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Rebuild credit after bankruptcy? Charge, repay, repeat

Erica Sandberg

September 24, 2015

QHi Erica,

How can I restore my credit rating after a bankruptcy four or so years ago? What happened: We lost our house to foreclosure because the banks wouldn’t refinance at the then-current low interest rate. Plus, we had about $10,000 in credit card debt. It all went into the bankruptcy. We lost our $300,000 investment in a $1 million-plus home. We’ve had no debt or credit cards since. Is a secured card the way to go? Should I go through my bank? Wells Fargo? Another bank? I want to start getting points again for travel! — Jade

ADear Jade,

Repairing a reputation, whether personal or professional, takes time and effort. Thankfully, some years have passed since you were formally absolved of your debts, so you’re already on your way to a more impressive credit rating. The first 24 months after a bankruptcy discharge are the most harmful to credit scores, but then the impact begins to wane.Ask Erica

And effort? Well, that just means using credit products in deliberate, positive ways. In short, charging and repaying, repeatedly and responsibly. When you do that, you’re proving to future creditors that you understand how to manage your money and can honor your financial obligations.

Because you haven’t had a credit card  (and from what I gather haven’t taken out any loans either), you don’t have fresh information being listed on your credit reports. Consequently, you don’t have much being factored into your credit scores except the bankruptcy, foreclosure and anything else that preceded these actions. Those negative marks are taking up too much scoring weight.

Obtaining a secured card is an excellent way to get back in the game. I talk these products up a lot because they make so much sense for both parties: Lenders gain by bringing on a new customer without taking much — if any — risk, as the line of credit is collateralized by a cash deposit. The lender can claim the funds if the person defaults on the account, so will lose nothing. Borrowers, on the other hand, also benefit as they can get a credit card, even with a bad or a limited credit history.

So where does one research and then apply for one of these secured cards? This site is a great place to start, since you’ll see a wide array of what’s available. Wells Fargo is a perfectly fine bank that offers secured cards, but you should shop around to identify the best account for you. When you do, apply and wait — you should be approved. When you are, you can begin to charge again.

At that point you’ll be hitting the “effort” part of the equation. I can’t emphasize enough how crucial it is to use the card often, and always pay on time and in full. It is the fastest way to add positive activity to your credit reports. Payment history and low debt (even better, no debt) are the top two factors in a FICO, which is the most commonly used credit score today.

After a year of wielding the secured card responsibly, check your FICO score to see which rewards cards are in your updated scoring range. Some creditors offer credit cards with perks to people with scores in the mid-600s, but the really great rewards — especially those for travel — are reserved for those with scores that are above 700.

To speed up raising our credit score, consider adding another card to your wallet, even if it doesn’t have all the bells and whistles you’re after. This way you’ll have two accounts in rotation, and by charging both and paying in full and on time, your score will shoot up quickly.

Soon the problems of the past will be behind you, and you’ll be eligible for an unsecured credit card that allows you to rack up major points for flights and enjoy special travel-related privileges.  Just don’t return to the days of unmanageable card debt. Keep balances near zero and you should do just fine.

Got a question for Erica? Send her an email.

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