Rebuild Credit After Bankruptcy

As most who have filed for bankruptcy at some point are aware, not only does it affect your finances, but it also does great damage to your credit score. Fortunately, rebuilding credit after bankruptcy is a possibility, and by establishing proper financial habits and both cautiously and responsibly taking on credit, it is possible to eventually attain a credit score of 700 or even 750. Having a good credit history will not only allow you to obtain credit, but also get better rates.

Steps

Establishing Good Financial Habits

  1. Commit to maintaining solid financial habits over time. The key to rebuilding credit is consistency over time. This means paying bills on time and meeting all credit obligations when they are due.
    • It is important to remember that delinquencies remain on your credit report for seven years before disappearing. A delinquency refers to a missed payment of one month, although they typically aren't reported to credit bureaus until two months are missed. This means that you will need to focus on maintaining good credit paying behavior for at least seven years (which means not adding any further delinquencies) in order to have a clear report.[1]
  2. Review your credit report. The journey to rebuilding credit begins by knowing exactly where you stand with regards to credit, and how far you need to go to get to the credit score you want. Typically anything over 700 is considered good, with 750 — 850 considered excellent. Conversely, anything under 640 is considered poor with 400 or lower being very poor. Knowing this helps inform you how drastically your finances need to be restructured.[2]
    • Get copies of your credit report from all three major bureaus, which are Equifax, Experian, and TransUnion. Do not contact the three nationwide credit reporting companies individually— you can request reports from the bureaus of your choosing via one source. Free annual credit reports are provided only through annualcreditreport.com, 1-877-322-8228 or mailing to Annual Credit Report Request Service.[3] Be careful of fraudulent websites.
    • To request through the mail, complete the https://www.annualcreditreport.com/requestReport/landingPage.action Annual Credit Report Request Form] and mail it to:
      • Annual Credit Report Request Service
      • P.O. Box 105281
      • Atlanta, GA 30348-5281
    • Mark the date on your calendar when you can get another round of free credit reports next year. Consider that your appointment for checking your progress.
    • You can also get a free credit score from websites like Credit Karma and Credit Sesame.
  3. Dispute any incorrect information on your credit report. It is not uncommon for incorrect information to appear on your credit report, or for there to be inconsistencies between reports by different bureaus. For example, debts that are paid in full could be listed as unpaid, or incorrect payment history could be present.
    • To dispute incorrect information on your credit report listed by the bureaus listed above, you can use this sample dispute form and mail it to the company.[4]
    • Include copies of any documents that prove there is an error in the report.[4] Make it clear where the error is on the report (you may wish to include a copy with the error circles or highlighted) and that you wish to have it corrected.[4]
    • Send your letter via certified mail and make sure you request a return receipt, which will give you documented proof that the bureau received your letter.[4]
  4. Create a budget. Bankruptcy can negatively affect your credit score for up to 10 years. Proper budgeting skills are the first step in building strong financial habits that will not only help you rebuild credit, but also help you maintain good credit going forward and prevent financial hardship. Budgeting allows you to know what money comes in, and make a strict plan for what goes out. That prioritizes and leaves room for debt repayment, savings, and on-time bill payments. The golden rule of budgeting is to never spend more than you make. If you are, this means spending needs to be reduced, or income needs to be increased.[5]
    • Start by determining exactly how much you bring in every month.
    • Then determine how much you spend each month. This will include necessities like housing/shelter, food, utilities, communications, transportation, medical expenses, and all loan repayments. It will also include discretionary items like vacations, nights out, etc. To figure this out, it is helpful to look at your bank statements.
    • Subtract your expenses from your income to determine how much extra cash you have every month. Your goal should be have 5 to 10 percent of your monthly income left over for savings.
  5. Create savings in your budget and reduce non-essential expenses. Once you know how much you make and how much you spend, it is important to reduce non-essential expenses as much as possible. This will leave more room for on-time bill payments (an essential part of rebuilding credit), free up cash for repaying loans in a timely manner, and allow for savings every month. The key is to be aware of what you want versus what you need, and to reduce needs as much as possible. Make sure to look at your needs as well, and confirm they are not wants. For example, you may need a cell phone, but a 3GB data plan is likely a want, where a 1GB plan may be all you need. Here's a list of needs for most people:
    • Housing/shelter. You probably have to pay rent or a mortgage every month. If what you're paying is too high, consider more affordable housing.
    • Food. Realistically estimate how much money you spend on food every month, including both groceries and dining out. If you need to cut that number down, consider eating at home and packing a lunch more often.
    • Utilities. Water, trash, electricity, and/or natural gas bills are usually unavoidable, but you can reduce them by being conservative. Take shorter showers, unplug electronics that are not in use, dress warmly instead of turning on the heat, and so on.
    • Communications. You probably need access to a phone, whether it's a land line or a cell phone. If your mobile bill is eating a big chunk of your money every week, see if you can downgrade to fewer minutes or a smaller data plan.
    • Most people probably wouldn't consider cable or internet access absolutely necessary to live. If you need to get online, but you can no longer afford access at home try using the WiFi at your local library or coffee shops.
    • Transportation. Whether it's a car, a bike, or a bus pass, you probably have to spend money to get around. If you have a car, figure out the monthly costs for gas, insurance, maintenance, and registration.
    • Medical expenses. If you have a chronic condition that requires regular doctor visits or medication, be sure to note these costs. You could also include how much money insurance costs you every month. There is a tax deduction for those individuals whose medical costs exceed a certain threshold; make sure you know what you keep track of your spending (keep the receipts) when you prepare your tax return.
  6. Pay your bills on time. Once your budget is created, you will have a clear image of what your expenses are. It is important to prioritize your expenses so that all bills are paid exactly when they are due. Payment history makes up 35 percent of your credit score,[6] and on-time repayments can quickly and easily rebuild your credit score.
    • If you tend to be late paying your bills and incur late fees, it is essential to stop. Draw up a calendar with all of your due dates (or enter it into your phone), and check it religiously. Make sure the money is ready ahead of time, and try to mail payments or do online transfers a day or two ahead of the deadline.
    • Getting into the routine of paying your bills consistently can help you break some of the bad financial habits that contributed to your bankruptcy. Accept that it might be a difficult adjustment, but it will ultimately be best for your bank account.
  7. Build a small cushion in savings. Every month, it is important to put a little bit away in savings. Although 5 to 10 percent is recommended, saving anything is positive. Having emergency savings allows you to forgo using credit if there a sudden bill that emerges.[5]
    • Start small. Most financial experts recommend having enough money in savings to cover six months of expenses, but that is an ambitious starting goal (although you can make that an eventual goal).

Applying For Credit

  1. Open a new checking and savings account. If you do not already have both a checking and a savings account, open one of each at a local bank or credit union. To Choose a Bank or Credit Union That Is Right for You:
    • Compare the interest rates and fees of all financial institutions between your residence and place of employment, or if you are unemployed, within 10–15 miles of your home.
    • Consider the various services each bank provides and the likelihood you will want or need each of them. A bank with many different services you will never use may not be the best choice for you.
    • Talk to friends and family members about their banking institution. Find out if they are happy with the interest rate, minimum deposit requirements, fees, and service they receive, and if they would recommend that you use the same institution.
  2. Get a secured credit card. Unlike a debit card that directly draws money from your bank account, a credit card allows you to borrow money and pay it over time. This is the easiest way to start rebuilding credit. A secured credit card involves giving the bank money (say $500), and then the bank gives you credit in that amount. Secured credit cards are typically offered through banks, although some credit card companies like Discover also offer Get a Secured Credit Card. [7]
    • Start with around $500. As your credit improves, ask the bank if you can slowly start raising the limit.
    • Be wary of anyone that asks you for outrageous start-up fees (some places try to charge up to $200) or for you to call a 1-900 number that will charge you money. Some lenders specifically seek out recently filed bankruptcies since they cannot seek court protection again for seven years. Don't open more than one or two accounts.
    • Be sure to ask if your transactions will be reported to all three major credit bureaus. You want them to see that you're paying off your debts so your score can begin to improve.
    • Know that some banks might force you to wait for a year after you've filed bankruptcy to get a secured card. If that's the case, focus on building up your savings in the meantime.
    • Get a secured card at a bank you want to continue to use for awhile. You'll eventually want to ask if you can switch to an unsecured card with the same bank, so choose wisely.
  3. Get a retail or gas credit card. When you're back on track with a secured card, you can try applying for a retail or gas credit card. This is important to improving credit, because one aspect of your credit score is "types of credit in use." By using different types of credit, you improve your credit score. Keep these points in mind when you're looking into it:[7]
    • Make sure your transactions will be reported to all three credit bureaus. Remember, the point of all this is for them to see you being responsible with your money.
    • Avoid huge start-up fees.
    • Try to get a card at a store where you won't be tempted to go on a shopping spree. Gas cards are a good idea because gas is a necessary expense you won't be tempted to splurge on. Try to avoid department stores that might tempt you with expensive items that are out of your price range.
    • Along with retail and gas cards (which are typically accessible to people with poor credit), eventually adding other types of credit can go a long way to improve your credit rating. These other types of credit include installment loans (like a line of credit, or car loan) or mortgages. If you do not already have loans in these categories, it is very wise to wait at least two years after bankruptcy to consider a car loan, mortgage, or line of credit.
  4. Pay off your balance every month. You might have heard that carrying a balance is great for your credit score, but that's not necessarily true. Especially if you have bad credit, the credit bureaus want to see that you're capable of paying off the balance as often as necessary. Keep in mind that 35 percent of your credit score is payment history, so paying bills on-time and in-full will quickly build your credit.
  5. Avoid closing accounts. As mentioned earlier, 35 percent of your credit score is payment history. Another 30 percent is amounts owed. This is calculated by looking at how much you owe relative to how much credit you have available. When you close accounts, your total credit limit decreases, which lowers your credit score.[8]
    • If you feel you can't control the urge to spend on a particular account, destroy your card.
  6. Avoid finance companies. Remember, finance companies exist to make a profit. Instead of being swayed by debt consolidation offers, focus on maintaining your budget, putting money into savings, and slowly building up the limit on your secured card or retail card.
  7. Ask when you can upgrade to an unsecured card. If you've successfully managed a secured card for more than 12 months, consider asking your bank if you can switch over to an unsecured card. Most banks will agree to letting you have a low-limit unsecured card after 12 to 24 months.
    • Keep the same mentality you had with the secured card. Avoid spending money you don't have on the unsecured card so that you can keep yourself from sliding into bankruptcy again.

Tips

  • Try to do most of your business through one bank, through which you have a checking account, savings, and a credit card. Being a member in good standing with one bank can help you get access to better account perks later on.
  • Don't give in to shame. Fight the instinct to punish yourself for having bad credit, and instead focus simply on what you're doing to improve. Remember, lots of people have walked this path before you. If they can make it, you can too.
  • Track your spending with the help of an online banking app or website. Look for one that you can attach to your bank account and credit card, so you can see exactly where your money is going and budget accordingly.
  • Seek professional help. The National Foundation for Credit Counseling can offer free or low-cost help if you're trying to rebuild your finances. Start here: http://www.nfcc.org/FirstStep/firststep_01.cfm.

Warnings

  • A large number of inquiries on your credit report can have a negative impact on your credit score. Therefore, you should not apply for every credit card or loan offer that arrives in your mail or inbox.

Related Articles

Sources and Citations

  1. ↑ http://www.experian.com/credit-education/improve-credit-score.html#HowLong
  2. ↑ https://www.creditkarma.com/faq/what-is-a-good-credit-score
  3. ↑ https://www.consumer.ftc.gov/articles/0155-free-credit-reports
  4. ↑ 4.0 4.1 4.2 4.3 http://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
  5. ↑ 5.0 5.1 https://balancetrack.org/rebuildaftercrisis/index.html
  6. ↑ https://www.wellsfargo.com/financial-education/credit-management/calculate-credit-score/
  7. ↑ 7.0 7.1 http://www.bankrate.com/finance/debt/5-ways-to-rebuild-credit-after-bankruptcy.aspx
  8. ↑ http://finance.yahoo.com/news/7-tips-improve-credit-score-120002518.html
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