The (Long) Path to Rebuilding Your Credit

Rebuilding Your Credit Takes Time.

There’s no easy way to raise your credit-worthiness overnight and although many companies claim to offer “credit repair” services, consumers should be cautious. The only way to quickly boost your Credit Score is file a dispute to have inaccurate information removed. If all of your credit information is accurate (or if the credit bureau finds your dispute to be “frivolous”) then the only way to raise your credit is with time.

The good news: time does heal everything…well, almost everything.

About Credit Scores and FICO

A credit score is a number that essentially represents a company’s or a consumer’s credit worthiness. The most commonly used credit score is the FICO score, developed by Fair Isaac Co (get it? Fair Isaac Co). To banks and other lending institutions, a consumer’s credit score represents the “risk” involved. A higher score means less risk and therefore that lender may be more willing to lend to you and may even offer lower rates.

FICO scores range from 300-850, with 723 as the median credit score for Americans in 2010. Historically, 640 was used as the division between “prime” and “sub-prime”, but after the recent credit crunch most lenders use 660 (meaning it may be difficult to get approved for a loan or receive decent interest rates if your score is below 660). 740 is another dividing mark where consumers with a score at or above 740 generally receive the best interest rates. Essentially, think of any score below 500 as “very poor”, 500-609 as “poor”, 610-659 as “fair”, 660-739 as “good”, 740-799 as “great”, and 800-850 as “excellent”; however, every lender uses different scales, and in fact some use their own scoring system instead of FICO.

Some other scoring systems include NextGen, VantageScore, and CE Score. VantageScore ranges from 501-990 and CE Score (used by Quizzle) ranges from 350-850.

Source: [1]

Factors Used in Determining FICO Scores

Algorithms that are used to determine a FICO score are very, very complex. However, I’ve broken down the basics and (over-) simplified how FICO scores are constructed below (well, Wikipedia did):

35%: Payment history-Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a FICO score to drop. Bills paid on time will improve a FICO score. 30%: Credit utilization-The ratio of current revolving debt (such as credit card balances) to the total available revolving credit or credit limit. FICO scores can be improved by paying off debt and lowering the credit utilization ratio. Alternatively, applications for and receiving the credit limit increase will also drive down the utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on a FICO score. 15%: Length of credit history-As a credit history ages it can have a positive impact on its FICO score. 10%: Types of credit used (installment, revolving, consumer finance, or mortgage)-Consumers can benefit by having a history of managing different types of credit. 10%: Recent searches for credit-Credit inquiries, which occur when consumers are seeking new credit, can hurt scores. Individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries, however. While all credit inquiries are recorded and displayed on credit reports for a period of time, credit inquiries that were made by the owner (self-check), by an employer (for employee verification) or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score.

Source: [2]

Step 1: Get Your Free Credit Reports

In order to begin to rebuild your credit, you have to know where you stand. The Fair Credit Reporting Act allows consumers to get one free credit report from each of the three major credit bureaus once every 12 months. The three big credit bureaus are Experian, Equifax, and TransUnion.

The only place to get your free credit reports is at This site is the (only) government-regulated service established by the Fair Credit Reporting Act [3] that allows consumers to get a free copy of their credit report from Experian, Equifax, and TransUnion every 12 months. Beware of the many free credit report and score scams that require a 30-day free trial and then charge a monthly fee. Also, it’s important to note that your free credit reports do not include your FICO score. You can, however, get your score (or estimate of your FICO score) through free services such,, and

You are also entitled to a free credit report if you are ever denied credit, employment, or any other application where credit was a factor, but you must supply the denial letter within 60 days and only for the credit bureau whose report was used in the decision. If you’re unemployed and actively seeking employment or if you’re on government assistance programs such as SNAP, Medicaid, or welfare you also qualify for an additional credit report every 12 months. You’ll also get a revised credit report and score after successfully filing a dispute with a credit bureau. Otherwise you’ll have to pay to receive a copy of your credit report, usually $7-10 each, and more for your actual FICO score.

Step 2: Review Your Reports and Check for Inaccuracies

First, review your credit reports and make sure that there aren’t any inaccuracies (or surprises). You may have been a victim of identity theft and not have even known about it. Or maybe an account is listed as being in collections even though it’s been settled or paid off, or you may have never even known about it.

Revolving credit accounts like credit cards and installment accounts like auto loans and mortgages aren’t the only items listed: if you’re (very) late for a utility bill then that company may have forwarded your delinquent account to collections (even if you thought you paid that last cable bill before you moved, but they charged you one last $25 fee and you never got the notice).

If you see any possible errors, be sure to first contact the creditor or company to try and resolve the issue, and then file a dispute with each affected credit bureau (not all companies report to all three, and your reports and scores may be slightly different…or very different). Filing a dispute online is the easiest, and it’s completely free. Be sure to include all appropriate information, such as the company name, account number(s), amounts, and provide any documentation available. The item will then be “under investigation” and after a couple weeks if the dispute is approved, the item will be corrected or removed and the credit bureau(s) will send you a free, updated credit report and score.

You should also update your personal information: any name changes, current address, and telephone numbers (I recommend that you get a free Google Voice number and link it to one of your mobile numbers. That way if a debt collector calls you can block them, but also forward calls or texts to any or all of your phone numbers and transcripts and recordings to your email. Completely free and you even get to pick your number!)

Consumers can also add a “personal statement” that all creditors will see. This may help creditors to better understand any negative records, such as by stating “filed bankruptcy due to medical bills” or “filed bankruptcy for divorce”. Believe it or not, such a personal statement may help you to get approved if your score is “on the fence” in the eyes of a creditor or prospective employer.

Disputing Inaccuracies with TransUnion

You can quickly and easily dispute online with TransUnion.

You also can file a dispute via mail. [TransUnion] recommends using a certified letter and keeping copies of any receipts and supporting documentation. Click for a sample letter.

2 Baldwin Place
P.O. Box 2000
Chester, PA 19022

Disputing Inaccuracies with Experian

You can dispute online with Experian.

Disputing Inaccuracies with Equifax

You can dispute certain items online with Equifax if you have an active Equifax credit report file number.

You can also file a dispute with Equifax via mail.

P.O. Box 740241
Atlanta, GA 30374-0241

Source: [4]

Step 3: Settle Your Outstanding Debts and Make Payments On-Time

Settling any negative accounts that are in collections or making payments on accounts that are seriously past due will really help your score. Creditors are usually very willing to settle a debt for substantially less than what is owed or make very flexible payment plans. Why? If your account is seriously delinquent a creditor knows that they may never get their money or they might fear a bankruptcy filing. They’ll be more than willing to take something-anything-if it will avoid a bankruptcy and expensive attorney fees. However, if you settle for less than what was owed it will be indicated on your credit report and you may have to claim the difference when you file for taxes if the amount is greater than $600.

After that, keep your payments as current as possible. With the passage of the Credit CARD Act of 2009 [5], credit card companies are required to provide more detailed statements and issue statements at least three weeks before the due date. This should allow plenty of time to plan your payments accordingly. If your minimum payments seem too high, try and make weekly payments in advance. Now credit companies cannot charge fees for multiple payments in a billing cycle or “convenience” fees for paying online or over-the-phone. (They also can’t raise rates on existing balances and cannot charge over-limit fees without your prior approval, among other cool restrictions.)

Step 4: Get a Secured Credit Card

One of the best tools to rebuild you credit is to get (and use) a secured credit card. This type of credit card is available to people even with bad credit, but requires a security deposit, usually between $200-1000. After you pay the deposit, your account will be opened and that amount will be your credit limit. This acts as a safety net in case you stop making payments. If you ever close your account your deposit will be refunded. Be careful as secured credit cards often have high interest rates (24.95% and up) and usually have an annual fee from $25-75.

Use your card every month and always pay on time, and try to never charge more than 30% of your credit limit (for example, if your limit is $1000, try to keep your balance below $300), but don’t not use your card, as that won’t help raise your score.

Usually after twelve months of on-time payments, you may be given the option of converting your secured credit card to an unsecured card that doesn’t require a deposit (and have yours refunded), and usually with a higher credit limit and lower interest rates or no annual fee. I wouldn’t recommend trying to convert or open an unsecured credit card until after you’ve made 12 or more on-time payments.

Orchard Bank Classic MasterCardsAn excellent credit card for help rebuilding credit scores; reports to 3 major credit bureaus monthly! Acceptance at millions of locations worldwide, including website purchases and reservations Your account information is updated and at your fingertips 24/7 so you can manage it your way Email and text messages are available to remind you of your upcoming payment due date On-call customer service representatives to assist you with questions or concerns

APPLY for an Orchard Bank Classic MasterCard NOW!

The Orchard Bank Secured MasterCard is consistently the highest rated secured credit card by Credit Karma users. The annual fee is waived the first year. It has been reported that Orchard Bank has good customer service. Members have also reported healthy credit limit increases and upgrades to unsecured cards with responsible payment history.

It is important to note that Orchard Bank does have a unique application process. When you apply, Orchard Bank will perform a soft credit inquiry (does not lower credit score) to determine the best product for you. If you have strong credit, they will provide an unsecured card. The secured MasterCard has an APR of 7.90%-19.90%, an annual fee of $0 – $60 for the first year and $35 – $79 per year thereafter, and no processing fee for people with poor or no credit. The minimum security deposit is $200.


No Processing Fee. Annual Fee Waive Year One Builds Credit History Upgrades to Unsecured Credit Card


Requires a $200 Deposit Credit Score Approval Data

AVERAGE Credit Score Approved for this Card: 599
LOWEST Credit Score Approved for this Card: 494

Source: [6]

CapitalOne Secured MasterCardGet the credit you need with no processing fees or application fees Automatic reporting to the 3 major credit bureaus Track credit with access to your credit score and other tools Your refundable security deposit can get you a line up to $3000 You may qualify for credit line increases with no further security deposit required Use it like any MasterCard credit card, accepted at millions of locations worldwide

APPLY for a CapitalOne Secured MasterCard NOW!

Capital One’s Secured MasterCard helps you build credit without breaking the bank. With no set up or processing fees and a hard-to-beat annual fee of $29, Capital One Secured MasterCard reports to all 3 major credit bureaus so you can take steps to build your credit history.

Additionally, Capital One provides credit resources, like access to your credit score, to help you monitor and better your overall credit health. After continued smart and responsible credit use, Capital One rewards eligible cardholders with a credit line increase without additional security deposits. Initial security deposit requirements start at $200, and can secure you a credit line up to $3,000.

A secured card is one of the best ways to turn around poor credit or establish good credit history, and Capital One’s Secured MasterCard is the right tool to help you do it an easily and affordably.


Low annual fee No processing or application fees


High interest rate Credit Score Approval Data

AVERAGE Credit Score Approved for this Card: 552
LOWEST Credit Score Approved for this Card: 488

Source: [7]

Step 5: Open a Pre-Paid Debit Card or Checking Account and Make a Budget

If you are unable to open a checking account due to poor credit (see Credit and Debit Reports below), a pre-paid debit card will allow you to manage your money safely and securely with a debit card, online banking, and other features such as bill pay.

Visa RushCard

The RushCard by Visa is a good option if you’re looking for a pre-paid debit card. It has (almost) all the convenience of checking account with no credit/debit check. It’s safer than cash and RushCard also offers a service to help build your credit. Every time you pay a utility bill or pay rent with Bill Pay, RushCard will report to all three major credit bureaus and help raise your score.

You can choose from a pay-as-you-go plan ($1 fee for transactions, max $10 per mo, plus others) or a monthly plan with lower fees for $9.95 a month. There’s a small, one-time fee to activate your card ($3.95 and up, depending on the design you choose).

You can load your card many ways, including free direct deposit, free bank transfers, free PayPal transfers, Wire Transfers ($3.95 fee or so when placing transfer), or by using a GreenDot MoneyPak ($4.95 or less when purchasing).

Visa RushCard also has an awesome refer-a-friend program that pays referrers $5 when another person activates a card after using the referral URL or code to sign up.

ING Direct

Yes, even you need an active checking account. I strongly recommend an online, paperless checking account with ING Direct. With their Electric Orange free checking account you can earn interest (with no minimum balance) and get a MasterCard Debit Card…and never pay a single fee. Ever. No overdraft fees, no monthly maintenance or dormancy fees, and no minimum balance (well, $1 or more is required to open the account). No ATM fees either.

You can also apply for a line of credit for your Electric Orange account so if a transaction ever puts you in the red, you still won’t pay a fee but the transaction will be approved. Your account will then act like a credit card and you’ll be charged a very competitive interest rate until your balance is back in the green.

ING Direct accounts are paperless, and there never were any paper checks available (now you can order paper checks for a nominal fee of $5-the only fee I’ve ever seen at ING Direct) and there are no branches available to cash your checks or make a deposit. Adding money to your account is easier than you’d think, with free online bank transfers (or from PayPal), free direct deposit, free wire transfers, person-to-person transfers, and you can always mail an endorsed check and have it deposited. There’s also free bill pay and an option to have ING Direct print and mail a check to a company or person-all for free.

Open an ING Direct Electric Orange Checking or Orange Savings account using a referral URL and with at least $250 and you’ll get a $25 bonus after 30 days (and your referrer will get $10). Using the Refer-a-Friend program you can refer up to 50 friends per year and earn up to $500!

Other Checking Accounts

Ally Bank offers a similar online-only checking account with competitive rates. If you’re hesitant to open an online-only account, consider a free checking account at one of your local credit unions. Credit unions are more considerate when it comes to poor credit and often have better rates and more benefits, as well as being more community-oriented.

Credit and Debit Reports

It’s worth noting that sometimes ING Direct (and other banks) check your credit and may deny your application if your credit history is too adverse. Banks that have deposit accounts also use another system called a Consumer Debit Report to check your history with checking and savings accounts, the most common being ChexSystems. Whenever you “bounce” a check or commit other similar nasties, your bank likely reports you to ChexSystems, which might make it more difficult to open a checking or savings account. Get your free Consumer Debit Report from ChexSystems here. and Budgeting

After you have a secured credit card and a checking account, you’ll need to make a budget plan. offers a fabulous (and free) online money management tool and budget. Add all of your financial accounts such as credit cards, loans, investments, savings bonds, retirement accounts, checking and savings accounts, and even your pre-paid debit cards and will automatically grab all of your transactions and balances. will then sort transactions and make cool pie charts and graphs and tell you exactly where your money is going, how much you’re making, and even how much you spent on gas or on iTunes last month-or in 2008.

Budgeting with is really easy after you know exactly how much you’ve been spending every month and they’ll even recommend a budget for you. Just log in every day or so and you’ll see how well you’re doing and show how close to your budget you’re at for each category this month, and how well you’ve done in the past. You can also choose to get text or email alerts whenever you get a large deposit, make a large purchase, get close to your credit limit, have a low balance, or come close to maxing out your monthly budget. is absolutely free (supported by advertisements) and is really an invaluable budgeting and comprehensive money management tool.

Step 6: Track Your Credit

Now that you’re well into rebuilding your credit, you should track your progress…for free. While you can only request a free credit report so often (normally every 12 months), you can get free updates to a “lite” version of your credit reports and your FICO score (or estimate) for free.

CreditKarma allows you to get and track your credit report and score through TransUnion, completely free. You can update your report and score every day, and even watch your progress with charts and get text or email alerts when something changes. You can run a credit simulator to see how opening or closing a credit card, making payments or taking on more debt, or even how filing for bankruptcy would affect your score. CreditKarma offers an estimate of your FICO and VantageScore, as well as your “Auto Insurance” score. They also bombard you with credit card and deposit account offers to “Save $2000 a year!” offers a similar free service with slightly more details with your Experian report. While it may not be as user-friendly and more annoying asking you to pay to upgrade to see your full report everywhere, it does offer slightly more details and a different score from Experian.


Finally, is yet another free service from Quicken. Quizzle offers your entire credit report from Experian and CE Score, and also has some (limited) budgeting and tracking tools. However, you can only update your credit report for free every 180 (?) days. They also annoyingly beg you to upgrade and update your report daily.

While you shouldn’t expect your credit scores to jump to 740 after one month, it is reassuring to see your progress every couple months (even if your score only goes up one or two points).

The Black Hole of Debt: Bankruptcy

While covering the specifics of US Bankruptcy laws is outside the scope of this guide, bankruptcy is an important factor in determining credit scores.

As you would expect, filing for bankruptcy has a seriously negative impact on your credit. Bankruptcies are meant to be a last resort, and they will stick with you (and on your credit report) for quite a long time. However, in some instances filing for bankruptcy might actually improve your credit score by a small amount…maybe. (Try running a credit simulator at; however, you really should exhaust every other option before filing for bankruptcy.)

There are two main types of bankruptcies for individuals: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy is also referred to as a “straight” bankruptcy and generally involves the liquidation of all of the filer’s non-exempt property and assets with distribution to the creditors, and discharge of all eligible debts (in other words, most or all debts are “forgiven”; a “clean slate”). A Chapter 7 bankruptcy will stay on your credit report for TEN years.

A Chapter 13 bankruptcy is sometimes called “bankruptcy lite” (well, by me anyway), and involves creating a debt-repayment plan with either a partial or no liquidation of property and assets. Under a Chapter 13 bankruptcy, the filer agrees to repay at least part of his/her outstanding debts over a period of time. After successful completion of the repayment plan, any remaining debts are discharged. While a Chapter 13 bankruptcy is less serious than a Chapter 7, it will still negatively affect your credit and stay on your report for SEVEN years.

With the Bankruptcy Reform Act of 2005 [8] (allegedly to help prevent abuse), it has become harder to file for bankruptcy and there’s a push for consumers to opt for a Chapter 13 over a Chapter 7. Filers must meet a “Median Income Means Test” for a Chapter 7 and filers must take approved credit counseling courses for both Chapter 7 and 13.

Before you file for bankruptcy, try to get help from a credit counselor or other professional and consider joining a Debt Management Program (but watch out for scams!). However, joining a Debt Management Program will initially hurt your credit.

Tips to Keep Your Credit Score in Check Tip: Make Payments On-Time

This might be obvious, but having an on-time payment history is the biggest sole factor in determining your FICO score. It’s OK if you’re payment is a few days late, as only payments later than 30 days affect your score (although you’ll still be slammed with a hefty late-payment fee).

Late payments are indicated each month with a 30, 60, 90, 120, or more day-late notice. Even one 30 day-late notice will heavily impact your score.

Tip: Keep Your Balances in Check

One big factor in your credit score is your Credit Utilization ratio. This is essentially the percent of your running balance is to your credit limit. Never max out credit cards or have balances higher than 80% of your limit. Try to keep your ratio between 10-30% and at best below 50%. Having no running balance won’t help your credit, either.

If you insist on paying off your entire balance every month (which is a good idea as you’ll never be charged interest), it might be a good idea to wait until a week before your payment is due before paying it off. Remember to use your card each month (but avoid charging for items like groceries and fast-food as that can lead to a very bad habit of using your credit cards too much). Credit card companies report your running balance a certain day each month, so try and not only keep your payments current, but try to have the company report a running balance between 10-30% or your credit limit each month.

Tip: Don’t Close Unused Accounts

In years past, it actually hurt your FICO score to keep old, unused revolving credit (credit card) accounts open. However, all that has changed. Again, one major factor in calculating your FICO score is the average age of your open accounts. So, if you close your oldest account your average age will decrease, and thus your score. While not using a credit card account by keeping a zero balance doesn’t necessarily help your score, if it increases your average age of open accounts, it does actually help to keep it open, even if you never use it. It’s also important to consider any annual fees.

Tip: Don’t Open Too Many Accounts at Once

Like it was just mentioned above, the average age of your open accounts is a big factor in determining your FICO score. Then it should be obvious that when you open a new account, your average age will decrease as well. Also, “hard pulls” (or credit report inquiries not performed by you to check your credit) count against your score. These inquiries stay on your report for two years, and it’s a good idea to keep the number of inquiries below two. This isn’t a major factor, but if you have too many inquiries then creditors may suspect that you desperately need credit and may be a higher risk.

It’s worth noting that the number of inquiries is usually “grouped” if you apply for similar accounts within a two-week period. This allows you to not damage your credit if you shop around for the best rates for say, a new auto loan. “Soft-pulls”, such as when you check your own credit reports don’t affect your score.

Tips: Have a Variety of Credit Accounts Open

It’s a good idea to mix it up and have different types of credit accounts open. That’s to say, if all of your accounts are revolving accounts (credit cards), you’re score will be slightly lower. Having open credit cards along with different installment accounts, like an auto loan, a mortgage, and some student loans actually helps your score.

Closing Remarks

I hope you find this guide useful and actually use it to help improve your credit.

Like it or not, your credit score is an important part of life, and increasingly so. Your credit score is no longer just used when applying for a loan or credit card, but for all financial accounts, like a checking or savings account, but also when you apply for Auto Insurance, a job, or even an apartment to rent. In the next five years it just might be nearly impossible for those with bad credit to get any job other than at McDonald’s or find a place to live.

When trying to improve your credit, it’s important to be organized and stick to your budget. Thankfully there are plenty of free resources to help you on your long path to rebuilding your credit.

For Mom and Tim.




People also view

Leave a Reply

Your email address will not be published. Required fields are marked *