Rebuilding After Bankruptcy

You took the plunge.  You heard the warnings and knew the consequences, but it was the right decision for you.  Now you need to put the bankruptcy behind you and swim back to shore.  You need to begin the task of rebuilding your credit.

The truth is that the bankruptcy will stay on your credit report for up to 10 years.  However, you can mitigate the negative effects of the bankruptcy and start rebuilding your credit soon after completing the bankruptcy process.

Many sources say that after two years of positive credit behavior, you can earn a decent credit score.  Of course, there is no guarantee of this, and every lender has its own set of guidelines.  However, there is a consensus that, with positive credit behavior, you can get back on your feet after bankruptcy. 

Here are some tips for rebuilding your credit after a bankruptcy.

Pay Creditors on Time.  It is highly possible that you have some secured loans that survived the bankruptcy.  Make sure you make those loan payments on time and in full, since payment history makes up about 35 percent of your credit score.  If you open new credit, you must pay those bills on time and in full as well.  

Open a Secured Credit Card.  You may be thinking that credit cards are evil, especially after filing for bankruptcy.  However, the reality is that bankruptcy wreaks havoc on your credit score, and you need positive forms of credit to rebuild it.  Traditional credit card grantors may be reluctant to extend credit to you, but the next best thing is a secured credit card.

Secured credit cards require that you put down a cash deposit prior to using the card.  Your credit card limit is approximately equal to the amount of your security deposit.  You then use the card as you would use any other credit card.  You make charges and pay your credit card bill at the end of the billing cycle.  The key part of this process is paying your credit card bill.  People often mistake secured credit cards for pre-paid credit cards, which deduct your payments from the amount you originally deposited.  With a secured credit card, your security deposit will not be used unless you default on the monthly payments.  Essentially, you’re depositing money so the creditor doesn’t get burned if you choose not to pay.  In addition to the security deposit, some secured credit cards also charge an annual fee and their interest rates can be rather high.

In order for secured credit cards to work in your favor, they must report to the credit bureaus.  When you pay your bills on time, the creditor reports your positive payment history to the three major bureaus: Experian, Equifax and Trans Union.  Before you apply for a secured credit card, check with the secured credit card company to make sure they report to the credit bureaus.

Be sure to shop around for the secured credit card that best fits your needs.  Bankrate.com has some good information about secured credit cards and a great search engine for secured credit cards.

Open a Gas Credit Card.  Gasoline cards offer the same benefit as secured credit cards if they report to the credit bureaus.  As with secured credit cards, you should check with the company ahead of time to make sure that they report to the bureaus.  The nice thing about gas credit cards is that purchases are usually limited to gas, which means you’ll be less likely to go on a shopping spree.  I don’t know about you, but I’ve never seen anyone “splurge at the pump” and buy extra gas.  Most credit cards do not charge interest if you pay your balance in full each month.  Therefore, you can rebuild your credit without paying additional fees.

Keep Balances Low.  While your payment history is about 35 percent of your FICO credit score, the amount of your debt is also a major factor and makes up about 30 percent of your credit score.  The FICO credit score compares the amount of credit available to the amount you are using.  Try to keep the ratio as low as possible.  You should strive to use no more than 30 percent of your available credit.  Thus, if you have a credit card with a limit of $1,000, you should be using no more than $300 if possible.  And your goal should be to pay credit card balances in full each month. 

Rebuilding after a bankruptcy isn’t the easiest thing you’ll ever do, but it certainly isn’t impossible.  Stay diligent and use credit responsibly moving forward.  With a little time and effort, you’ll be able to recover from the murky waters of bankruptcy.

 

Disclaimer: This article is not to be used for legal advice.  Speak with an attorney if you have specific questions about your situation.

Bankruptcy