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By Mike Roberts

The Credit Solut ionCopyrig ht 20 12 by Mik e Roberts


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Copyright Information:

Copyright 2011, 2012 by Mike Roberts

All rights reserved. No part of this book may be reproduced, distributed,

transmitted, stored in a retrieval system or used in any form or by any means,whether electronic, mechanical or digital, except as may be expressly permittedby applicable copyright laws or as expressly allowed by the publisher or theauthor in writing.

Publisher Infor mation:

Published by Smart Consumer Solutions, LLC, 601 Van Ness Ave, STE E869San Francisco, CA 94102.

Disclaimer:

All of the information contained in this publication is true and accurateaccording to the best information available to me at the time of publication.Please understand, however, that laws and credit industry practices andprocedures are constantly evolving; so you should independently update laws,practices and facts before you take action. I do not accept any responsibility forerrors or mistakes of any kind, or for any damages or losses that might resultfrom the use of any information provided.

Also, I am not a lender, a collection agent or a credit reporting agency. I am notan accountant or an attorney, and nothing in these materials is intended asprofessional advice. It is personal opinion only. I am providing it to you withoutany warranties or guarantees whatsoever. To obtain advice as to the tax or legalconsequences of any action covered in these materials, or any action that youmight consider based on these materials, you should consult an attorney, anaccountant, or both. What I have tried to do here is simply offer solid, usefulinformation that I have obtained through my own personal and businessexperience. Any action you choose to take based on any information that Iprovide, including forms and other attachments, is entirely your responsibility.


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Table of Cont ent s

Introduction: ................................................................................................... 3

Who Needs Good Credit? ........................................................................ 3

Why Do You Need Good Credit? .............................................................. 3

What Exactly Is Good Credit? ................................................................ 3

Will You Benefit from This Report? .......................................................... 4

Step 1: Figure out Your Current Finances. ........................................................ 6

Step 2: Open a Bank Account. .......................................................................... 7

Step 3: Get a Secured Credit Card. ................................................................... 8

Step 4: Become an Authorized User. .............................................................. 10

Step 5: Get an Unsecured Credit Card. ........................................................... 12

Step 6: Get an Installment Loan. .................................................................... 14

Some General Principles. ............................................................................... 17

Some Credit Repair Methods to Avoid. ......................................................... 18

The End Game. .............................................................................................. 21


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Introduction:

Who Needs Good Credi t?

You Do !In fact, everyone does. I feel very strongly about this because Ipersonally know what its like to have credit that isnt so good. Ive been there.Ive felt the pain, believe me; and I want to help you avoid it (if you have nocredit now) or stop it (if you have bad credit now). Thats exactly why Ivewritten this report. If your credit picture is bleak, thats about to change. Thehelp you need is in your hands right now.

Why Do You Need Good Credit ?

Because We Live in a Credit Society.The world we all live in today favorsthose with good credit and punishes those who dont have it. Bad credit cancost you a fortune. For an in- depth look at how severe the penalties for poorcredit can be, take a look at The Credit Solution, Chapter 1. The details andexamples presented there are not for the faint hearted, but they will help youunderstand exactly why establishing good credit is worth the effort. Theyll helpyou stay motivated and focused as you go through the process of changingyour financial life. I want you to avoid paying the multi- hundred thousanddollar penalties that I know youll have to pay over your lifetime if you dontestablish good credit now.

What Exactl y Is Good Credi t?

Its a FICO Score of at Least 720 . Whenever I talk about good credit, Imreferring to a FICO credit score of 720 or better. As you know from The CreditSolution, there are three major credit reporting agencies (CRAs): Experian,Equifax and TransUnion. Their sole purpose in life is to compile detailedinformation about your financial life and report it upon request, in the form ofcredit reports and FICO scores, to creditors around the world. In The CreditSolution, I explain exactly how the CRAs do what they do, how the creditreporting system really works, and how they calculate your FICO score; but forpurposes of this report you just need to understand that you need a score of720 or higher.


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Wil l You Benefi t f rom This Repor t?

The information that I cover in this report will help you (in fact, it will beinvaluable to you) if

You have not yet established credit in your own name.

o Maybe youre a young person, just starting out in your adult life,and youve never financed a purchase or held a credit card in yourown name.

o Perhaps youve recently ended a marriage in which your spousehandled all the finances.

Youve suffered through a financial meltdown that thoroughly trashedyour credit.

o Maybe theres a bankruptcy in your recent past or youve recentlylost your home through foreclosure;

o You might be one of the millions of people whove been hit with anavalanche of medical expenses and youve had several accounts goto collections;

o Perhaps youre now unemployed, and as a result youve defaultedon one or more loans; or

o

Maybe you just havent been financially responsible in the past, butyouve turned a corner in your life and you want to start fresh.

It really doesnt matter why you have no credit, or why your credit is bad.Regardless of the reason, the information youll find here will help you improveyour financial life (and your life in general).

Bankr upt cy or Foreclosure?If youve recently suffered through a bankruptcyor a foreclosure, you might be thinking that there isnt any hope for youthattheres no way youll be able to rebuild your credit any time soon. Think again.

Its true that these negative marks can torpedo your credit score(sometimes by 200 points or more),

Its true that they generally stay on your credit report at least seven years(ten years for bankruptcies),


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But its not true that your credit score has to remain low throughout theseven or ten years.

The fact is that the harmful effect of a bankruptcy or foreclosure fades withtime. The CRAs weigh recent events more heavily than older events in

calculating your FICO score. This means that there are things you can do rightnow to help yourself. You can start now to build a history of recent events thatwill begin to outweigh your bankruptcy or foreclosure as time goes by. You canbuild up your decimated credit, and achieve a respectable score in as little as18 months to two years after a bankruptcy or a foreclosure if you work hardduring this period to establish other loan accounts and make all your paymentson time. In this report, Im going to show you exactly how to do just that.

Heres how this will work: Im going to take you through this in six steps.

Steps 1, 2, 3 and 4 are available to you right now no matter who you are

or how dismal your credit situation might be. You can get started todaywith Steps 1 through 4 even if you lost your home through foreclosurelast week and recently filed bankruptcy.

Steps 5 and 6 are for those of you who have completed the first foursteps or who already have established some minimum level of credit. Ifyouve done nothing to date to establish credit, or if youve recentlysuffered through a financial catastrophe that destroyed your credit, youllhave to wait a little while to start moving through the last two steps.When I say a little while, I mean it. You wont have to wait long. If youfollow the first four steps, you can be working your way through Steps 5

and 6 in as little as three to six months.

I know that this process will work for you because Im going to show you whatyour options are, and Im going to help you decide which ones to pick. If youmake the wrong choices as you go along, you can end up wasting your timeand making your credit picture worse instead of better. You want to avoid that,and you will. When youve finished this report, youll be ready to start buildingyour credit and youll know exactly how to do it.

One mor e thing : Ive learned the hard way what it takes to establish andrebuild damaged credit. Ive gone through it myself, and Ive had the pleasure

and satisfaction of helping thousands of others improve their credit. Ivestudied the lending and credit reporting system in depth, and Ive learned howthe various parts to the puzzle fit together. Ive put a lot of thought into thecredit- building steps that youll find in this report, and I promise you that theyare all critical. Please dont leave any of them out. To get the maximum benefitfrom this program, you need to do each and every step.


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Step 1 : Figur e out Your Cur rent Finances.

The first thing you have to do is determine exactly where you stand financiallyright now. You need to know how much money you have coming in every

month, and how much youre spending. Now maybe youre a person whobudgets very carefully, and youve already calculated your monthly income andexpenses down to the penny. But . . . youre probably not. I certainly wasntwhen I started working on improving my credit, and I can tell you fromexperience that starting with a candid cash flow assessment is a huge help.

Get Your Worksheets. To help you through this Ive put together twoworksheets for youone for your monthly income and another for yourmonthly expenses. Youll find them in the Where Do Things Stand RightNow? section of the Bonus Workbook that comes with The CreditSolution. Please go there now and fill out the two worksheets. Youll find

plenty of examples, instructions and useful tips to help you through theprocess.

Get Your Credit Reports. Dont make the mistake of relying on yourcheck register and the bills that show up in your mailbox to get acomplete list of your expenses. You might have obligations that dontimmediately come to mind, and you need to factor those in. Get yourcredit report from all three of the major CRAs and go over it carefully tomake sure youre accounting for everything. Its amazing how often acredit report will reveal items that are long forgotten. I go over the detailsof how to get your report, and how to read and understand it, in The

Credit Solution.

Once youve accounted for everything and youve finished putting in all thenumbers, youll see the current financial truth revealed. Youll see either goodnews or bad news. Youre currently running in the black or the red (youreeither making ends meet, or youre not).

If Youre in t he Red, youre falling farther and farther behind with eachpassing month. This isnt good. The longer it continues, the less likely itis that youll ever establish good credit. If this describes you, you still canuse much of the material in this report to help yourself right now; but to

take full advantage of my approach, youll soon have to find a way to getyour expenses down. You really have only two options:

o You can find places in your budget where you can economize (thismight work for you if your expenses exceed your income by only asmall amount), or


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o You can learn how to negotiate with your creditors and convincethem to reduce the amounts you owe. This way you can take somebig bites out of the numbers in your expenses column.

You might be surprised to learn that this is even possible, but I

promise you it is. Ive done it myself; and Ive put together acomplete method that you can use to reduce your own debts bynegotiating with your creditors. It includes detailed instructions,form letters to creditors, and negotiation techniques; and you canfind out more about it on the Credit Solution website.

I strongly recommend that you do both, especially if you have a lot ofdebt; but helping you with the process of getting your finances in shapeis beyond the scope of this report. The good news is that even if youre inthe red right now, you can still make good use of the information thatfollows. Youll just be using the tools and techniques a little differently.

Ill explain more as we get into the details.

If Youre in t he Black , congratulations. Theres no reason why you cantlook forward to establishing good credit, and keeping it that way. Youreall set to take full advantage of the credit- building techniques Im aboutto share with you.

Step 2 : Open a Bank Account .

If you already have a bank or credit union account, thats great. If you dont,open one. In fact, I recommend that you have both a savings and a checkingaccount. There are two reasons for this:

1.Youre going to be applying for credit, and credit applications oftenrequest checking and savings account numbers. If you can supply thosenumbers, this tells the potential creditor that you have some of the basicpersonal finance tools (a checking account and a savings account) inplace. If you cant identify any bank accounts, it sends the oppositemessage.

2.

You need a relationship with a bank or a credit union, for reasons thatwill become clear as we move along.

Lets be clear: Im not suggesting that you need a bank account because it willdirectly help your FICO score. In fact, it wont. By itself, opening a bank accountwont help your score at all because banks and credit unions dont reportchecking or savings activity to the CRAs. The reason I recommend having a


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bank account is that it will put you in a better position to do some of the thingsthat will help your scorethings that Ill cover in Steps 5 and 6.

Step 3: Get a Secured Credit Card.

OK, now its time to start taking actions that directly will affect your creditscore. As you know from reading The Credit Solution, everybody builds goodcredit the same wayby using credit. Its the process of borrowing money, andrepaying it on time, that establishes and reinforces a credit history. So you needto borrow some money, and the sooner you do it the better. The easiest,quickest way to borrow is with a credit card. You need one, and you need itnow.

But . . . if your credit is really in the tank right now, you might be having thisthought: No way. Theres no chance I can qualify for a credit card. Im sunk.Well, believe me; youre not out of luck. There is something called a securedcredit card that you can get right nowtoday. Before we get into the details ofthis, lets cover some credit card basics:

What i s a Credit Card?A credit card is any type of loan account that has thesefeatures:

It is open ended. This means that you dont borrow a fixed amount whenyou open the account, and there is no fixed date on which the accountwill close.

How much you owe from month to month depends on how much you usethe card, and whether you reduce your balance to zero each month.

Because credit cards just continue indefinitely, they are often referred to asrevolving accounts. Like other kinds of loans, credit cards come in twoflavorssecured and unsecured.

If a card is unsecured, there is no collateral for the loan. There isnothing for the credit card company to seize if you dont pay. Its moredifficult to get an unsecured credit card, but the interest rates and fees

are usually better on these cards. Most credit cards are unsecured.

If a card i s secur ed, this means that the credit card company can takesomething of value from you (the collateral) to satisfy the debt if youdefault. These cards are much easier to get because the credit cardcompany doesnt have to worry. If you dont pay, it will just seize thecollateral.


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You might not qualify for an unsecured card right now, but you can get asecured card today. Heres how these work.

You deposit some cash with the credit card company and they hold on toit as collateral. The amount of your deposit becomes the credit limit on

your card.

Once you have the card, you can use it just like any other credit card; butif you default on the account, the credit card company keeps yourdeposit.

You make your monthly payments out of your cash flow, not from theamount you deposit with the credit card company.

Youll pay a higher interest rate and higher annual fees than you wouldfor an unsecured card.

Some banks and credit unions offer these cards, and if yours does thats yourbest bet. If not, youll be able to find one online. Most major banks and creditcard companies have these available, so you can shop the features. Look for acard that

Has no application fee,

Requires a relatively low annual fee (under $50 instead of $100 or more),

Does not require that you buy an insurance policy to cover the risk of

default (If you hear the words insurance policy move on; this is a suresign that youre dealing with an unscrupulous company. They dont needinsurance. Theyll have your deposit as a guarantee of payment.),

Offers an opportunity to switch the account to unsecured status after aperiod of good payment performance (usually at least a year, but possiblyless),

Pays interest on your deposit amount (it wont be much, but something isbetter than nothing), and

Has a wide range of deposits and corresponding spending limitsavailable. Some companies will let you start as low as $200, and as youget into the swing of things theyll let you deposit more and increase yourlimit to as high as $3,000.

Again, these secured cards are made to order for people with troubled creditand they are the easiest kind of card to get. They are extremely useful from a


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credit- building point of view because they provide an opportunity to start rightaway building up a positive payment history.

Two really important tips:

Talk to your banker, or call and talk to the credit card customer servicefolks, and make sure youll qualify before you fill out the application.There are a few companies (only a few, fortunately) whose policy is todeny even secured cards to people with recent bankruptcies. You want tomake sure youre not applying to one of these because every time youapply for any kind of credit, it counts as an inquiry on your creditreport. As you know from The Credit Solution, inquiries can mount upand hurt your score.

Make sure that the card youre applying for reports to all three creditbureaus (CRAs). You can ask you banker or get this information on the

phone from the customer service representative. Dont take no ormaybe for an answer on this. Be certain that your card company reportsto all three CRAs.

Step 4 : Becom e an Author ized User.

While youre waiting for your new secured credit card to arrive, I want you toidentify a couple of people in your life who meet two criteria:

1.

They are very financially responsible. You know for certain that they haveexcellent credit.

2.

They know you well, and their feelings about you are loving andgenerous.

Only very close friends or family members are going to make this list, andthats OK because you only need one or two such people. Why do you needthem? Because they can help you rebuild your credit by allowing you to becomean authorized user on one of their credit cards.

Becoming an authorized user on someone elses account provides a way to getaccess to a good card and reap all the credit- building benefits. It is open to younow, no matter what condition your current credit is in. An authorized user is aperson who has a credit card with his name on it, and can use the card; but hasno responsibility for paying on the account. The owner of the account has allthe liability; the authorized user has none.


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And heres the kicker: Even though as an authorized user you have no liabilityfor money owed on the account, the owners payment record is factored intoyour FICO score calculation. Thats right; the owners timely payments on theaccount build up your credit score.

OK, youre thinking about now, sounds great. But who in his right mind isgoing to agree to this? My friends and relatives love me; but theyre not crazy.Maybe not, but being crazy isnt a requirement. There is a way to handle thisthat will allow you to put this tool to work for you and at the same time avoidany risk for anyone. Heres how to approach it:

Explain to your friend or relative that all they have to do to add you toone of their existing accounts is contact the credit card company andmake the request (theyll just need your name, address and SSN).

Explain that when the new card is issued with your name on it, it should

be mailed to the owner of the account, not to you, and that when itarrives the owner should put it in a desk drawer or destroy it.

Explain that you dont need to carry the card because you dont intend touse it. The only purpose of this exercise is to help you build credit, not toactually allow you to spend the account owners money.

Explain that you also dont want to know the account number andsecurity code (that way you wont be able to make online purchases withthe card).

Explain that the owner can remove you from the account at any time,without notice to you and without your consent.

Explain that your own poor credit history wont affect the owners scoregoing forward because you are not in control of the account in any way.The owner will still make the payments, and its the owners paymenthistory alone that will affect his score. The fact that youre an authorizeduser on the account wont affect the owners credit at all.

These assurances should be enough to persuade a close friend or an immediatefamily member to help you out with this; but just convincing someone to go

along with your plan isnt all there is to the exercise. Here are some importantconsiderations:

Make sure that the credit card company reports authorized users to theCRAs. This is critical. If they dont, this is all a waste of time and effort.The whole point of this is for you to get the benefit of the ownerspayment record on the account, and that cant happen unless the CRAs


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know that youre an authorized user.

Make sure that the account is in good standing and that the owner has nolate pays on record. The older the account is, and the longer the ownerhas been paying on time, the better. If the owners payment record isnt

good, becoming an authorized user will immediately hurt your score.

Its best for you if the limit on the account is high and the owner makes ahabit of keeping the balance below 30%of that limit. I cover the reasonsfor this in detail in The Credit Solution.

Make sure you have absolute faith in the account owners financialresponsibility. Remember that you probably wont be getting statementsor seeing any correspondence on the account. If the owner gets behind ordefaults, you wont know until its too late. Any credit score gains youmight have made will already have disappeared.

As a tool for building credit, authorized user status on someone elsesestablished account is a beautiful thing. It has lots of advantages:

The standard practice is to add authorized users to accounts withoutrunning a credit check on the person to be added. This means that yourreport wont be hit with a new inquiry when youre added to the ownersaccount.

You dont have to be approved. It doesnt matter how dark your creditpicture is.

The positive effect on your score can be substantial and quicksometimes as much as a 40- 70 point bump for a single card within a fewweeks.

Once youre on the card, you dont have to do anything to keepimproving your score. As the owner continues to pay as agreed, yourscore should continue to rise.

If you handle it right, there is no risk to you and no risk to the accountowner.

Step 5 : Get an Unsecured Credi t Card.

As I said at the beginning, this step might not be available to you right away ifyour credit is completely destroyed. Even so, you might qualify for anunsecured credit card sooner than you think- - especially if you have already


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started to build some good payment history using Steps 3 and 4. There are twotypes of unsecured cards.

Bank Cards . Contact your banker or credit union officer. This is where being acustomer and establishing a personal relationship at your local branch can

count for something. Explain what youre trying to do, and why you want thecard. These folks have good unsecured cards available through major servicingcompanies (Visa and Mastercard), and the rates and fees are favorable. Yourbank or credit union might provide you with an unsecured card

If you have checking and savings accounts with the bank that you havenot overdrawn, and

They know that you have other revolving accounts (secured cards orauthorized user status on someone elses card) that are in good standing.

If your credit is in the very early stages of recovery, then the limit on this firstcard is going to be really lowmaybe $500 or even less. Thats OK.The pointhere is to get the card and use it sparingly. Youll want to pay the balance downto zero more often than not, but not all the time. Its important to leave a smallbalance on the card (less than 10%of the limit) once every few months. Thatway the CRAs will see that youre using the card and theyll give the maximumpositive weight to your borrowing activity.

Unsecured cards issued through such online companies as CitiBank, Chase,Capital One and Discover work the same as cards obtained directly through alocal bank. These companies basically function as long- distance banks, so

there isnt the opportunity for a personal relationship that might be available ata local branch; but otherwise their unsecured cards offer the same credit-building advantages as bank cards.

Store Cards. This type of card includes department and big box store chargecards, as well as oil company cards. Sometimes called retail cards, store cardstypically are easier to get than bank cards; but because of the heavy interestrates and fees, they are less desirable. Still, if you cant get a bank card just yet,this is a good option for the purpose of establishing credit.

But dont just fill out the application at the store or gas station. You want

to make sure youll qualify first. Take the application home with you, callthe company customer service folks, and tell them your situation. Tellthem the truth (theyre going to run an inquiry anyway if you apply), andask if youre likely to get the card. Again, the idea here is to avoid aninquiry if youre going to be turned down.


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If they say youll likely be approved, make sure they report to all threeCRAs.

Step 6: Get an Installment Loan.

As you already know if youre using The Credit Solution, its important to have amix in your credit profile. I cant overstate this point: You need more than onekind of loan account, and an installment loan is a vitally important ingredient inthe recipe for good credit. If you want to take full advantage of my approachand build up a high credit score as quickly as possible, you need to get aninstallment loan. Before we get into exactly how to accomplish this, lets coverthe basics.

What i s an Installm ent Loan?An installment loan is a loan that normally has

these features:

The loan is for a specific number of dollars. The amount of the loan isidentified when the loan contract is signed, and the lender gives you thatamount (the loan proceeds).

You agree to pay all of the money back, with interest, over a fixed periodof time. Usually the payments are made monthly. The repayment periodmight be as short as one year; it might be as long as thirty years.

When the loan is repaid, the account is closed and as far as that loan is

concerned, the lender/ borrower relationship ends.

Secur ed or Unsecur ed. An installment loan might be secured or unsecured. Bynow, you already know what these terms mean. If the loan is secured, thismeans that the lender can seize the collateral if you dont pay. Car loans andhome mortgages are both secured installment loans. If the loan isnt secured,there is no collateral. The lender still has plenty of ways to collect from you ifyou dont pay, but immediately grabbing your property isnt one of them.

How to Get Your Installment Loan. This is where your bank or credit unionrelationship comes in. If you have an account already, your bank knows you.

Youre a customer. You can sit down with a loan officer and talk about what youwant to do. Dont be afraid to discuss your purpose, which is to establish orbuild up your credit. There is no need to hide your intentions. Establishing orimproving credit is a perfectly legitimate objective, and the fact that youunderstand this will only make you more credible.

Here are some guidelines to help you through this step:


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Try to get an unsecured loan if you can; but keep in mind that if youhavent done anything yet to establish or rehabilitate your credit,approval isnt likely. Still, it doesnt hurt to talk it over with your lender toget a preliminary sense of whether you might qualify (Just make sure youdont go beyond the talk stage until you know youll be approved,

because a formal application will result in an inquiry on your creditreport.) From your point of view, an unsecured loan is the simplest, butit comes with some cautions:

o First, and most important, this kind of loan only makes sense ifyoure absolutely certain that you have the cash flow to make thepayments. You cant afford to get into trouble with this loan andfall behind. That will just hurt your credit.

If you have any doubt whatsoever about your ability to handle thepayments out of cash flow, then you should take the money (the

loan proceeds), put it into a separate account in this very samebank or credit union, and just leave it there during the life of theloan contract. Remember, youre not borrowing this moneybecause you need it or because youre going to spend ityoureborrowing it to establish a loan repayment history with the creditbureaus.

o Second, dont borrow a lot and dont borrow for a long term. Startwith maybe $500 or $1,000 for a short period (but not too short).To get the maximum credit- building effect from the loan, it shouldhave a term of at least 12 months.

o Finally, dont forget to make sure that your bank reports allrepayment activity to all three major CRAsExperian, Equifax andTransUnion. If they dont, that defeats your purpose and you needto find somewhere else to borrow the money.

The easiest way to find out about this is to ask your loan officer. Ifhe doesnt know the answer, he can easily make a phone call or getthe information from his manager.

If you cant get the loan officer to give you an unsecured loan, ask for a

secured loan. There really isnt any reason why she should say no to you,because if the secured loan is structured right, there is no risk to thebank. Here are some ways this might work:

o You can offer the loan proceeds as security for the loan. The loancontract will provide that


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All of the loan proceeds will immediately be deposited intoan account at the bank. This account will serve as the bankscollateral for the loan;

You wont have the ability to withdraw from the deposit

account while the loan remains unpaid, and

If you dont pay as agreed, the bank can take the money outof your account and use it to pay off the loan.

Ask your bank or credit union if it has a credit builder loanprogram for which you might be eligible. If it does, youll findthat the loan contract has exactly these features. They typicallyinvolve a small amount ($500- $1,000).

With this approach, youll need to come up with the payments

out of your monthly cash flow. You wont be using the loanproceeds to make the payments. So again, make sure you canhandle this.

o An alternate twist on this same idea is to have the bankautomatically take the monthly payments directly from this depositaccount. Instead of you sending a check each month, the bank justwithdraws the payment from the established account.

This way you dont even have to remember to make thepayments.

The added advantage here is that there is no danger thatyoull get behind or default on the account. Its bullet proof.

o Finally, you can offer some other form of collateral as security forthe loan. If you have a car that is paid off, for example, you couldask the bank to accept it as collateral for the loan (collateral andsecurity are the same thing).

You might be wondering about using a cosigner as a way to get a loan. Idont recommend this. If someone cosigns a loan with you, its a great

deal for you, but its a terrible deal for the cosigner. Thats because thecosigner is equally responsible for the debt. If payments are late, or ifthere is a default, it damages the cosigners credit rating just as it doesyours. The cosigner takes a huge risk, and gets no benefit.

o If youre only borrowing the money in the first place because youwant to establish a credit payment history, you wont need acosigner. You should be able to get the loan using one of the


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secured loan methods already discussed.

o Cosigners are usually used when someone with no credit or badcredit is trying to buy something, like a car. Youre not doing that.You have a very different purpose.

Benef it s of an Installment Loan. From the point of view of establishing credit,an installment loan has several benefits:

It should be easy to get if you use the loan proceeds to secure the loan. Ifthe bank gets paid through automatic withdrawal from a securedaccount, there is no risk to the bank at all.

If you use the loan proceeds to make the payments, you dont have toworry about being late or defaulting on the account.

If you make the payments out of cash flow, you always know exactly howmuch you need each month. There are no surprises.

It will contribute to your credit mix. There is the possibility that becauseyou are applying for new credit and your report will show a new inquiry,your score might drop just a little temporarily. This effect wont last. Yourscore will soon rise and be higher than it would be if you had only creditcards.

Some General Pr incip les.Here are some important points to keep in mind, regardless of which of thesetools you use:

Always, always, always make your payments on time. On revolvingaccounts, pay the balance down to zero most of the time, but not everymonth. There is an important reason why you need to leave a smallbalance (no more than ten percent of your limit) on your card from timeto time.

o

Remember that the CRAs use a mathematical formula to calculateyour FICO score. Apparently this formula mistakes a monthly zerobalance for a complete lack of borrowing activity.

o If you always run a zero balance, the formula thinks that yourenot using your card at all and it assigns little or no positive weightto your payment activity. To be sure your account works to yourcredit- building benefit, you need to leave a small balance on the


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card from time to time.

o I know that always paying down to zero every month is excellentpersonal financial management, and normally the best financialmanagement will help you build your credit. But in this case it

wont. Leave a small balance on your cards from time to time, evenif it runs against your instincts.

Use your credit cards just enough to generate some activity and build arepayment history. The idea is to let them function as a credit- buildingtool, not to use them to buy things.

When you use your cards, dont allow yourself to exceed 30%of the limiton any card at any time. This is critically important, and if you disregardit, you can really slow down your march toward a good score. For moreon this, see The Credit Solution, Chapter 6.

Dont apply for several cards all at once. Especially if your credit iscompletely on the rocks, you might be tempted to apply to severalcompanies in the hope of being accepted by one or two. Dont do it.Every application will result in an inquiry on your credit report, andseveral inquiries can offset any credit score gains you might otherwisemake. Take it one step at a time, and always call and interrogate thecustomer service reps first. You want to have a good idea whether youllbe accepted before you submit your application.

Persistence will pay off. Just because you dont qualify for a bank Visa or

Mastercard today doesnt mean youll get the same answer in threemonths or six months. Use the tools you qualify for, make yourpayments, build up some history, and try again later.

Variety is good, and to some extent more is good. Remember what I saidearlier (and what I talk about in detail in The Credit Solution) abouthaving a mix of loans and having more than one line of revolving credit.If you can, you want to have at least two installment loans and threecredit cards.

Som e Credi t Repair Method s to Avoid.

There are some personal financial tools out there in the marketplace that mightseem convenient and attractive, but that do nothing whatsoever to help youestablish or improve your credit. I want to cover them here because I dont wantyou to waste your time and effort.


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Debit Card s. Debit cards look and feel like credit cards, but they wont helpyour credit at all. Why not? Because none of the banks report debit card activityto the credit bureaus. They dont report because there is no credit involvedyoure not borrowing money.

When you use a credit card, youre using the lenders money to buy things.Youre borrowing. When you use a debit card, all youre doing is drawing downon an existing checking account balance. Youre using your own money, not thebanks. There is nothing in the nature of repayment for your bank to report.From your banks point of view, using your debit card is no different fromwriting a check.

Prepaid Credit Cards. Depending on where you look on the internet, you mightsee offers suggesting that you can use a prepaid credit card to repair yourcredit score. Dont believe it. Even though this device calls itself a credit card,it is nothing of the kind. It is a debit card, period. Heres how these work:

When you open the account, you deposit a sum of money with the creditcard company. Sounds just like a secured credit card right? Wrong.

The prepaid credit card company doesnt use your deposit as collateralfor the loan the way a secured card company does; they use the money toactually pay for your purchase when you use the card. When you buysomething, you draw down on your deposit balance right then and there,the same as you do when you use a debit card.

These prepaid credit card companies dont report to the CRAs for the

same reason that banks dont report debit card activitythere is noborrowing involved. Youre always using your own money.

Prepaid credit cards are absolutely useless for building your FICO score,and they are carry exorbitant fees. Avoid them.

Peer- to- Peer Lendin g.The internet has made it possible for enterprisingprivate investors to offer to loan money directly to private citizens. They dothis, without getting a bank or finance company involved, through so- calledpeer- to- peer lending sites. A couple of the best known are Prosper andLending Club. The idea is that if you want to borrow some money, you post the

amount you need on the site and private lenders compete for the opportunity tolend to you.

This can be pretty enticing, but these sites are for people with pretty goodcredit. The reputable sites require a pretty high credit score (640 for Prosperand 660 for Lending Club) for participation. If you have no credit, or bad credit,these sites are a waste of time; plus, they run a credit check when you postyour loan request. I recommend staying away from these sites, at least until you


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have built up your credit to the point where you can participate.

Guarant eed Accept ance Cards . If you see an offer for a credit card thatguarantees approval, regardless of your credit, beware. Chances are that thisis a fee harvester cardmeaning that it carries an enormous application fee

and huge monthly or annual fees regardless of activity. These cards can carryvery low limits, require a deposit, and cost hundreds of dollars a year. Often thecard company doesnt even report to the CRAs. If you follow the steps Ivealready covered, you shouldnt need this kind of card. Steer clear.

Rent- to- Own Contracts. Technically, a rent- to- own contract (available insome places for purchasing furniture and appliances) is a loan, but you shouldavoid these no matter what.

First, the terms are always awful- - the interest alone might be twice whatthe item is worth.

Second, youll be adding to your expenses for no good reason. You dontwant to do that when youre in the credit building phase of your financiallife.

Third, these companies almost never report to any of the big three CRAs;and if they do, the effect on your credit is probably negative. Dont forgetthat the purpose of the credit reporting system is to let your creditorsknow whether you handle your finances responsibly. If you are sodesperate for a new sofa that you will pay twice or even three times whatits worth, this sends exactly the wrong message to the CRAs.

Pay Day Loans.Avoid these like a plague, for all the reasons you should stayaway from rent- to- own deals. A person who agrees to the horrific terms of apay day loan is telling the whole world that his finances are completely out ofcontrol. You dont want one of these loans on your credit report.

Loans f rom Retir ement Plans or Insur ance Policies. You might not have aretirement plan or a whole life insurance policy (if youre a young person juststarting out you almost certainly dont), but Ill cover them both just to be safe.From the credit- building perspective, borrowing from a retirement plan or aninsurance policy is a non- starter. The reason: youre borrowing from yourself.

Its your money. Your repayments wont be reported to any CRA, and this wonthelp your score at all.

Author ized User Piggyback Of fers. Back three or four years ago, someenterprising people got the idea to offer authorized user status for a fee. Thesefolks would open a legitimate credit card account, and for an enormousmonthly charge, allow others (always people who desperately were trying toimprove their credit) to become authorized users on the account. This worked


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for awhile, but pretty soon the CRAs figured out what was happening. Theysoon started identifying these piggyback operations and refusing to use suchaccounts in calculating authorized user FICO scores.

If you come across such an offer, dont be tempted. It will cost a fortune, and it

wont help you. The CRAs are able to tell the difference between a legitimateauthorized user and one who has signed up with a piggyback operation.

The End Game.

I hope youve made a personal commitment to handling your financesresponsibly and building your credit record. If you have, the materials youvejust covered will help you achieve your goals. I guarantee it. Its very possible toestablish credit from scratch, and to repair damaged credit that bears the scarsof hard times. Ive done it myself, thousands of others have done it, and youcan do it too.

The secret is in understanding how the credit reporting system works, and inlearning to use all the tools Ive identified here to make the system work in yourfavor. Dont forget that these steps work best when they work together. Youneed to employ them all; each is a key ingredient in your recipe for creditsuccess. Again, here are the key ideas at work:

Your FICO score is calculated using all of your loan repayment activityover an extended period (seven to ten years).

The FICO calculation weighs recent activity and events more heavily thanolder data.

If youre repairing damaged credit, the process is really all aboutdiluting the effects of negative events by making sure that recentpositive activity gets into your record.

Lets say you have a bankruptcy, and you have no recent good loanrepayment activity in your report. In this case, the FICO calculator assignsa huge weight to the bankruptcy, and it keeps assigning it a huge weight

as the months and years go by because there is nothing in your record tobalance against it. You score is a disaster, and it remains a disaster.

But if over time you establish some good payment histories, these willstart to dilute the effect of your bankruptcythe good history will providean antidote to the negative history. Within a couple of years, if yourrecent activity is strong and spotless, your score can dramatically


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improve.

This system is all about building up a recent positive history and avoidingthe activities that can add negative items to your FICO calculation. If youfollow the steps that Ive discussed, and if you avoid the pitfalls that Ive

identified, youll have success.

This concludes my report on establishing and repairing credit from scratch.Now that youve reached the end, I encourage you to go back to Step 1 and getstarted building or rebuilding your credit life. Good luck.

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