Rebuilding credit after bankruptcy
By Erica Sandberg
December 30, 2014
I filed for Chapter 7 three years ago, mostly because of a slew of medical bills. Obviously, my credit took a hit, and I know I deserved it (I also had a lot of credit card debt). But I've been living within a strict budget since then, and I feel I'm ready to try cards again. Will my bankruptcy keep banks from looking at me as a good risk? — Jodi
About 43 million people in the U.S. have overdue medical bills listed on their credit files, according to a December 2014 Consumer Financial Protection Bureau report, and health care debts are the primary reason people declare Chapter 7 bankruptcy. Clearly, you are not alone.
Good company aside, your credit rating almost certainly went bad well before you discharged the debts. If you maxed out your credit cards and missed payments, or didn't satisfy your hospital bills (causing them to land in collections), your reputation slid. To lenders, you've been a risky person to do business with for quite some time. Unless you've added positive data to your reports to indicate you've turned a new financial leaf (such as evidence of a well-managed car, student or home loan), you are still somewhat of a credit risk.
Interestingly, though, the bankruptcy might have helped your credibility. Prior to the discharge, you owed a lot of money. Afterward, you owed none — or at least much less. That means you are in a better position to qualify for a credit card, as you're not still swamped with payments for other debts. And since you cannot file again until eight years have passed, you'd be stuck with whatever you charged, thus giving an issuer a measure of confidence that you'll repay what you borrow.
The fact that the bankruptcy notation is several years old also works to your advantage. While it will appear on your credit reports and be calculated into your credit scores for 10 years, banks and other lenders are more interested in the present and recent past than what you did a long time ago. Therefore, the worst damage occurred in the first 24 months after filing.
Although you surely do not have perfect credit, if you have a job that pays well, you're in a fine position to get at least a secured card. Here's how a secured card works: You put a deposit down for say, $300, and you are allowed to charge up to that amount. However, you should pay the balance in full and on time each month for your credit score to benefit. Also, make sure the issuer will file your payment history with the three major credit bureaus, TransUnion, Experian and Equifax.
You may even qualify for a low-limit unsecured credit card. Either option would be great to start out with, as they would give you the opportunity to prove to lenders that you are a changed person. You've been living within your means for an extended period of time, so you should be comfortable with paying your essential bills.
After you get the new credit card, use it as you would a debit card: Charge one of your normal expenses (groceries is a sensible one), then pay the balance with the money in your checking account before the bill arrives. This way you'll never be tempted to spend more than what your income can handle. It won't be long before evidence of the bankruptcy retreats into the background of your credit history and your perfectly managed account assumes the forefront.
Regarding your “I deserved it” comment: It's important to take personal responsibility for what you might have done wrong, but it seems that you've learned from your mistakes and won't repeat them. Don't beat yourself up any more.
Health care costs can rack up fast, though. If you haven't built insurance premiums into your budget, do it now so you're properly covered in case of emergency.
Got a question for Erica? Send her an email.