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By Mi ke Rober t s





The Cr edi t Sol ut i on
Copyr i ght 2012 by Mi ke Rober t s


1

Copyr i ght Inf or mat i on:

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 permitted
by applicable copyright laws or as expressly allowed by the publisher or the
author in writing.



Publ i sher Inf or mat i on:

Published by Smart Consumer Solutions, LLC, 601 Van Ness Ave, STE E869
San Francisco, CA 94102.


Di scl ai mer :

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

Also, I am not a lender, a collection agent or a credit reporting agency. I am not
an accountant or an attorney, and nothing in these materials is intended as
professional advice. It is personal opinion only. I am providing it to you without
any warranties or guarantees whatsoever. To obtain advice as to the tax or legal
consequences of any action covered in these materials, or any action that you
might consider based on these materials, you should consult an attorney, an
accountant, or both. What I have tried to do here is simply offer solid, useful
information that I have obtained through my own personal and business
experience. Any action you choose to take based on any information that I
provide, including forms and other attachments, is entirely your responsibility.
2

Tabl e 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


3

Int r oduct i on:
Who Needs Good Cr edi t ?

You Do! In fact, everyone does. I feel very strongly about this because I
personally 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 no
credit now) or stop it (if you have bad credit now). Thats exactly why Ive
written this report. If your credit picture is bleak, thats about to change. The
help you need is in your hands right now.

Why Do You Need Good Cr edi t ?

Because We Li ve i n a Cr edi t Soci et y. The world we all live in today favors
those with good credit and punishes those who dont have it. Bad credit can
cost you a fortune. For an in- depth look at how severe the penalties for poor
credit can be, take a look at The Credit Solution, Chapter 1. The details and
examples presented there are not for the faint hearted, but they will help you
understand exactly why establishing good credit is worth the effort. Theyll help
you stay motivated and focused as you go through the process of changing
your financial life. I want you to avoid paying the multi- hundred thousand
dollar penalties that I know youll have to pay over your lifetime if you dont
establish good credit now.

What Exact l y Is Good Cr edi t ?

It s a FICO Scor e of at Least 720. Whenever I talk about good credit, Im
referring to a FICO credit score of 720 or better. As you know from The Credit
Solution, there are three major credit reporting agencies (CRAs): Experian,
Equifax and TransUnion. Their sole purpose in life is to compile detailed
information about your financial life and report it upon request, in the form of
credit reports and FICO scores, to creditors around the world. In The Credit
Solution, I explain exactly how the CRAs do what they do, how the credit
reporting system really works, and how they calculate your FICO score; but for
purposes of this report you just need to understand that you need a score of
720 or higher.



4

Wi l l You Benef i t f r om Thi s Repor t ?

The information that I cover in this report will help you (in fact, it will be
invaluable 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 your
own name.

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

Youve suffered through a financial meltdown that thoroughly trashed
your credit.

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

o You might be one of the millions of people whove been hit with an
avalanche of medical expenses and youve had several accounts go
to collections;

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

o Maybe you just havent been financially responsible in the past, but
youve 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 improve
your financial life (and your life in general).

Bankr upt cy or For ecl osur e? If youve recently suffered through a bankruptcy
or a foreclosure, you might be thinking that there isnt any hope for youthat
theres 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),

5

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

The fact is that the harmful effect of a bankruptcy or foreclosure fades with
time. The CRAs weigh recent events more heavily than older events in
calculating your FICO score. This means that there are things you can do right
now to help yourself. You can start now to build a history of recent events that
will begin to outweigh your bankruptcy or foreclosure as time goes by. You can
build up your decimated credit, and achieve a respectable score in as little as
18 months to two years after a bankruptcy or a foreclosure if you work hard
during this period to establish other loan accounts and make all your payments
on 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.

St eps 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 today
with Steps 1 through 4 even if you lost your home through foreclosure
last week and recently filed bankruptcy.

St eps 5 and 6 are for those of you who have completed the first four
steps or who already have established some minimum level of credit. If
youve done nothing to date to establish credit, or if youve recently
suffered through a financial catastrophe that destroyed your credit, youll
have 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 you
follow 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 what
your options are, and Im going to help you decide which ones to pick. If you
make the wrong choices as you go along, you can end up wasting your time
and 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 building
your credit and youll know exactly how to do it.

One mor e t hi ng: Ive learned the hard way what it takes to establish and
rebuild damaged credit. Ive gone through it myself, and Ive had the pleasure
and satisfaction of helping thousands of others improve their credit. Ive
studied the lending and credit reporting system in depth, and Ive learned how
the various parts to the puzzle fit together. Ive put a lot of thought into the
credit- building steps that youll find in this report, and I promise you that they
are all critical. Please dont leave any of them out. To get the maximum benefit
from this program, you need to do each and every step.

6

St ep 1: Fi gur e out Your Cur r ent Fi nances.

The first thing you have to do is determine exactly where you stand financially
right now. You need to know how much money you have coming in every
month, and how much youre spending. Now maybe youre a person who
budgets very carefully, and youve already calculated your monthly income and
expenses down to the penny. But . . . youre probably not. I certainly wasnt
when I started working on improving my credit, and I can tell you from
experience that starting with a candid cash flow assessment is a huge help.

Get Your Wor ksheet s. To help you through this Ive put together two
worksheets for youone for your monthly income and another for your
monthly expenses. Youll find them in the Where Do Things Stand Right
Now? section of the Bonus Workbook that comes with The Credit
Solution. Please go there now and fill out the two worksheets. Youll find
plenty of examples, instructions and useful tips to help you through the
process.

Get Your Cr edi t Repor t s. Dont make the mistake of relying on your
check register and the bills that show up in your mailbox to get a
complete list of your expenses. You might have obligations that dont
immediately come to mind, and you need to factor those in. Get your
credit report from all three of the major CRAs and go over it carefully to
make sure youre accounting for everything. Its amazing how often a
credit report will reveal items that are long forgotten. I go over the details
of 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 the
numbers, youll see the current financial truth revealed. Youll see either good
news or bad news. Youre currently running in the black or the red (youre
either making ends meet, or youre not).

If Your e i n t he Red, youre falling farther and farther behind with each
passing month. This isnt good. The longer it continues, the less likely it
is that youll ever establish good credit. If this describes you, you still can
use 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 get
your expenses down. You really have only two options:

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

7

o You can learn how to negotiate with your creditors and convince
them to reduce the amounts you owe. This way you can take some
big 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 a
complete method that you can use to reduce your own debts by
negotiating with your creditors. It includes detailed instructions,
form letters to creditors, and negotiation techniques; and you can
find out more about it on the Credit Solution website.

I strongly recommend that you do both, especially if you have a lot of
debt; but helping you with the process of getting your finances in shape
is beyond the scope of this report. The good news is that even if youre in
the red right now, you can still make good use of the information that
follows. Youll just be using the tools and techniques a little differently.
Ill explain more as we get into the details.

If Your e i n t he Bl ack, congratulations. Theres no reason why you cant
look forward to establishing good credit, and keeping it that way. Youre
all set to take full advantage of the credit- building techniques Im about
to share with you.

St ep 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 checking
account. There are two reasons for this:

1. Youre going to be applying for credit, and credit applications often
request checking and savings account numbers. If you can supply those
numbers, this tells the potential creditor that you have some of the basic
personal finance tools (a checking account and a savings account) in
place. If you cant identify any bank accounts, it sends the opposite
message.

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

Lets be clear: Im not suggesting that you need a bank account because it will
directly help your FICO score. In fact, it wont. By itself, opening a bank account
wont help your score at all because banks and credit unions dont report
checking or savings activity to the CRAs. The reason I recommend having a
8

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

St ep 3: Get a Secur ed Cr edi t Car d.

OK, now its time to start taking actions that directly will affect your credit
score. As you know from reading The Credit Solution, everybody builds good
credit the same wayby using credit. Its the process of borrowing money, and
repaying it on time, that establishes and reinforces a credit history. So you need
to 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 it
now.

But . . . if your credit is really in the tank right now, you might be having this
thought: 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 secured
credit card that you can get right nowtoday. Before we get into the details of
this, lets cover some credit card basics:

What i s a Cr edi t Car d? A credit card is any type of loan account that has these
features:

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

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

Because credit cards just continue indefinitely, they are often referred to as
revolving accounts. Like other kinds of loans, credit cards come in two
flavorssecured and unsecured.

If a car d i s unsecur ed, there is no collateral for the loan. There is
nothing for the credit card company to seize if you dont pay. Its more
difficult 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 car d i s secur ed, this means that the credit card company can take
something of value from you (the collateral) to satisfy the debt if you
default. These cards are much easier to get because the credit card
company doesnt have to worry. If you dont pay, it will just seize the
collateral.

9

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

You deposit some cash with the credit card company and they hold on to
it 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; but
if you default on the account, the credit card company keeps your
deposit.

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

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

Some banks and credit unions offer these cards, and if yours does thats your
best bet. If not, youll be able to find one online. Most major banks and credit
card companies have these available, so you can shop the features. Look for a
card 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 sure
sign that youre dealing with an unscrupulous company. They dont need
insurance. Theyll have your deposit as a guarantee of payment.),

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

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

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

Again, these secured cards are made to order for people with troubled credit
and they are the easiest kind of card to get. They are extremely useful from a
10

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

Two really important tips:

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

Make sure that the card youre applying for reports to all three credit
bureaus (CRAs). You can ask you banker or get this information on the
phone from the customer service representative. Dont take no or
maybe for an answer on this. Be certain that your card company reports
to all three CRAs.

St ep 4: Become an Aut hor i zed User .

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

1. They are very financially responsible. You know for certain that they have
excellent credit.

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

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

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

11

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

OK, youre thinking about now, sounds great. But who in his right mind is
going 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 this
that will allow you to put this tool to work for you and at the same time avoid
any risk for anyone. Heres how to approach it:

Explain to your friend or relative that all they have to do to add you to
one of their existing accounts is contact the credit card company and
make 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 it
arrives 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 to
use it. The only purpose of this exercise is to help you build credit, not to
actually allow you to spend the account owners money.

Explain that you also dont want to know the account number and
security code (that way you wont be able to make online purchases with
the 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 score
going forward because you are not in control of the account in any way.
The owner will still make the payments, and its the owners payment
history alone that will affect his score. The fact that youre an authorized
user on the account wont affect the owners credit at all.

These assurances should be enough to persuade a close friend or an immediate
family 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 important
considerations:

Make sure that the credit card company reports authorized users to the
CRAs. 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 owners
payment record on the account, and that cant happen unless the CRAs
12

know that youre an authorized user.

Make sure that the account is in good standing and that the owner has no
late pays on record. The older the account is, and the longer the owner
has 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 a
habit of keeping the balance below 30%of that limit. I cover the reasons
for this in detail in The Credit Solution.

Make sure you have absolute faith in the account owners financial
responsibility. Remember that you probably wont be getting statements
or seeing any correspondence on the account. If the owner gets behind or
defaults, you wont know until its too late. Any credit score gains you
might have made will already have disappeared.

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

The standard practice is to add authorized users to accounts without
running a credit check on the person to be added. This means that your
report wont be hit with a new inquiry when youre added to the owners
account.

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

The positive effect on your score can be substantial and quick
sometimes as much as a 40- 70 point bump for a single card within a few
weeks.

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

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

St ep 5: Get an Unsecur ed Cr edi t Car d.

As I said at the beginning, this step might not be available to you right away if
your credit is completely destroyed. Even so, you might qualify for an
unsecured credit card sooner than you think- - especially if you have already
13

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

Bank Car ds. Contact your banker or credit union officer. This is where being a
customer and establishing a personal relationship at your local branch can
count for something. Explain what youre trying to do, and why you want the
card. These folks have good unsecured cards available through major servicing
companies (Visa and Mastercard), and the rates and fees are favorable. Your
bank or credit union might provide you with an unsecured card

If you have checking and savings accounts with the bank that you have
not overdrawn, and

They know that you have other revolving accounts (secured cards or
authorized 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 first
card is going to be really lowmaybe $500 or even less. Thats OK. The point
here is to get the card and use it sparingly. Youll want to pay the balance down
to zero more often than not, but not all the time. Its important to leave a small
balance on the card (less than 10%of the limit) once every few months. That
way the CRAs will see that youre using the card and theyll give the maximum
positive 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 a
local bank. These companies basically function as long- distance banks, so
there isnt the opportunity for a personal relationship that might be available at
a local branch; but otherwise their unsecured cards offer the same credit-
building advantages as bank cards.

St or e Car ds. This type of card includes department and big box store charge
cards, as well as oil company cards. Sometimes called retail cards, store cards
typically are easier to get than bank cards; but because of the heavy interest
rates 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, call
the company customer service folks, and tell them your situation. Tell
them the truth (theyre going to run an inquiry anyway if you apply), and
ask if youre likely to get the card. Again, the idea here is to avoid an
inquiry if youre going to be turned down.

14

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

St ep 6: Get an Inst al l ment Loan.

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

What i s an Inst al l ment 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 is
identified when the loan contract is signed, and the lender gives you that
amount (the loan proceeds).

You agree to pay all of the money back, with interest, over a fixed period
of time. Usually the payments are made monthly. The repayment period
might 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. By
now, you already know what these terms mean. If the loan is secured, this
means that the lender can seize the collateral if you dont pay. Car loans and
home 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 if
you dont pay, but immediately grabbing your property isnt one of them.

How t o Get Your Inst al l ment Loan. This is where your bank or credit union
relationship 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 you
want to do. Dont be afraid to discuss your purpose, which is to establish or
build up your credit. There is no need to hide your intentions. Establishing or
improving credit is a perfectly legitimate objective, and the fact that you
understand this will only make you more credible.

Here are some guidelines to help you through this step:

15

Try to get an unsecured loan if you can; but keep in mind that if you
havent done anything yet to establish or rehabilitate your credit,
approval isnt likely. Still, it doesnt hurt to talk it over with your lender to
get a preliminary sense of whether you might qualify (Just make sure you
dont go beyond the talk stage until you know youll be approved,
because a formal application will result in an inquiry on your credit
report.) From your point of view, an unsecured loan is the simplest, but
it comes with some cautions:

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

If you have any doubt whatsoever about your ability to handle the
payments out of cash flow, then you should take the money (the
loan proceeds), put it into a separate account in this very same
bank or credit union, and just leave it there during the life of the
loan contract. Remember, youre not borrowing this money
because you need it or because youre going to spend ityoure
borrowing it to establish a loan repayment history with the credit
bureaus.

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

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

The easiest way to find out about this is to ask your loan officer. If
he doesnt know the answer, he can easily make a phone call or get
the 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 the
bank. Here are some ways this might work:

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

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All of the loan proceeds will immediately be deposited into
an account at the bank. This account will serve as the banks
collateral 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 out
of your account and use it to pay off the loan.

Ask your bank or credit union if it has a credit builder loan
program for which you might be eligible. If it does, youll find
that the loan contract has exactly these features. They typically
involve 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 loan
proceeds to make the payments. So again, make sure you can
handle this.

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

This way you dont even have to remember to make the
payments.

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

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

You might be wondering about using a cosigner as a way to get a loan. I
dont 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 the
cosigner is equally responsible for the debt. If payments are late, or if
there is a default, it damages the cosigners credit rating just as it does
yours. The cosigner takes a huge risk, and gets no benefit.

o If youre only borrowing the money in the first place because you
want to establish a credit payment history, you wont need a
cosigner. 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 bad
credit is trying to buy something, like a car. Youre not doing that.
You have a very different purpose.

Benef i t s of an Inst al l ment 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. If
the bank gets paid through automatic withdrawal from a secured
account, there is no risk to the bank at all.

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

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

It will contribute to your credit mix. There is the possibility that because
you 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. Your
score will soon rise and be higher than it would be if you had only credit
cards.

Some Gener al Pr i nci pl es.

Here are some important points to keep in mind, regardless of which of these
tools you use:

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

o Remember that the CRAs use a mathematical formula to calculate
your FICO score. Apparently this formula mistakes a monthly zero
balance for a complete lack of borrowing activity.

o If you always run a zero balance, the formula thinks that youre
not using your card at all and it assigns little or no positive weight
to your payment activity. To be sure your account works to your
credit- 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 excellent
personal financial management, and normally the best financial
management will help you build your credit. But in this case it
wont. Leave a small balance on your cards from time to time, even
if it runs against your instincts.

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

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

Dont apply for several cards all at once. Especially if your credit is
completely on the rocks, you might be tempted to apply to several
companies in the hope of being accepted by one or two. Dont do it.
Every application will result in an inquiry on your credit report, and
several inquiries can offset any credit score gains you might otherwise
make. Take it one step at a time, and always call and interrogate the
customer service reps first. You want to have a good idea whether youll
be 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 three
months or six months. Use the tools you qualify for, make your
payments, build up some history, and try again later.

Variety is good, and to some extent more is good. Remember what I said
earlier (and what I talk about in detail in The Credit Solution) about
having 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 three
credit cards.

Some Cr edi t Repai r Met hods t o Avoi d.

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

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Debi t Car ds. Debit cards look and feel like credit cards, but they wont help
your credit at all. Why not? Because none of the banks report debit card activity
to the credit bureaus. They dont report because there is no credit involved
youre 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 down
on an existing checking account balance. Youre using your own money, not the
banks. 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 from
writing a check.

Pr epai d Cr edi t Car ds. Depending on where you look on the internet, you might
see offers suggesting that you can use a prepaid credit card to repair your
credit 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 credit
card company. Sounds just like a secured credit card right? Wrong.

The prepaid credit card company doesnt use your deposit as collateral
for the loan the way a secured card company does; they use the money to
actually pay for your purchase when you use the card. When you buy
something, 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 no
borrowing 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 - t o- Peer Lendi ng. The internet has made it possible for enterprising
private investors to offer to loan money directly to private citizens. They do
this, without getting a bank or finance company involved, through so- called
peer- to- peer lending sites. A couple of the best known are Prosper and
Lending 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 to
lend to you.

This can be pretty enticing, but these sites are for people with pretty good
credit. The reputable sites require a pretty high credit score (640 for Prosper
and 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 post
your 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.

Guar ant eed Accept ance Car ds. If you see an offer for a credit card that
guarantees approval, regardless of your credit, beware. Chances are that this
is a fee harvester cardmeaning that it carries an enormous application fee
and huge monthly or annual fees regardless of activity. These cards can carry
very low limits, require a deposit, and cost hundreds of dollars a year. Often the
card company doesnt even report to the CRAs. If you follow the steps Ive
already covered, you shouldnt need this kind of card. Steer clear.

Rent - t o- Own Cont r act s. Technically, a rent- to- own contract (available in
some places for purchasing furniture and appliances) is a loan, but you should
avoid these no matter what.

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

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

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 forget
that the purpose of the credit reporting system is to let your creditors
know whether you handle your finances responsibly. If you are so
desperate for a new sofa that you will pay twice or even three times what
its worth, this sends exactly the wrong message to the CRAs.

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

Loans f r om Ret i r ement Pl ans or Insur ance Pol i ci es. You might not have a
retirement plan or a whole life insurance policy (if youre a young person just
starting 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 an
insurance policy is a non- starter. The reason: youre borrowing from yourself.
Its your money. Your repayments wont be reported to any CRA, and this wont
help your score at all.

Aut hor i zed User Pi ggyback Of f er s. Back three or four years ago, some
enterprising people got the idea to offer authorized user status for a fee. These
folks would open a legitimate credit card account, and for an enormous
monthly charge, allow others (always people who desperately were trying to
improve 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. They
soon started identifying these piggyback operations and refusing to use such
accounts 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 legitimate
authorized user and one who has signed up with a piggyback operation.

The End Game.

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

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

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

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

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

Lets say you have a bankruptcy, and you have no recent good loan
repayment activity in your report. In this case, the FICO calculator assigns
a 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 to
balance against it. You score is a disaster, and it remains a disaster.

But if over time you establish some good payment histories, these will
start to dilute the effect of your bankruptcythe good history will provide
an antidote to the negative history. Within a couple of years, if your
recent 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 avoiding
the activities that can add negative items to your FICO calculation. If you
follow 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 get
started building or rebuilding your credit life. Good luck.

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