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 close to 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. Creditors want to see that you can handle more than one credit account at a time. But use all of the cards only if you can pay the charges in full each month. You don't need to build up interest charges on these cards.

Creditors may 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.

Where do credit reports and credit data come from?

Credit reports are compiled by credit bureaus -- private, for-profit companies that gather information about your credit history and sell it to any number of businesses that are allowed to see your credit report: banks, mortgage lenders, credit unions, credit card companies, department stores, insurance companies, landlords, and 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).

Credit reports include noncredit data such as names you previously went by, past and present addresses, Social Security number, employment history, and even 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, 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 stop messing up my credit report?

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, at www.nfcc.org), or Myvesta.org, at www.myvesta.org, both of which provide budgeting help for free or at a nominal fee.