Rebuilding Your Credit After Bankruptcy

    Bankruptcy inflicts financial misery on more than a million Americans every year, but there is a way to ease the pain, if you’re willing to take active steps to rebuild your credit score.

    It will take time, since bankruptcy can affect your credit score by hundreds of points — especially if you had a good score to begin with. Bankruptcy will weigh on your credit report for 7 to 10 years, depending on which chapter you file under, but you can reclaim financial independence. Credit bureaus reward responsible financial behavior, even for those who have declared bankruptcy.

    It helps to start with a game plan, preferably one that emphasizes the need to pay all bills on time, every month. People who have struggled with this in the past would be wise to adopt the motto: “Live below your means.”

    Put another way: Pay all your bills every month, then put at least 5 percent of your income aside in an emergency fund, just in case.

    Another part of the game plan should be to request your credit report, which is free, and examine all the negative marks on it to be sure you are responsible as charged. The credit bureaus make mistakes, and any mistake can be damaging to your score.

    Be certain, for example, that you are not being “double charged” for a debt. Companies often sell debts to collectors, and both parties may be reporting the same debt to the credit bureaus. That is why it makes sense to be certain the information on your credit report is 100 percent accurate.

    Get a Secured Credit Card

    The next step is to obtain a credit card, which is still the fastest way to improve a credit score. How you use the card probably needs to change some, but having one is the quickest way to put a positive spin on your credit.

    It is very unlikely that you will receive the kind of credit card you’re accustomed to using, which would be an unsecured credit card. You probably will have to apply for a secured credit card, meaning you will need to make a deposit equal to the credit limit you expect on that card.

    If, for example, you want a $500 spending limit on the card, you will need to give the card company a $500 deposit to hold as security against failure to make payments.

    Even with a deposit, many companies won’t issue you any kind of credit card for a year or more after your bankruptcy is filed. Do not be discouraged. They want you back. They just want there to be a cooling-off period.

    Beware of Credit Card Fees

    Before you accept a secured credit card, ask about any fees that go with the card. Some companies charge fees as high as $200 for a $500 secured credit card. Also, be certain that the card company you choose reports to all three credit bureaus, as this is not always the case.

    When you are issued a card, it is wise to start spending slowly. Do not max out your credit card. Only use 25 to 30 percent of the credit limit, and be certain to pay it off at the end of every month. Leaving a balance is a tell-tale sign that you have not overcome irresponsible behavior.

    When you are comfortable paying off the monthly credit card balance, it may be time to apply for an unsecured card. Once again, you may be rejected or asked to agree to conditions that include high fees or interest rates, so expect that.

    However, if enough time has passed (typically one year), and you have been diligent in paying off the secured credit card at the end of every month, you should be able to obtain a regular, unsecured credit card. When you do get an unsecured credit card, the goal is the same as with the secured card: Pay it off at the end of every month.

    Car Loans Possible

    The next step in rebuilding your credit score will be to obtain some kind of loan. Car loans are a good starting point, especially a short-term one with easy-to-afford payments. If you can handle the dual responsibility of car payments and credit card payments – without falling behind – your credit score will climb.

    Opportunities to access credit beyond that depend on the profile you are building. Mortgage loans are possible, though lenders usually wait at least two to three years after bankruptcy to even consider an application.

    Paying off debts on time is always the No. 1 factor in improving your credit score. Staying well under credit limits also is helpful. Credit scores range from 300 to 850, and it is not unusual for someone who declared bankruptcy to rebuild their credit score to somewhere around 700 over several years.

    Bankruptcy will be considered a negative on your credit report, at least for 7 to 10 years. There is no way around that. Bankruptcy does not erase a bad credit history, but it does give you a second chance. Don’t waste it. Demonstrate that you’ve learned a lesson about personal finances, and your credit score will begin to reflect that.

    You can emerge from bankruptcy with all the financial rights and privileges you need to be successful.

    Al Krulick

    Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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