A recent study concluded that the typical American has more than $3,000 in credit card debt.

While that amount is nowhere near the heart-stopping $400,000 that one Midwest couple currently has in credit card debt, it’s enough to make a mortgage lender think twice before granting a loan.

Every mortgage lender, real estate agent or home builder can tell story after story of otherwise qualified home buyers knocked out of the market by their credit. Common credit issues range from having too much available credit to late payments, to unpaid balances, unpaid federal income taxes, judgments and bankruptcies.

Having good credit means more than just being able to secure a mortgage. It means getting that loan at the best terms and conditions offered in the marketplace.

If you have credit problems, as most first-time buyers do, it’s important to get them cleared up. You can’t hire someone to do this for you. You have to do it yourself. All you need is time, a little bit of elbow grease, and tenacity.

According to the non-profit Consumer Credit Counseling Service (with some 1,600 member offices nationwide), there are six steps to reestablishing your credit. You need to develop a budget to repay your debts, design a plan to manage your money, pay in cash for everything, obtain your credit report, apply for secured credit (like a debit card) and finally, reapply for unsecured credit (like a regular Visa).

It’s not easy, but here are some strategies for building credible credit:
Check Credit History. The first thing you should do is get a coy of your credit report and that of your spouse, partner, or anyone else who will be applying with you for a mortgage. The three major national credit reporting bureaus are Experian (formerly known as TRW), Equifax, and Trans Union. Until March 1, Experian will provide you with one free credit report per year. After that, it will begin charging up to $8 per report, the same fee charged by the other major credit bureaus. You should get a copy from each, as well as from a local credit reporting bureau, since each may have different information.

You can reach Experian-Consumer Assistance at PO Box 8030, Layton, Utah, 84041. Phone: (800) 392-1122; Equifax-Consumer Affairs Dept., PO Box 740256, Atlanta, GA 30374. Phone: (800) 685-1111; Trans Union, Consumer Disclosure Center, PO Box 930, Springfield, PA, 19064; Phone (610) 690-4909. Check For Errors. Many credit reports contain factual errors that may be easily corrected. For example, your social security number may contain an incorrect digit, and someone else’s credit history may be intermingled with yours. If you have the same name as your mother or father, their credit problems may be listed on your report.

Also, steer clear of credit repair companies that advertise in the local newspaper, through the U.S. mail and through the Internet. Experts say these companies cannot do anything for you that you can’t do for yourself except lighten your wallet.

Put Your Financial House In Order. It’s important to create a workable budget that will allow you to pay off your debt and start saving money for a down payment and closing costs.

Start by recording every cent you spend. Cut up your credit cards (or keep them frozen in water in the freezer), and start paying for everything in cash. Force yourself to live on the income you bring in, or less. If you’re paying more than 20 percent of your net household income toward consumer credit, you could be in financial danger.

Consumer Credit Counseling Service (CCCS) clients who successfully complete the agency’s debt management course spend 70 percent of their take-home salary on living expenses (including rent, or mortgage, food, clothing, and shelter), 10 percent on debt, and 20 percent on savings.
Contact Your Creditors. If you have errors, mail proof of the error (and the correction) in writing to your creditors (via certified mail). You may also write an explanation of up to 100 words (regulations limit the length) explaining your side of the story. This explanation will become part of your credit record.

If your account contains “negatives” or “derogatories,”; such as an unpaid bill that was eventually charged off, you should work to get them removed by repaying the debt, even through it had been written off by the creditor.
Negotiate With Your Creditors. Although it isn’t widely known, many creditors will negotiate with you to settle your debts. CCCS frequently can get creditors to stop charging interest on a debt so that clients can begin to settle it. Typically, you might settle for 80 cents on the dollar, and the creditor agrees to delete the negative information on your credit report. Make sure all settlements are in writing.

Pay Your Bills On Time. This is the single best thing you can do to fix your credit. On-time payments show a creditor — or a prospective lender — that you’ve cleaned up your act and are now taking your credit responsibilities seriously.

Cancel Your Credit Accounts. Although you may not use the stack of credit cards in your wallet, lenders believe you could at any time. If you add up the credit lines, you might have $25,000 to $50,000 worth of credit just waiting for your signature. Having fewer credit cards with on-time payments generally rates high with lenders.

Don’t Jump Jobs. Lenders like to see a history of job stability. Two years with the same employer is ideal, but they’ll take one year, especially if you’re making a lateral move. Self-employed workers may now use signed work contracts to show prospective future earnings. Still, the best idea for those self-employed is to get at least a year under your belt before applying for a loan.

Don’t Buy A Car Before You Apply For A Mortgage. When you apply for auto financing, the dealer will send out a request for funding to many lenders. This can have a negative effect on your credit report. If you must buy a car within six months of applying for a loan, ask that the dealer keep the request for funding to one bank.