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Bad credit score? Here's how to fix it

Building or rebuilding a credit score seems like an impossible task. Young people starting out think they'll never qualify for the best interest rates. Homeowners who may be facing foreclosure think their scores will never recover.

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We asked readers what they wanted to know about FICO scores, and we had many requests for guidance on building or rebuilding them. We posed these questions to Fair Isaac product support manager Barry Paperno, who has worked for the credit-score company since 1995.

A reader who hasn't used credit cards in 15 years and has paid off the car and the mortgage wants to know how to build a credit history again. Any suggestions?

A misconception is that it takes a lot of credit, or that you need a long history or a lot of credit to establish credit, and that's not true. You can get by with one account on your credit report, because the minimum criteria are an account that's at least six months old and one that has been reported to the credit bureau or updated at the credit bureau within the last six months. It doesn't even need to be active; it just needs to have been reported by whoever issued that account. It can be the same account you've had for over six months that gets reported every month -- then you have a credit history with that account. Or, like in this person's case, let's say that the mortgage that they paid off is still on the credit report from 15 years ago. That would meet the requirement of being on the report for six months. Then let's say he gets a new credit card -- the first day that that gets reported to the bureau and shows up on his credit report, he's got a FICO score.

Rebuild and repair
A FICO expert explains what it will take to build a credit score and how to repair a score after a foreclosure.
5 questions for Fair Isaac expert
1. How can you build credit?
2. How can you find out to which bureaus the creditor reports?
3. How many inquiries will hurt your score?
4. How long should you wait to apply again after you've been turned down?
5. How much will your score decline after a foreclosure?

That's basically what the score requires. In terms of the strategy to go about doing that, there may be some pitfalls to avoid and things to do to get the most bang for your buck. When you're in the Catch-22 -- you don't have credit and before somebody's going to issue credit they want to see some credit -- one thing that people do is get a secured card. Credit unions are good for that or a bank that you've had a good relationship with for some time. You would use it in the same way as you would a credit card, any bank card. It would be a Visa or MasterCard, for example, but the lender would require collateral from you, usually in the form of a deposit.

That deposit usually corresponds to the limit that they're going to extend you. So, for example, if you'll put a $500 deposit down in their bank or credit union, they will give you a $500 limit. You can run your balance up to that and you can pay it every month just like you do a credit card, but of course there's more security for the bank. If you default, they can just take the money you have on deposit. The thing to make sure of is that it functions like a credit card, and to make sure that it's going to be reported to the credit bureaus as such. It doesn't do your score any good if that's not reported to the credit bureaus. You want to make sure that it's reported to all three credit bureaus, if possible.

Next: "Don't be a minute late because you have no track record ..."
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