By John W. Schoen Senior producer
msnbc.com
updated 12/1/2009 6:11:04 PM ET 2009-12-01T23:11:04

Among the many legacies of the housing bust is a widespread collapse of consumer credit. In the space of a few years, bankers have gone from lending to anyone with a pulse to demanding a pristine payment history.

The result is a collapse in consumer credit that shows no signs of easing. In September, the latest figures available, revolving consumer credit fell at an annualized rate of 13.3 percent. The situation is worsening. In the first half of the year consumer credit was dropping at a rate of just under 10 percent.

No one is suggesting we go back to the reckless days of setting up tables at college orientations to hand out credit lines to freshmen. The credit card industry learned the hard way that when their models break, the results can be painful for all concerned.

But the lending spree has destroyed the credit histories of millions of Americans. The rules of the consumer credit game suggest it will be years before those failed borrowers are able to dig themselves out of the hole. Until those households get access to credit again, our consumer-driven economy will continue to slog along in low gear.

In the meantime, there are steps consumers can take to get back in the good graces of the financial services industry that helped put them in a hole they find themselves in.

I am trying to build credit for myself and husband. I have a low credit score, and he has none. We bought a truck and it's under both names, so we are hoping after we pay it off it will help with our credit. He has a repo under his belt and I have a couple of phone bills that I let get too high and couldn't pay them off. So my question is, what can we both do to build and increase our credit scores? We want to buy a house in the future and would like to build our credit so it won't be so hard on us. Any information or ideas that could help?
— Crystal, Amarillo, Texas

There are lots of reasons for financial setbacks, some of which you can’t control. With the “real” unemployment rate pushing 20 percent, job loss is a big one. Health setbacks are another; nearly two out of three personal bankruptcies were the result of out-of-control medical bills.

Letting the phone bill “get too high,” on the other hand, isn’t on the list of uncontrollable setbacks. You can fix that right away. Phone companies have done all kinds of research to figure out clever ways to charge you more than your fixed monthly plan. So think of it as a game. Every month the phone company charges you more than your plan, they win. If you stick within the plan, you win.

But it will take more than a few months of prompt payments to get back on track. The formula created for scoring credit doesn’t care why your payment history faltered. Maybe you're one of those people who just can't stick to a budget. Or maybe you happened to have hit a period of bad luck. The credit algorithm can’t handle that distinction. That’s a pretty big flaw in the “science” of calculating credit ratings.

Long ago, there was an actual banker you could visit and explain the difference. That person had the discretion to distinguish between deadbeats and good souls who had hit a bad stretch. But much as we might all wish to return to a day when credit was extended by human beings instead of computers, that time is gone.

Your best approach is to try to convince the computer that you’re a good risk again. The good news is that this can be pretty simple. The bad news is that it can take years.

The computer wants to see a record of your ability to manage a gradually increasing level of credit over several years. So you’re better off starting with a small credit line that you can manage well.

One shortcut you might look into: If you have savings you’re willing to commit, try to find a lender willing to give you a “secured” credit card. This means you agree to let the lender use your savings to pay off your card if you’re late.

It’s not much different than a debit card, but debit card payments are drawn directly from your bank account and have no impact on your credit score. By taking out a secured credit line, you’re essentially spending your money the same way, only you get a history of managing “credit.” That’s your goal here: to build a solid track record of timely payments as soon as you can.

If you think you can manage your spending well, you might look for retailers who are eager to sign you up for their own credit cards. When you go out and buy a big-screen TV or new pair of shoes, the easiest way the retailer can raise the real price is to sell it to you on credit.

Most people are easily seduced by the idea that a $2,000 purchase costs “only” $65 a month. The interest you’ll cough up for the “convenience” of paying over time is hidden. At 10 percent interest over three years, that TV comes to $2,324.24.

You can turn this pitch on its head if you have the discipline to manage store cards. One of the variables those computer programs look at is the difference between the total credit extended to you and the amount you actually owe. So if you can open six store credit cards with, say, $5,000 in credit among them, and you let them sit there so you owe $0, you are “successfully managing your credit.”

Stores know having that credit line is a huge temptation. If you can take those cards and never use them, you may be able to accelerate the recovery in your score.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.35%
$30K home equity loan FICO 5.06%
$75K home equity loan FICO 4.50%
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Source: Bankrate.com