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How to Rebuild Your Credit After Bankruptcy

Erica Sandberg

December 30, 2011

QHi Erica,
I’m trying to recover from a recent bankruptcy. I had no other choice. I was $30,000 in debt after unexpected medical bills and divorce. This forced me to look closely at my debt, cut up the cards and get into a program paying $850.00 a month. To no avail, I was just getting deeper and deeper into debt. I’ve learned a lot about credit and I know I must rebuild it as soon as possible. My credit is now ruined for 10 years, so how do I begin to rebuild it? I know how to rebuild my credit score, as I have done that by paying bills on time. But now I have no credit to pay on time except for my mortgage. I am told that getting a credit card with a low limit and low interest rate is the best and that I should pay it almost off every month. Is this what I need to do? I haven’t used a credit card in three years. I think they are taboo. What can I do, if anything? — AnnTh_credit-counselor

ADear Ann,
The reasons you cited for declaring bankruptcy are pretty textbook. Expensive out-of-pocket medical expenses alone are often enough to put even an insured person over the financial edge. Add a marriage dissolution — with all the legal fees of the divorce itself and the extra costs of suddenly living alone — to that and the burden can be stupefying.

It also looks like you did make a solid attempt at paying those you owe by using a credit counseling agency’s debt management plan (DMP). These payment arrangements can be helpful. Participating creditors often reduce interest rates, which makes the balances cheaper to repay. Ask Erica

However, they are not for everyone. I was once a credit counselor, and as much as I tried to ensure that a DMP was the right solution before proposing it, some clients floundered. Like you, they tried to keep up, but even with a carefully constructed budget, they couldn’t because they simply didn’t have enough cash to go around. In these situations, Chapter 7 bankruptcy was the inevitable logical next step.

So here you are, trying to regain your credit footing after discharging your debt. This is what you need to know and do:

Know: Good credit isn’t always important. If you won’t be buying a home or financing something such as a car or appliance, renting an apartment or looking for a job, you really don’t need good credit.
Do: Assess your needs. If it makes sense to rebuild your credit, either take out a loan for a necessary item and pay it back quickly or get another credit card and start using it well.

Know: Your credit is not ruined for a decade. Yes, the notation will be listed on your credit report for a total of ten years, and, technically, it is the worst thing that can appear on your file. However, the older it gets, the less impact it has on your score. Creditors and other businesses tend to place greater importance on recent activity.
Do: Expedite the healing. You’re helping your report and scores along right now by paying your mortgage on time, but you can pick up the pace by getting a credit card and charging responsibly. This way, you would be adding great charging patterns to the mix.

Know: Almost every adult can get a credit card. Some accounts are for people with perfect credit, others are for those who have damaged credit. You’re in the latter category. And that means you will probably have to pay a little more for it, at least in the beginning, through higher interest rates and other fees.
Do: Apply for the right card for you. Forget waiting for offers to come to you. Check out the best deals for those in your risk category and apply for one that meets your needs.

Know: Credit cards aren’t evil! Taboo is an awfully strong word. Think about what a credit card is. It’s a piece of plastic that allows you to buy something now and pay for it later. Can you spend more than you can afford to repay? Yes. So don’t.
Do: Use them right. You’re correct — once you have a credit account, use it, pay on time and keep the balance at zero. That’s it. The end. Follow this rule and you’ll not only rebuild your reputation in as little as a year, but you will also avoid the costly debt that brought on the bankruptcy.