Scrubbing Your Credit Report

I'd like to clean up my credit report so I can buy a home. Should I work with a company that claims to do this?

Regardless of whether you're eyeing last summer's bathing suit or a recently damaged credit report, getting back into shape is never easy. In either case, what you need is a lifestyle change — not a quick fix.

Traumatic swimsuit issues aside, the first step in credit repair is assessing the damage. Start by ordering copies of your credit report from the three major credit bureaus: Equifax, Experian and TransUnion. (You can order all three reports at once by using a service such as TrueCredit.) If you find outdated information or mistakes on any of the reports (a likely scenario), contact the credit bureau and ask to have the data removed. Unfortunately, information that's negative but accurate is almost impossible to remove. So stay away from any credit-repair agency that tells you otherwise.

In fact, credit-repair companies simply do what consumers can do for free on their own. They pull up your credit report and send letters to the credit bureaus disputing negative information. The bureaus then have 30 days to prove that the information is accurate, or else they must remove it from your report. A common tactic of unscrupulous credit-repair agencies is to "inundate the credit bureaus with these letters, knowing they need to investigate each and every one, and that's impossible to do in 30 days," says Sheila Adkins, a spokesperson for the Council of Better Business Bureaus. Unable to meet the deadline, the bureaus remove the information in dispute.

Sound too good to be true? You betcha. In another 30 to 60 days, when the creditors submit their regular reports to the bureau, the negative information will reappear in your report.

So here's a more viable solution. Assuming your credit score (which is a number that assesses your creditworthiness based on the information on your report) could use some boosting, your strategy should be to replace past mistakes with good behavior. What this boils down to isn't rocket science: You simply need to pay all of your bills on time. Granted, not all late payments will wind up on your credit report. For example, tardy phone and gas bills won't show up unless they're handed over to collection agencies. But it's always better to be on the safe side — and, let's face it, on-time bill payment is a pretty important habit to embrace.

You also should make an effort to pay any overdue debt — like that reposed car. Repossession is a big minus on your credit score, but fixing it isn't entirely impossible. If the car hasn't already been resold, you should try to work out an arrangement with the lender to start repaying what you owe, suggests Gerri Detweiler, author of "The Ultimate Credit Handbook." Of course, lenders prefer to strike up a deal before the car is repossessed, so once the damage has been done, don't expect the repayment terms to be generous. If the repossession has left a mark on your credit report, you could ask the lender to have it removed, Detweiler says. But keep in mind that lenders aren't obliged to do this (and in a lot of cases, aren't willing to do so), so don't bank on this.

Finally, be sure to work on paying down that credit-card debt — especially because department-store credit cards come with notoriously high interest rates. You can run your numbers through our calculator to see how long it will take you to pay off your debt given your current repayment amounts.

Sound like a plan? Now all you need to do is stick with it. As an incentive, focus on the fact that working to improve your credit score over the next six months could lead to a substantially better mortgage rate. (To see which type of rate you may be eligible for based on your current score, visit MyFico.com.)

Should you find that your debt is overwhelming, contact a debt counselor, preferably a local member of the National Foundation for Credit Counseling.