Myths about the process for reestablishing credit after bankruptcy abound. Some people say you should wipe you hands clean of credit cards and loans. Others say you should open accounts, but tuck them away in a drawer. Still others say that your credit score will be so low that you cannot get a loan until the bankruptcy falls off your credit report in ten years.
What is the truth?
In short, the truth is that your credit score will suffer after bankruptcy, and it will not begin to improve until you do something about it. If you want to improve your credit score, doing nothing is not an option. Instead, begin the process of reestablishing credit after bankruptcy by opening new lines of credit.
Do apply for three to five credit cards as soon as your bankruptcy is complete. You might not qualify for traditional “unsecured” credit cards, so consider secured credit cards instead. A secured credit card requires you to make a deposit that is equal to or greater than the limit. Keep in mind that the deposit is not credited toward your balance unless you default. You will receive a bill that you must pay monthly. Balances that you carry from month to month will be assessed an interest rate. After six to eighteen months of timely payments, you might qualify to have the card transferred from “secured” to “unsecured.” If your request is granted, your deposit will then be refunded. Otherwise, the deposit will not be refunded until you close the account and pay the balance in full.
Another option is to be added as an authorized user to a family member’s credit card. In this way, you can “borrow” the person’s good credit history.
Do open all the credit card accounts at once. About 15 percent of your credit score is determined by the age of your accounts. Each time you open a new credit card, the average age drops. Therefore, the fastest way to begin reestablishing credit after bankruptcy is to open all their credit cards at once. Though you credit score will initially drop (10 percent of your score consists of credit inquiries), it will begin to rebound after six months of timely payments.
Do keep the credit cards active while maintaining a low balance (or no balance at all). If you want to display that you have turned over a new leaf, you must keep the accounts active. This tells the credit bureaus that the bankruptcy created a clean slate for you to begin demonstrating responsible behavior. If you do not use the credit cards, the credit bureaus have no way of knowing whether you can handle debt.
At the same time, you want to keep your balance low. The lower your balance, the better your score. Your best bet for reestablishing credit after bankruptcy is to pay one bill each month with each of your credit cards. Then immediately pay the balance on the credit cards in full. This keeps your balance at $0, and it keeps the accounts active.
Do get an installment loan. If you are in the market for a new car or a household appliance, buy it on installment. Critical to the process of reestablishing credit after bankruptcy is that you give the credit bureaus new information by which to judge you. After all, the credit bureaus place more emphasis on recent activity than they do on past activity. Getting an installment loan, and then paying it on time, tells the credit-scoring bureaus that you can manage different types of credit responsibly.
That said, make sure the installment loan is small and manageable. By all means, do not use this as an excuse to buy a $25,000 car. Instead, visit your bank or local credit union and ask for an $1000 installment loan on your current vehicle.
When it comes to reestablishing credit after bankruptcy, there are three big “don’ts.”
- Wipe your hands clean of credit. No credit is the same as bad credit. If you do not begin a strategic plan to rebuild your credit, your score will not increase, even when the bankruptcy falls off your credit report.
- Miss a payment. The credit bureaus will consider one missed payment a giant red flag, and your credit score will sink.
- Keep a balance over 30 percent of the limit. If your credit card balance creeps past 30 percent of the limit, the credit bureaus will assume you are getting in over your head. If you must carry a debt, make sure it is less than 30 percent.
By following these rules of reestablishing credit after bankruptcy, you could see your credit score increase to 720 in just two or three years!