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How to Rebuild Credit After Bankruptcy

By Barb Miller

Most people I work with are very concerned about improving their credit scores post-bankruptcy. This is a good thing since nearly all important transactions like finding a job, buying insurance, financing a car or home, or even renting an apartment may well depend on your credit score. The good news is you can have excellent credit again! But, it will take time and hard work to get there. If you’re groaning over the “time and hard work” comment, simply recall how long it took to get to the point of filing bankruptcy and all your hard work to avoid that step. In comparison, working on your credit should be a piece of cake.

First Things First
Start by checking your credit report for accuracy. You can get your credit reports free at AnnualCreditReport.com or by calling the toll free number (1-877-322-8228). If you received free copies within a year of your request, you must pay a small fee. When you get your credit reports, review them carefully to make sure your name, address, and employment information are correct. Look over the account information carefully. Any account you included in the bankruptcy should show a zero balance, and may have a notation that the account was part of a bankruptcy.

In addition, your bankruptcy will show under the “Public Record” section of each credit report. You should know that the bankruptcy filing can legally stay on your credit report up to 10 years, although it can fall off sooner. As time goes by and your credit improves, new creditors will be more concerned about how you used credit since your bankruptcy discharge rather than the bankruptcy itself.

Ongoing Secured Loan Obligations
If you filed bankruptcy and had car loans or mortgages but were current (or got current) during the bankruptcy, continuing those payments on time every month will help to rebuild credit faster. The key is on time payments since 35% of your credit score is based on whether you pay bills when they are due. Paying early is even better if at all possible.

Be Ready to Use Credit Again
Although it helps your credit score to have a payment history, don’t rush out looking for new credit until you are certain you can handle it responsibly. This means you can stick to a budget, and save money every month for emergencies. Only then should you consider using small amounts of credit that you pay in full when the bill arrives. Start small, perhaps getting a gas card or one for a retail store. But beware! These creditors typically charge double digit interest rates so be sure to pay the bill in full each month to avoid expensive interest charges.

Existing Credit Cards
You may have an open credit card account from before your bankruptcy. If so, use the card but keep balances low. Again, make monthly payments on time. Ideally, you should be able to repay the monthly balance in full because you are simply using credit as a tool to rebuild your score, not to supplement income or in place of emergency savings. On the other hand, you must use credit to rebuild credit. Consumers who use credit moderately are considered a better risk than those who don’t use credit at all.

Secured Credit Cards
If all else fails, talk with a local bank or credit union about getting a secured credit card. Secured means you must deposit money into an account which becomes collateral for using the credit card. Your line of credit depends on the amount you deposit. Make sure the lender reports your account activity each month to the 3 credit reporting bureaus. Without a solid payment history being documented on your credit reports, no one will know what a terrific job you are doing. When creditors don’t report, your new and improved credit history will remain a mystery.

Use the card for small purchases each month and again, pay your bill in full when due. You can’t use the funds in the account for payments so be sure not to charge more than your budget allows you to pay in full. After a year, talk with the lender again to see if you qualify for an unsecured credit card. Before signing on the dotted line, make sure the interest rate and other terms are affordable for you.

How Long to Rebuild Credit
Anyone who promises they can repair your credit quickly is likely a scammer or con artist. Building good credit takes time and patience. But, time will pass regardless so you may as well make good use of it. Once actively trying to improve your credit, it typically takes 2 years before you’re accepted for a major credit card at decent interest rates. To qualify for a mortgage with reasonable terms, it takes about 4 years.

Barb Miller is a Certified Financial Counselor and Bankruptcy Specialist with LSS Financial Counseling. She specializes in blogging about bankruptcy, student loans, and financial education. LSS Financial Counseling is a member of the National Foundation for Credit Counseling. To schedule an appointment with a certified financial counselor call 877.577.2227 or visit their website at ConquerYourDebt.org.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.


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