Build Credit After Bankruptcy

Achieving a good credit score can be a realistic goal after filing for bankruptcy. You can build credit after bankruptcy by making wise financial decisions. Live within your means and use credit accounts sparingly. Make payments on time. Ensure building a good credit score is something you are committed to doing. Building credit after bankruptcy takes time, but happens through careful planning.

Steps

Getting Credit after Bankruptcy

1. Apply for a new credit card. First, figure out if you really need one. If you already have a credit card, applying for a new one could further damage your score. New credit inquiries, which account for approximately 10 percent of your FICO credit score, lower your credit score because it make you look like you are desperate for more credit. Also, 13 to 15 percent of your credit score is based on the length of your credit history. New credit accounts bring the average length of your credit history down, which has a negative effect on your credit.
   • FICO is a company that develops credit scores based on your payment history and other factors. Most lenders use the FICO score to evaluate your creditworthiness.
   • If you decide to get a new credit card, it is often easiest to get one from a gas station or department store.
   • Before applying for a new credit card, wait until you are working, have been at your current address for more than a year, and you don’t have a high number of other new credit inquiries on your credit report.
2. Get a secured credit card. Many people with a history of bad credit or bankruptcy are denied for regular credit cards. However, if you are someone who really needs a credit card because, for example, you travel a lot for work, consider getting a secured credit card. With a secured credit card, you deposit a sum of money with a bank or credit union, and they give you a credit card with a credit limit for a certain percentage of your deposit. The percentage can range anywhere from 50 to 120 percent of your deposit.
   • The amount you are required to deposit differs from bank to bank. The deposit could be anywhere from a few hundred to a few thousand dollars.
   • Many banks charge expensive application and processing fees, and the interest rates on a secured card can be upwards of 20 percent.
   • Most major banks report secured credit cards to the three credit reporting agencies. However, smaller banks may not. Ask if your bank reports to the credit reporting agencies. If not, having that secured credit card will not improve your credit.
   • If you use the card responsibly for several months or a year, some banks may allow you to convert the secured card into a regular credit card.
3. Ask someone to be a cosigner or guarantor. If you are having trouble getting approved for a credit card, ask a trusted friend or family member to cosign your application. Do keep in mind that personal and family relationships can be ruined by these types of arrangements, since a cosigner or guarantor promises to pay your debt if you default. Cosigners are typically used for consumer accounts. Guarantors are used for business credit accounts. The lender usually reports both your name and your cosigner’s name to the credit reporting agencies.
4. Secure a bank loan with a CD or savings account. Take some money that you have saved and open a savings account or a certificate of deposit (CD). Ask your bank or credit union to give you a loan against the money in the account. The bank will require you to hand over your passbook and ATM card, removing your access to the money in the account. This way, the bank assumes no risk if you default on the loan.
   • Typically, the bank will lend you up to 85 percent of what is in the account.
   • Most banks will give you anywhere from one to five years to repay the loan. In order to establish a pattern of paying your bills, take at least 12 months to repay the loan and make all payments on time.
   • Ask the bank if they will report the loan to the three credit reporting agencies. If not, then the loan will not improve your credit.
5. Purchase an item on credit from a local merchant. Local stores may allow you to purchase an item on credit. Be prepared to make a downpayment of at least 30 percent. Also, you may have to accept a high interest rate. The store may need you to get a cosigner on the credit account. Finally, make sure the merchant reports its accounts to the three credit reporting agencies in order to rebuild your credit.
   • If a store will not issue you credit, try establishing a relationship with the merchant by purchasing items on layaway. Once the merchant sees that you are capable of making regular payments, they may be willing to let your purchase an item on credit.

Using Credit Responsibly

1. Make a budget and stick to it. Create a budget that delineates all of your monthly expenses. Figure out how much money you have left over to put towards debt payments each month. Only charge what you can afford to pay each month.
   • For example, suppose after paying for your rent, utilities, transportation, food and other necessary expenses each month, you have $80 left over. Don’t charge more than $80 per month on your credit card so that you can afford to pay the credit card bill each month.
2. Borrow only what you can afford to borrow. This shows future lenders that they can depend on you to pay back what you borrow. As a rule of thumb, you should spend no more than one-third of your income on debt. This includes mortgages, credit cards, student loans and car loans. Monitor your spending each month to make sure you are no spending more than you can afford.
3. Pay your bills on time. Your credit score is based in large part on your ability to pay your bills on time. This shows lenders that you are responsible and dependable. Make a commitment to never miss a payment. Consider setting up automatic payments that can be deducted from your bank account every month on the due date. This way you will never make a late payment or miss a payment.
4. Carry credit card balances responsibly. If you have to carry a balance on your credit card, pay at least the minimum amount due each month. Make all of your payments on time. Keep your balance below 25 percent of your total credit limit. Part of your credit score is based on the percentage of available credit you are using. Make a plan to pay down your balance as quickly as possible.
5. Monitor your credit report. Check your credit report at least once per year. Look for accounts you don’t recognize, loans that have been paid off but are still reported as “open,” and mistakes in your personal information. Contact the credit reporting agencies to Dispute Credit Issues or suspicious activity.
   • You are entitled to receive one free credit report per year from annualcreditreport.com.
   • Your credit report does not include your credit score. You may need to purchase this separately.

Improving Your Credit without Getting New Credit

1. Open deposit accounts. Creditors look for bank accounts as a sign of stability. A savings or money market account improves your standing with lenders. They assume that if you have a savings or money market account that you are making an effort to build your savings. The existence of these accounts makes lenders comfortable because they know you have a source of extra money for paying bills. This is especially important in the event of an unexpected major expense.
2. Increase your credit card limit. Your credit score improves if you are using a smaller percentage of the credit available to you. Increasing your credit limit on existing credit cards but not using that credit may improve your credit score. Requesting a credit limit increase is not the same as applying for new credit, so it does not have a negative effect on your credit score.
   • Before asking for a credit limit increase, bring any of your delinquencies current, make regular payments for several months or more, and pay down the balance by paying more than the minimum payment each month.
3. Add positive information to your credit report. Add information to your credit report that shows stability. You can send a letter to the credit reporting agencies to ask them to add items to your credit report. Enclose any documentation that verifies the information you want to add to your credit report, such as copies of your driver’s license, cancelled checks and paystubs that show your employer’s name and address. Keep copies of all of your correspondence with the credit reporting agencies.
   • Ask to have your current employment put on your credit report. Include your employer’s name and address and your job title. If you have been at your current job for less than two years, ask to have your previous employment added to your report.
   • Add your current residence, and if you have been there for less than two years, add previous residences to your credit report.
   • Include your telephone number in your credit report. This gives lenders a way to get in touch with you, even if your number is unlisted.
   • Ask to have positive account histories added to your credit report if the lender just doesn’t report them or if they only report them to one of the credit reporting agencies.

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• Build Good Credit
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Sources and Citations

See also

• Protect Your Job when Filing for Bankruptcy
• Buy a Car After Bankruptcy
• File for Chapter 13 Bankruptcy
• File for Chapter 7 Bankruptcy
• File Chapter 7 Bankruptcy Without a Lawyer
• File Bankruptcy in the United States
• Request a Bankruptcy Fee Waiver
• Reapply for a Mortgage After Bankruptcy
• Buy a Car While in Bankruptcy
• Rebuild Credit After Bankruptcy

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