If the recession did a number on your ability to pay your bills, your credit score has probably taken a big hit.
Here are five steps to help you repair the damage.
1. Face the music.
Before you can begin turning your credit life around, you have to be willing to look at all the bad marks on your credit report.
Everyone is entitled to a free copy of their credit report once a year from each of the three major credit bureaus: Experian, Equifax and TransUnion.
Each of the bureaus offers credit reports, but some are bundled with pay services, such as credit monitoring. You don't need to pay. Instead, visit AnnualCreditReport.com, a website created by the three credit bureaus. That's where you can get it for free once a year.
Some people prefer staggering the three reports -- getting one every four months -- so they can monitor their credit for free throughout the year. I prefer getting all three at once so you can compare the reports in the same time frame.
You can also get a free report if you've been turned down for credit in the past 60 days.
Read your credit reports cover to cover. Note any unpaid or overdue debts, and make sure there are no errors on your reports. If you find mistakes, notify the credit bureaus. They have 30 days to investigate and correct the error.
Next, consider your credit score. This is a statistical number that's calculated based on a variety of your credit habits, but you can't get it for free. Many websites tout "free" credit scores, but these are only free if you purchase another service, such as identity theft protection -- again, probably something you don't need. Instead, you can outright purchase your credit score from the three credit bureaus. These generally cost $17 or less, but because scores are often marketed as part of a bigger package, make sure you're not signing on for a monthly service you don't need.
A website called CreditKarma.com offers free credit scores, but the score it offers is not the widely used FICO score, which is what you'd get from the credit bureaus. CreditKarma uses a different algorithm and analysis, so while your score is probably similar to your FICO score, it won't be exactly the same.
While the CreditKarma score will give you a ballpark of what lenders are seeing, you may be better served by seeing the same scores a majority of lenders see. More lenders use the FICO score, and a newer scoring model called VantageScore is gaining popularity.
2. Analyze your budget.
The next step is to take a close look at your budget to figure out where you'll find the money to pay your debts.
Try this budget work sheet from the National Foundation for Credit Counseling (NFCC) for some guidance, and read my story "Eight Easy Ways To Save $5,000 a Year" for some painless ways to cut back on expenses.
Budget is often a dirty word, but you need to know what funds are available before you can start to pay off your debts. If debt payoff is your priority, consider cuts in spending. If you're talking serious debt reduction, be prepared to make cuts -- possibly painful cuts -- in discretionary areas like vacations and other extras.
If you spend less, you can save more.
3. Contact your creditors.
If you've fallen behind on bills, contact your creditors before they try to track you down or send your account to collections.
Call the 800 number on your credit card and explain to the rep that you've fallen on hard times. If you've lost your job, say so. If you've been struggling with big medical bills, say so.
Then ask the rep to work with you for a repayment plan you can afford based on your budget. You may be able to negotiate a lower interest rate, fewer fees or a smaller minimum monthly payment.
Before you agree to a payment plan, make sure it's one you can afford based on your budget. There's no sense in agreeing to a new plan if you're still going to be over your head.
If you negotiate a plan you can live with, ask your creditor to send it to you in writing, just in case.
A bigger step: You can even ask your lender if it would accept a smaller lump sum in exchange for discharging the rest of your debt. If you take this route, know that your credit score will take a hit. If you're already hurting and you're planning to invest some time to "start over," it may make long-term sense.
It's also possible that your lender isn't willing to negotiate with you because you haven't been reliable with recent payments. That means you may need to hire a pro. Consider tapping the expertise of a reputable credit counselor who can negotiate with your lenders on your behalf. Depending on the program you enter, you may pay a set amount each month to the credit counseling agency, which will in turn pay your lenders (generally known as Debt Management Programs).
But be warned: There are many seedy credit counselors out there -- specifically, those that bill themselves as debt consolidation firms. Instead, search for a nonprofit counselor who is recognized by the National Foundation for Credit Counseling. The NFCC website also offers many terrific educational articles about working with credit counselors.
4. Make a plan and stick to it.
Whether you've negotiated your debts on your own or with the help of a credit counselor, it's essential that you stick to the plan.
To improve your credit score, there are several action items you need to make priorities:
• Pay on time: Payment history makes up 35 percent of your FICO credit score. Make sure your future payments are timely. When I pay my credit card bills, if I'm not sure I can pay in full, I always send the minimum as soon as I get the bill. That way I at least know a payment has been recorded on time. I then make the remainder payment when I have the money available.
• Don't open new credit: While you're paying down old debts, you don't need to add to your credit cards. Too much new credit in a short time period can have a negative impact on your credit score.
• Lower your balances: As you're paying off debt, don't make new charges. Your credit utilization ratio -- a percentage that compares your available credit to the amount of outstanding balances -- is also a credit score factor.
5. Change the way you spend.
Going forward, you can spend in a way that makes sense for your budget and for your credit score.
If you have outstanding balances, stop charging. If you can't pay cash or use your debit card, don't buy it.
Once your balances are in control, start using credit again, but gently. Show your lenders you can make small charges and pay them off in full at the end of the billing cycle.
If your credit was so poor that your credit card accounts were suspended, consider getting a secured credit card. For these, you make a deposit to a savings account, and the bank gives you a credit card with a spending limit equal to the amount in the savings account. The bank can then use your savings account as collateral if you don't pay.
After you show the lender that you can wisely manage a secured card, you may be able to convert the card to a regular credit card. To find good deals on secured cards, check BankRate.com.