How to Rebuild Your Credit After Bankruptcy
If you’ve gone through a bankruptcy and are worrying about how you’ll ever rebuild your credit and have a good credit score, don’t despair. There are some simple things you can do right now to start bringing your credit score back from the abyss.
1) Check your credit reports for inaccuracies.
You are entitled to a free credit report from each of the three credit reporting bureaus: Equifax, TransUnion and Experian, once every twelve months. You can obtain those reports by visiting AnnualCreditReport.com. Review everything on your reports very carefully and if necessary, follow the instructions each bureau gives at the end of the report to dispute any errors. The credit bureaus are required to investigate inaccurate items and update your report to reflect the correct information. Unless you see your reports, you won’t know if they contain some erroneous information that could be damaging your credit score. It’s possible they could contain accounts that aren’t yours, an incorrect social security number or any number of things that need to be corrected. Make it a habit to check your credit reports at least once a year because they’re constantly changing.
2) Find out your current credit score.
Yes, it might be a little painful to see your post-bankruptcy credit score, but it will be a reference point as you move forward in the credit rebuilding process. There are many websites where you can purchase your credit score. You can also buy your credit score from the credit bureaus themselves. If you don’t want to pay for your credit score or sign up for one of the many credit-monitoring services that charge a monthly fee, consider CreditKarma.com. When you register for a free account with this company, you’ll be able to keep track of your TransRisk score, VantageScore and Auto Insurance score for free. The site also has some helpful features like simulating how various financial moves, such as getting an auto loan, opening a new credit card or applying for a mortgage will affect your credit score. It also explains why your scores are what they are and makes suggestions of how to improve your score.
3) Apply for a secured credit card.
Depending on your overall financial situation and income, it is sometimes possible to qualify for an unsecured credit card right after bankruptcy, but it will likely have a rather low credit limit and a high interest rate. For most people, it’s much easier to get approved for a secured credit card. For those not familiar with secured credit cards, here’s how they work. You apply for them just like a regular credit card and if you’re approved you must make a deposit that the credit card company holds as collateral on your account. For example, if you make a deposit of $400, you will have a $400 credit limit. Your purchases are not deducted from your deposit. You must make a payment (at least the minimum amount) every month exactly like a regular credit card. Some credit card companies will pay interest on your deposit and when your credit improves, you may be able to graduate to an unsecured credit card with the company. Don’t be tempted to fall for the credit card offers that will likely flood your mailbox after you file for bankruptcy. Most have insanely high annual fees and outrageous interest rates. Some of the better-rated secured credit cards are the Wells Fargo Secured Visa Card, Capital One Secured MasterCard and the DCU Visa Platinum Secured Visa Card. The interest rates on these cards vary widely and some of them charge annual fees. Just because they’re secured cards, there’s no guarantee your application will be approved. If you’re declined, make sure to keep current on all your other financial obligations and apply again in a few months or so. The longer you wait after your bankruptcy has been discharged, the better your chances of approval. BankRate.com is a helpful site to search for cards that have higher approval odds for those with poor or bad credit and can allow you to do a side-by-side comparison of several cards so you can make the best choice. For more information about secured credit cards, see my article: Best Secured Credit Cards After Bankruptcy.
4) Use a credit card to rebuild your credit.
After going through a bankruptcy, some people are anxious to start obtaining credit right away and others swear they’ll never use another credit card in their life. If you’re one of the latter, consider getting a credit card, even a very low-limit one, for the sole purpose of rebuilding your credit. Having no active credit lines open can actually bring down your credit score. Even making a few small charges (such as a tank of gas or a couple coffees) and paying them off in full at the end of the month will show that you’re being responsible with credit and you’ll be rewarded with a better credit score. Don’t get carried away though, especially if you’re someone who has had trouble managing credit cards in the past. One, maybe two credit cards is more than enough.
5) Don’t apply for too much new credit.
When you apply for a new credit card, car loan, mortgage or other types of credit, this will appear as an inquiry on your credit report. Be sure to limit the amount of new credit you apply for as much as possible because too many inquiries will weigh down your credit score.
6) Start building an emergency fund.
Things happen. Cars break down. The family dog gets sick. The roof starts to leak after a heavy rain. Don’t let unexpected expenses end up on your credit card and risk getting back into the cycle of accumulating debt. No matter what your income, open a separate savings account and start setting aside as much as you’re able to each month. Sign up for automatic deductions directly from your paycheck or monthly transfers from your checking account if you can. Just don’t be tempted to touch it for anything other than true, legitimate emergencies. If you don’t want to pay the monthly fees many banks charge on savings accounts, consider a local credit union or an online bank such as Capital One 360 (formerly ING Direct) or Ally Bank, which offer free savings accounts with better than average interest rates that can get you on your way to a solid emergency fund.
7) Other ways to improve your credit
The good news about bankruptcy is that you can eventually restore your credit, sometimes much faster than you think. Using a secured credit card is not the only way. If you have the cash available, open a CD at your local bank and use it as collateral for a small personal loan. Make the payments on time each and every month and you’ll have a positive item on your credit report. The same can be done with an auto loan, assuming you buy a vehicle that you can easily afford the monthly payments on.
8) Be patient.
If you’re doing everything right: not getting into more debt, paying all your bills on time every month and being responsible with the credit you have, time is your best friend when it comes to credit. With every month that passes after your bankruptcy, your credit will gradually improve. Although that ugly bankruptcy mark on your credit report won’t disappear for seven or sometimes ten years, the further you get from the bankruptcy discharge date, the less weight it will hold in your credit score as long as you’re doing everything else you can to improve your credit.
Here are some resources and links to sites mentioned in this article:
Credit Reporting Bureaus
Credit Score Sites
Secured Credit Cards
Learn More About Rebuilding Your Credit From These Books on Amazon.com
© 2012 carolynkaye