People who have been through a financial crisis -- bankruptcy, repossession, foreclosure, history of late payments, IRS lien or levy or something similar -- may think they won't ever get credit again. Not true. Following some simple steps, you can rebuild your credit in just a couple of years.

What's the first step in rebuilding credit?

To avoid getting into financial problems in the future, you must understand your flow of income and expenses. Some people call this making a budget. Others find the term budget too restrictive and use the term spending plan. Whatever you call it, spend at least two months writing down every expenditure. At each month's end, compare your total expenses with your income. If you're overspending, you have to cut back or find more income. As best you can, plan how you'll spend your money each month.

If you have trouble putting together your own budget, consider getting help from a nonprofit group such as Consumer Credit Counseling Service (agencies affiliated with the National Foundation for Credit Counseling) ( http://www.nfcc.org), Myvesta.org ( http://www.myvesta.org), Genus Credit Management ( http://www.genus.org) or Money Management International ( http://www.mmintl.org), all of which provide budgeting help for free or at a nominal fee.

Okay, I've created a budget. What do I do next to rebuild my credit?

Next, it's time to clean up your credit report. Credit reports are compiled by credit bureaus -- private, for-profit companies that gather information about your credit history and sell it to banks, mortgage lenders, credit unions, credit card companies, department stores, insurance companies, landlords and even a few employers.

Credit bureaus get most of their data from creditors. They also search court records for lawsuits, judgments and bankruptcy filings. And they go through county records to find recorded liens (legal claims).

To create a credit file for a given person, a credit bureau searches its computer files until it finds entries that match the name, Social Security number and any other available identifying information. All matches are gathered together to make the report.

Credit reports include non-credit data such as names you previously went by, past and present addresses, Social Security number, employment history, marriages and divorces. Credit data includes the names of your creditors, type and number of each account, when each account was opened, your payment history for the previous 24-36 months, your credit limit or the original amount of a loan, and your current balance. The report will show if an account has been turned over to a collection agency or is in dispute.

How can I get a copy of my credit report?

There are three major credit bureaus -- Equifax, Trans Union and Experian. The federal Fair Credit Reporting Act (FCRA) entitles you to a copy of your credit report, and you can get one for free if:

• you've been denied credit because of information in your credit report and you request a copy within 60 days of being denied credit
• you're unemployed and looking for work
• you receive public assistance, or
• you believe your file contains errors due to fraud.

In addition, you can get one free copy a year if you live in Colorado, Georgia, Maryland, Massachusetts, New Jersey or Vermont.

The law says that if you don't qualify for a free report, you should pay no more than $8.50 to obtain a report from Equifax (P.O. Box 740241, Atlanta, GA 30374, 800-685-1111, http://www.equifax.com), Trans Union (P.O. Box 1000, Chester, PA 19022, 800-888-4213, http://www.tuc.com) or Experian (P.O. Box 2104, Allen, TX 75013-2104, 888-397-3742, http://www.experian.com).

• your full name (including generations such as Jr., Sr., III)
• your birth date
• your Social Security number
• your spouse's name (if applicable)
• your telephone number, and
• your current address and addresses for the previous five years.

What should I do if I find mistakes in my credit report?

As you read through your report, make a list of everything out-of-date. The credit bureaus should remove this information from your credit report.

• Lawsuits, paid tax liens, accounts sent out for collection, criminal records, late payments and any other adverse information older than seven years.
• Bankruptcies older than ten years from the discharge or dismissal. Credit bureaus often list Chapter 13 bankruptcies for only seven years, but they can stay for ten.
• Credit inquiries (requests by companies for a copy of your report) older than two years.

Next, look for incorrect or misleading information, such as:

• incorrect or incomplete name, address, phone number, Social Security number or employment information
• bankruptcies not identified by their specific chapter number
• accounts not yours or lawsuits in which you were not involved
• incorrect account histories -- such as late payments when you paid on time
• closed accounts listed as open -- it may look as if you have too much open credit, and
• any account you closed that doesn't say "closed by consumer."

After reviewing your report, complete the "request for reinvestigation" form the credit bureau sent you or send a letter listing each incorrect item and explain exactly what is wrong. Once the credit bureau receives your request, it must investigate the items you dispute and contact you within 30 days. If you don't hear back within 30 days, send a follow-up letter. If you let them know that you're trying to obtain a mortgage or car loan, they can do a rush investigation.

If you are right, or if the creditor who provided the information can no longer verify it, the credit bureau must remove the information from your report. Often credit bureaus will remove an item on request without an investigation if rechecking the item is more bother than it's worth.

If the credit bureau insists that the information is correct, call the bureau to discuss the problem:

• Experian: 888-397-3742
• Trans Union: 800-888-4213
• Equifax: 800-685-1111

If you don't get anywhere with the credit bureau, directly contact the creditor and ask that the information be removed. Write to the customer service department, vice president of marketing and president or CEO. If the information was reported by a collection agency, send the agency a copy of your letter, too. Creditors are forbidden by law to report information they know is incorrect.

If you feel a credit bureau is wrongfully including information in your report, or you want to explain a particular entry, you have the right to put a 100-word statement in your report. The credit bureau must give a copy of your statement -- or a summary -- to anyone who requests your report. Be clear and concise; use the fewest words possible.

What can I do to rebuild my credit?

After you've cleaned up your credit report, the key to rebuilding credit is to get positive information into your record. Here are two suggestions:

• If your credit report is missing accounts you pay on time, send the credit bureaus a recent account statement and copies of canceled checks showing your payment history. Ask that these be added to your report. The credit bureau doesn't have to, but often will.
• Creditors like to see evidence of stability, so if any of the following information is not in your report, send it to the bureaus and ask that it be added: your current employment, your previous employment (especially if you've been at your current job fewer than two years), your current residence, your telephone number (especially if it's unlisted), your date of birth and your checking account number. Again, the credit bureau doesn't have to add these, but often will.

I've been told that I need to use credit to rebuild my credit. Is this true?

Yes. The one type of positive information creditors like to see in credit reports is credit payment history. If you have a credit card, use it every month. Make small purchases and pay them off to avoid interest charges. If you don't have a credit card, apply for one. If your application is rejected, try to find a cosigner or apply for a secured card -- where you deposit some money into a savings account and then get a credit card with a line of credit around the amount you deposited.

But a word of caution: It won't do you any good in the long-run to apply for credit before you're back on your feet financially. You'll just end up with high cost credit that will put you back in the hole again. Even if you can get a card earlier, wait until you are ready to start using credit again.

How many credit cards should I carry?

Once you succeed in getting a credit card, you might be hungry to apply for many more cards. Not so fast. Having too much credit may have contributed to your debt problems in the first place. Ideally, you should carry one or two bank credit cards, maybe one department store card and one gasoline card. Your inclination may be to charge everything on your bankcard and not bother using a department store or gasoline card. When creditors look in your credit file, however, they want to see that you can handle more than one credit account at a time. You don't need to build up interest charges on these cards, but use them and pay the bill in full.

Creditors frown on applicants who have a lot of open credit. So keeping many cards may mean that you'll be turned down for other credit -- perhaps credit you really need. And if your credit applications are turned down, your file will contain inquiries from the companies that rejected you. Your credit file will look like you were desperately trying to get credit, something creditors never like to see.

How long does it take to rebuild credit?

If you follow the steps outlined above, it will take about two years to rebuild your credit so that you won't be turned down for a major credit card or loan. After around four years, you should be able to qualify for a mortgage.