www.cardweb.com/

•

http://www.creditcardsearchengine.com/

•

http://www.bankrate.com/brm/rate/cc_home.asp

Beyond Plastic
Your credit report wants to see different types of credit in addition to open accounts, balances
below 30 percent of their credit limits, small monthly payments made through your various cards
and a pattern of on-time payments. Credit cards are revolving credit, so you may want to take out
an installment loan to demonstrate your ability to manage this type of debt repayment. The most
common type of installment loan is an automobile loan.

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I’m not suggesting that you go out and buy a car if you have no need for one. In fact, if you
already have an automobile loan that you are paying off, then you already have a record of an
installment loan. This can work in your favor as long as you pay each installment on time.

However, if you do need a car and want to use an automobile purchase to help rebuild your
credit, you need to shop around for the best automobile loan (of course, you will need to find a
good car first). You will need to plan your shopping within a short period of time because the
FICO formula considers multiple mortgage and automobile loan inquires made within 14 days as
one inquiry. Such shopping around is a sign that you understand credit, seek credit responsibly
and plan large purchases you make with credit.

Typically, people with damaged credit can only qualify for loans for used cars, but don’t jump
into a loan agreement just because the dealership tells you that they can guarantee approval. You
may be able to find a much better interest rate from your bank or credit union. Credit unions are
known for offering members low interest rate automobile loans, so you should explore this
avenue when you shop around.

The same rules apply when managing an installment loan. Never pay late. Always pay at least
the minimum payment or more (make sure there is no penalty for early repayment). And make
sure the lender is reporting your account accurately and completely to the credit bureaus.

Monitor Your Progress
When repairing and rebuilding your credit, you should not do so blindly. Each credit bureau
offers credit monitoring services. Be sure to shop around because the price for this service varies
among credit bureaus. Make sure you evaluate credit monitoring services that can monitor
changes in all three credit bureaus and send instant notifications of any changes.

This service is worth the small fee, especially if you were able to have errors removed from your
credit file. Having a monitoring service in place will help you make sure those items are not
reinserted into your file. The credit bureaus are supposed to send you notification of such a

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reinsertion within five business days, but that does not lessen the value of credit monitoring. All
types of new errors can appear on your credit report and your ability to quickly detect and correct
them is essential for safeguarding your credit (and your identity).

Credit monitoring services monitor changes in your credit report, but they do not monitor your
credit score. You can purchase your three credit bureau credit scores whenever you have a need,
such as before you apply for any credit account. However, some credit card issuers provide their
cardholders with a “credit profile” feature that tracks their credit score from at least one of the
three credit bureaus. Be sure to look for this feature when shopping around for your credit card
account. If you do not see it, call and ask the credit card issuer if they have this feature.

Other Credit Building Tips
While this book is written for people fresh out of bankruptcy, a debt settlement program or credit
counseling (debt management plan), the information provided here applies to anyone. However,
if you are recovering from credit mishaps due to temporary income shortages or unexpected
expenses, you have another chance to boost your credit score. Simply pay off your debts. Your
“amounts owed” portion of your credit score will improve as your debt-to-available-credit ratio
improves. If you can’t fully pay off your balances, then pay as much as possible. Hold a garage
sale or raise some additional cash to get your balances as low to zero as possible.

Just be sure not to close any of your accounts. Closing accounts, especially older accounts,
negatively impacts your “length of credit history” portion as well as your “amount owed” portion
of your score. A credit limit of zero does you no good, even if you fully pay off the account. If
you close your account before fully paying it off, you could be doing worse damage and the
creditor will most likely require you to immediately pay your balance in full – not an easy task
for most people.

Another technique people use to improve their credit score is to become an authorized user on
someone else’s credit card account. Many creditors will import the credit habits of the account
holder into authorized users’ credit files, so the account holder will need to be someone with

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good credit to have a positive impact on your score. Call the credit card issuer to make sure they
import the account holder’s records into authorized users’ credit files before making this move.
You should fully disclose your reasons for seeking to become an authorized user on the account
and discuss with the account holder how you will use the credit card. Work together to establish
guidelines and expectations about your credit use to avoid any misunderstandings or conflicts.

Don’t ruin all your progress by making bad credit decisions. Avoid super-expensive credit, like
payday loans, title loans or pawn shops. Know where all your money is coming from and take
control over your spending. Being in control of your finances is perhaps the most important
aspect of recovering from a bad credit spell. The next chapter will discuss ways to help you stay
out of bad debt and credit situations.

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Chapter 4:
Safeguarding Your Credit
Now that you’ve worked so hard understanding, repairing and rebuilding your credit, you need to
take proactive steps to ensure you do not fall into bad debt or credit situations again. The
following information will provide you with the basics for maintaining financial wellbeing.

Budgeting
The old adage “If you fail to plan, you plan to fail” applies to personal finances, too. Your
budget is your financial plan, so make sure you create one and follow it. It’s not a difficult task,
but it does require some effort and attention.

First, you need to take a financial inventory of your income and expenses. If you use a debit card
to pay for groceries, gas and other purchases, you should be able to review your online or paper
bank statement to see where your money is being spent. Some online banking accounts allow
you to download your statements as spreadsheet files.

If you do not have such an account, you can take an inventory by tracking your spending over a
month’s period. Write down every penny you spend, where you spent it and what you purchased.
Group purchases into categories to help you get a broader idea of how much is going to different
areas. For example, list grocery purchases separate from gas purchases so you can see how much
you are spending for each.

If you have spreadsheet software, you can enter your monthly totals and have the program
automatically calculate the overall total spent and amount left over at the end of the month.
These spreadsheets are great tools for helping you quickly see how spending habits impact your
overall finances. We included a link to a budget spreadsheet with this book to help you get

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started with your budget. If you do not have Excel and cannot afford or do not want to purchase
it, you can download a free office program called Open Office. You can open, edit and save the
spread sheet using this software. It is available at http://www.openoffice.org. It’s a big download,
but it’s hard to beat free! Otherwise, use the PDF version of the spreadsheet.

Budgets are not just measurements of how you currently spend. By seeing how much you are
spending in different areas, you also discover ways to cut spending. With the spreadsheet, you
can see how much of an impact these changes in spending have on your overall financial
wellbeing. For example, if you eat at restaurants a lot, try cutting back by half and see how much
more money you can save at the end of the month. You might be amazed at how simple
adjustments to your spending habits can dramatically impact your household finances.

Frugality
An important part of your budgeting is learning to save. You should take great care about what
you buy and where you spend your money. Learning how to be frugal will greatly enhance your
chances at being financially stable, especially if you run into financial road bumps.

You don’t need to go to extremes to live frugally. If you search for frugal tips online, you are
likely to run into sites that explain hundreds of uses for baking soda, including using it for a
facial cleanser. Adopting some frugal ways does not require such a radical change in lifestyle,
but you can still free up a lot of money by learning the ways of the frugal.

Coupons, Loyalty Cards and Bulk

You may be surprised by how much coupons can save you. While most do require you to make
multiple purchases, the money you save is often worth it – especially if the items you are
purchasing are those you need or regularly use. For example, many grocery stores display
coupons for breakfast cereal that offer $1 off if you by two boxes instead of one. That’s 50 cents
off each box for a cereal you were going to buy anyway. The Sunday editions of your local
newspaper are usually packed with coupons, so start looking there.

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Loyalty cards are also another great way to save. Stores that offer these cards provide savings
much like coupons, but without the hassle of cutting up your newspaper. Some offer small cards
you can place on your keychain for greater convenience. You can save dozens of dollars per
shopping trip, which really adds up over time.

Bulk savings clubs, like Sam’s Club and Costco, provide great opportunities to save by buying in
bulk. They do charge a membership fee, but if you can save five to ten dollars each month, then
the membership fee pays for itself. Ideally, you will want to save more than ten dollars a month,
so you will need to comparison shop and see how much you are really saving by purchasing
items in bulk. Also, you should only purchase non-perishable items in bulk. Stock up on toilet
paper and paper towels, not milk and bread. You want to make sure the items you buy will last a
long time in storage.

Buy Store Brand

Buying grocery store brand products will save you money, and lots of it. Industry sales research
cited by the Private Label Manufacturers Association (PLMA) shows that American shoppers
save about $15.8 billion annually by choosing store brands over name brands. That’s a lot of
cash consumers are keeping in their pockets each year!

To demonstrate how much money you can save by switching from name brands to store brands,
your trusty writer ventured into a local grocery store with pen and legal pad, walked the various
isles and documented actual price differences for 20 common grocery items. I think you will
agree that the results are eye-opening.

Below are the results (prices include the store’s loyalty card discounts):

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Item

Name Brand

Store Brand Savings

%

Aspirin (100 ct)

Bayer

$6.39

$2.99

$3.40

53%

Acetametaphin (100 ct)

Tylenol

$13.99 $5.99

$8.00

57%

Ibuprofen (100 ct)

Motrin

$8.20

$6.39

$1.81

22%

Green Beans (14.5 oz)

Green Giant

$0.85

$0.63

$0.22

26%

Sweet Corn (15.25 oz)

Green Giant

$0.85

$0.59

$0.26

31%

Ketchup (36 oz)

Heinz

$2.59

$1.39

$1.20

46%

Mayonnaise (32 oz)

Miracle Whip

$3.69

$2.09

$1.60

43%

Mixed Fruit (15 oz)

Del Monte

$1.19

$0.95

$0.24

20%

Sugar (5 lbs)

Domino

$2.29

$1.99

$0.30

13%

Condensed Milk (14 oz)

Eagle Brand

$2.33

$1.39

$0.94

40%

Cornflakes (18 oz)

Kellogg’s

$3.31

$1.79

$1.52

46%

Raisin Bran (20 oz)

Kellogg’s

$3.39

$2.19

$1.20

35%

Facial Tissue (230 ct 3-ply)

Kleenex

$2.05

$1.49

$0.56

27%

Whipped Cream (8 oz)

Kraft Cool Whip $1.59

$1.09

$0.50

31%

Ice Cream (1.65L)

Edy’s

$5.69

$2.99

$2.70

47%

Chocolate Milk (half gallon)

Hershey’s

$3.49

$2.29

$1.20

34%

Graham Crackers (14.4 oz)

Honey Maid

$3.49

$1.50

$1.99

57%

Cream Cheese (8 oz)

Philadelphia

$1.85

$1.39

$0.46

25%

Eggs (large brown dozen)

Egg-Land’s Best $2.89

$0.93

$1.96

68%

Peanut Butter (40 oz)

JIF

$3.39

$0.90

21%

$30.96

42%

$4.29

TOTALS:

$74.41 $43.45

As you can see, buying store brands saves you a significant amount of money. This experiment
demonstrates a savings of just under $31 for 20 items – that’s an average savings of over $1.50
per item and 42% in total savings!

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The difference in prices is what the PLMA calls the “marketing tax” which you pay so name
brand manufacturers can promote their products through advertising and other means. However,
many store brand items are produced by the same manufacturers that make competing name
brand items. You can save a lot of money by choosing to not pay this “marketing tax” and keep
that money where it belongs – in your pocket.

Extra Income
If you find yourself in a financial crunch, look for ways to reel in some extra cash before turning
to your credit cards. Hold a garage sale. Put some old books or toys on eBay.com. Do some odd
jobs or get a second job if you think you can manage it. Turning so quickly to credit cards to
plug holes in your finances will often create much larger holes in the long run and could also
undo everything you’ve worked so hard to achieve.

The 5 Ps of Responsible Credit Use
You need to use credit so the credit bureaus will have information on which to base your credit
score. However, you want to always make sure that the information you are creating is good
information. Here are five basic rules to follow that will help you stay on top of your credit.

Pay on Time

Never, ever, ever pay late. Never, ever, ever miss a payment. Doing so will destroy your credit.
Ideally, you should pay off your balances in full each month, but you should at least pay more
than the minimum monthly payment. However, if all you can pay is the minimum payment, do it.
But never, ever, ever pay late unless you want to wreck your credit score. Know your due dates
and see if you can arrange convenient due dates with your creditors to make it easier to keep
track of your bill payments. Another good habit is to pay bills as soon as they arrive.

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Purchase Only What You Can Pay For

Yes, you must use credit to build your credit. However, this does not mean you should use credit
to extend your financial resources. Only charge to your plastic what you can immediately pay off
in cash. Make daily purchases, such as groceries, on your bank’s debit card. Using your debit
card is better than cash because you have a record of the transaction on your bank statement,
which you can download and use to update your budget.

Pay Off Balances

Pay off your balances at the end of the month. Most major credit card issuers offer online
accounts so you can see when a charge shows up. You can pay off each charge as you see it
appear on your online statement by using the credit card account’s online payment option or
through your bank’s online bill pay service, if your bank offers this service. Don’t carry a
balance if you don’t need to. Carrying a balance will end up costing you money in finance
charges that you would otherwise not pay if you just paid off your balances in full.

Plan Credit Use

Don’t use your credit cards haphazardly. As we mentioned in the last chapter, select a few small
bills, such as your water or phone bill, to pay with your credit card accounts and pay them off as
if your were paying the original water or phone bill. If you have a gas card, use it to buy gas and
then pay off the balance when you get home or as soon as the bill arrives. Keep track of how
much you spend to make sure you have enough in your budget to pay it off. You can do yourself
a favor by putting your credit cards away in a locked safe, except maybe one gas card and one
general purpose credit card for real emergencies. This will dramatically limit your credit use.

Pay More than the Minimum

While the first rule is to always pay on time (never, ever, ever pay late), you may run into a
situation where you cannot come up with the cash to cover an unexpected expense. An expensive

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payday loan or title loan is by far the worse credit option available, so you should avoid these
practically-predatory loans. What’s left if a garage sale won’t do the trick? You might end up
using your credit card to cover this expense. While you definitely do not want to make this a
habit, it is often a fact of life in an economy where more than 45 million people are without
health insurance and those with insurance need to set their deductibles ridiculously high just to
be able to afford the insurance premiums.

If you find yourself in this situation and are unable to pay off the balance at the end of the month,
then you need to pay more than the minimum payment. Credit card issuers set minimum monthly
payments very low to keep your balance as high as possible, which means they make more profit
from interest charges. Paying more than the minimum can greatly shorten the amount of time it
takes you to pay off the balance and reduce the amount you pay in interest charges.

Stay in Control
Following these guidelines will help you stay in control of your finances. However, these tasks
are not one-shot deals. You need to stay on top of your budget, continuously clip and organize
coupons, regularly search the web for money-saving ideas, keep your eyes open for ways to
bring in a little extra income and constantly remind yourself of the Five Ps of Responsible Credit
Use. These may be serious life style changes, but staying in control really pays off.

As mentioned in the previous chapter, you should monitor your progress. This is another tool in
your financial toolbox that will help you stay in control. You will be able to detect erroneous
items on your credit report quickly so you can dispute and resolve them quickly. If one of your
credit card accounts offers an online credit score tracking feature, you can see how well your
hard work is paying off. These tools also help motivate you to stay on track and stay in control.

For monitoring all three credit reports, we highly recommend Equifax.
Click Here to Get Equifax Credit Watch Gold 3-in-1 Now!
For purchasing all three credit scores, we highly recommend FICO Deluxe.
Click Here to Get FICO Deluxe from MyFICO.com!

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Closing Comments:
You Can Do It!
Credit is not repaired or rebuilt overnight. It takes time, patience and a good understanding of the
system. The information provided in this book gives you the information you need to work the
system in your favor without having to hire a credit repair company. You can do it!

Credit repair companies have the same information that you have, so you can do anything they
can do. Thanks to the Fair Credit Reporting Act, you have the right and ability to access your
credit and dispute errors you find on your credit report. This law and the information provided in
this book put you in the driver’s seat. Now, it is up to you to turn the key, push on the gas and
drive down the road to great credit. You can do it!

Yes, you are more than the sum of your FICO score, but your FICO score is important for your
financial life. As a member of the newly debt free, you have the opportunity to make a fresh start
and to create a new history for your credit and for yourself. You have the chance to realize your
dream of better credit and all the perks that accompany a better credit score. You can do it!

While we were careful not to flood you with too much information, we are including links to
information on the following credit laws: Fair Credit Reporting Act, Credit Repair Organizations
Act, Fair Credit Billing Act and Fair Debt Collection Practices Act. You don’t need to
understand every aspect of these laws to be successful, but we provide links to this information
so you can review them at your convenience. They are long and sometimes complicated, but you
can get through them with some time and patience. You can do it!

The goal of this book is to give you the information you need to take control of your credit and
stop letting your credit control you. You can do it!

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Links to over 200 pages of FREE information about important credit laws:
•

Fair Credit Reporting Act
o A Summary of Your Rights Under the Fair Credit Reporting Act
o Full Text of Fair Credit Reporting Act
o Full Text of the Fair and Accurate Credit Transactions Act (FACT Act)

•

Credit Repair Organizations Act
o Credit Repair: Self-Help May Be Best
o Warning Against “New Identity” Credit Repair Scams
o Full Text of the Credit Repair Organizations Act

•

Fair Credit Billing Act
o FCBA information on FTC website
o Full Text of the Fair Credit Billing Act

•

Fair Debt Collection Practices Act
o Fair Debt Collection Facts for Consumers
o Full Text of the Fair Debt Collection Practices Act

•

The Federal Trade Commission’s Guide to:
o Building a Better Credit Report

Don’t forget to download your personal monthly budget spreadsheet.
•

Personal Monthly Budget Worksheet - Microsoft Excel Version

•

Personal Monthly Budget Worksheet - Adobe PDF Version

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