How to Establish Credit with Bad Credit

Even if you have bad credit, you at least already have established credit. Your next step is to turn poor credit around by cleaning up credit reports and taking other steps to improve your credit score. However, don't expect the turnaround to take place overnight. Reestablishing credit requires a commitment of 12 to 24 months. That's generally how long creditors like to see you making on-time payments--on all of your accounts--before extending additional credit.

Instructions

1

Get a copy of your credit report from the website Annual Credit Report (see Resources). The three nationwide credit bureaus established the website to offer free reports as required under the federal Fair Credit Reporting Act.

2

Identify all the "bad credit" items on your report. Look for any accounts that are reporting as past due. Keep an eye out for accounts that have been "charged off" or listed with collection agencies. Credit-card companies and other creditors will close your account and list it as "charged off" if you stop making payments. When this happens, the account may be sold to a debt collection company and listed as a collection item on your report.

3

Bring all your existing accounts current by making payments. Then contact creditors and debt-collection agencies to resolve old debts. Offer to pay off old debts in exchange for the negative entries being removed from all three of your credit reports. Your offer may not be accepted, but it's worth a try. If you cannot get the information deleted on the first try, make a second offer to settle the accounts for less than the full amount owed. The New York Times reported in 1999 that some credit-card companies were settling delinquent accounts for as little as 20 percent of the balance. Settlement agreements usually are about half that amount, however.

4

Obtain a second copy of your credit report after a few months. You can receive up to three free copies a year from Annual Credit Report -- one from each of the credit bureaus. Check the updated credit report to confirm that the bad credit accounts have been updated. Your existing accounts should all be reporting as current, and the charged-off and collection items should have been deleted or changed to note that they were paid. Keep repeating the process if you have more bad credit items to clear. Once you have cleaned them all up, the passing of time and steady on-time payments will increase your scores and strengthen your credit.