3 steps to rebuild your credit after bankruptcy
By Miranda Marquit
January 22, 2015
Bankruptcy is often viewed as the death knell for your credit.
Once you've got that blemish on your credit report, it's difficult to qualify for the best rates on loans, and you might even be required to pay higher insurance premiums. Worse, for some employers, seeing a bankruptcy on your credit report raises a red flag.
But it doesn't have to be the end of everything for you credit-wise. Even though the bankruptcy will remain on your credit report for seven to 10 years, it's possible to begin rebuilding your credit immediately, and to see positive results in as little as a year.
Keep your credit promises
“You have to use and rebuild credit when coming back from a personal bankruptcy,” says Paul Kuzmickas, an Ohio bankruptcy attorney.
Kuzmickas says that the first step is maintaining current payments on the loans that were not discharged during the bankruptcy proceedings. You might have home or vehicle payments to make, and those should be made on time and in full. If you filed for Chapter 13 bankruptcy, keep up with the agreed-upon payment plan determined during the proceedings. (The most common types of bankruptcy are Chapter 13, in which you pay off your debts in three to five years according to a court-approved schedule, and Chapter 7, which relinquishes you from some debts.)
Since your payment history accounts for the biggest chunk of your credit score, rebuilding starts with keeping all of your obligations up to date.
Credit expert Wayne Sanford points out that you need to make sure your debts are properly recorded on your credit report. Check your reports at AnnualCreditReport.com for free once a year. “All of the debt that is part of the proceeding is under the umbrella of bankruptcy, and they are all now treated as one debt,” he says. “Sometimes, a debt will slip out, and it will look as though you are supposed to be paying on it separately. This isn't the case. If you notice that a debt is no longer listed as part of the bankruptcy, you need to contact the credit reporting agency and have that fixed.”
Use new credit
It's not just about maintaining the payments you already have. You also need to obtain and use new credit.
“This can be worrisome or scary for some,” says Kuzmickas. “This is how they got into financial trouble to begin with.”
The key is to start again with your credit, but do so responsibly. Credit cards are the fastest way to re-establish good credit — as long as you are careful.
Sanford and Kuzmickas recommend opening a secured card account. Right after bankruptcy, you might not qualify for an unsecured card, but you should be able to get a secured card — even if it's one with a limit as low as $200.
Here's how secured cards work: You give the issuer a deposit of say, $200, which allows you to borrow up to that limit. Just make sure the issuer gives your payment information to the three major credit bureaus each month — that's how your credit will build.
“You should try to make sure you have enough cash to make security deposits on at least one or two secured credit cards so you can immediately start rebuilding,” suggests Sanford.
Remember that the cash you deposit is collateral for the loan; it won't be used to make regular payments on your secured credit card. Use the secured card to make one or two small, planned purchases each month, then pay off the balance in full. After a few months of responsible behavior, you might qualify for an unsecured card. In some cases, secured credit card issuers are willing to convert secured cards into unsecured cards, refunding your security deposit in the process.
“The interest rate will likely be very high, but as long as you pay it off every month in full, you won't pay that interest,” says Kuzmickas.
Once you have an unsecured card, and you make regular payments, you can begin applying for installment credit, such as an auto loan. You might be able to qualify for a small personal loan at your bank. Collateral might be needed, but this type of installment loan shows that you can handle different types of credit.
You could also get on a cardholder's account as an authorized user. This allows you to build your credit, provided the primary cardholder is responsible with his credit. However, you will not be responsible for the monthly bill. It is easy to be removed from an account as an authorized user, unlike a co-signer.
Change your old, bad habits
To avoid falling into difficulty again, stick to good financial habits. Part of rebuilding your credit after bankruptcy is ensuring that you don't run into additional problems. Follow a budget that encourages you to live within your means. Set aside money for emergencies so that you don't have to turn to cards when you have problems.
“Coming back after bankruptcy is doable, but it will take time,” says Kuzmickas.