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3 Crucial Steps Toward Credit Repair

If your credit is bad, or not as good as you would like, there is no time like the present to get things moving on the right path. After all, your credit report and score are fluid, meaning that they simply indicate how strong your creditworthiness is now. What they look like in the future is up to you.

There are some credit repair steps you can take now, and with a little effort, you could begin to notice your credit improve very soon.

Know where you stand
You can't really start fixing your credit unless you know what's wrong. Fortunately, by law, you are entitled to a copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) absolutely free of charge once a year.

You can request your reports at this website set up by the credit bureaus. Be aware that most places advertising a "free credit report" are not part of this program, and will require you to sign up for a credit monitoring service. The actual annual credit report site will not ask for your credit card information or any monetary commitment whatsoever.

Once you have obtained your credit reports, go through them and highlight any negative entries such as collections, judgments, charge-offs, and accounts with late payments. If there is anything you don't recognize, immediately file a dispute with the credit bureau, and they will either verify the information within 30 days or have it removed from your report.

Most lenders use a scoring model called the FICO score, and you can purchase your own for about $20 at myfico.com. Once you are ready to apply for new credit, it's useful to know your score, but while you're in repair mode, it's not really necessary. Basically, the more negative stuff that gets cleared away and the more positive information you add to your credit report, the higher your score is going to get.

Talk to your creditors...you may be surprised
One strategy that works somewhat well is calling your bill collectors and other delinquent account issuers and having a conversation about your account. Debt collectors are so used to having to hound people that a little effort on your part can go a long way.

Many collectors are willing to settle old debts for far less than the balance owed, and most are willing to negotiate. For example, if you owe $2,000 on a collection account and you receive an offer to settle for $1,200, call and make them a reasonable offer. Explain your situation and that you want to pay the account, but you simply can't afford to pay more than a certain amount. The worst they can say is no.

Now, more than ever, it pays to settle collection accounts. It used to be that "settled" and even "paid-in-full" collection accounts could seriously hurt your FICO score. Now, under soon-to-be-implemented changes in the FICO formula, collection accounts that are settled will no longer have any effect on your FICO score. If a few collections are the only negative information on your report, this could make an enormous difference.

You need a credit card, but watch out for traps
It is tough to build up a good credit score without at least one account in good standing. However, watch out for some credit card "traps" and some other products that just won't help.

For example, there are some credit cards designed for people with bad credit but many come with very excessive fees. One extreme example is this card from First Premier bank, which has an annual fee of $45 ($75 for the first year), a monthly fee of $6.25, a processing fee of $95 and charges 36% interest. If this sounds ridiculously expensive, that's because it is.

There are some other bad-credit cards with somewhat lower fees and rates, but they are still very expensive.

Your best bet is to get a secured credit card, which works just like a normal credit card, except that it requires a deposit from you (which you get back upon closing the account) equal to your credit line. So, a $1,000 deposit will get you a credit card with a $1,000 limit. And, the card itself doesn't appear any different, nor will it be reported differently than any normal credit card.

And, unlike some of the "bad credit" products out there, interest rates and fees on secured cards are usually very reasonable. Most major U.S. banks offer some type of secured credit card, so shop around and see which is best for you.

It's a new day
As I mentioned earlier, your credit changes over time. As time passes, late payments and charge offs have less of an effect, and recent behavior is more heavily weighted. So, the absolute best thing to do for your credit, after you do some damage control, is to use it responsibly and effectively from here on out.

Your credit card may soon be completely worthless
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Matthew Frankel
KWMatt82

After several years as a high school math teacher, Matt brought his love of teaching and investing to the Fool to help people invest better. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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