How to Rebuild Your Credit After Bankruptcy

These days, you can’t do much without a good credit score.

Credit scores are important but they’re not the only thing.

You’ve always needed a good credit score if you’re buying a house or car, but these days, you can’t even rent an apartment or get a credit card without one.

Here are a few tips to help you build or improve your score:

Pay your bills on time.

• Even one late payment can kill your credit score. Recently, I messed up and paid one of my credit cards one day late. I got an immediate warning from Credit Karma telling me my credit score had gone down 80 points.
• A string of late payments will make it difficult to get new credit. If one late payment sent my credit rating into a nosedive, you can imagine what happens if you make a habit of paying late.
• If you mail your payments, allow lots of time. With today’s Post Office, it will take at least a week for your payment to get to its destination, and creditors don’t go by the postmark. It’s got to get there by the due date.
• Paying online is faster than snail mail for major creditors like credit card companies and bank lenders because it’s all electronic, but if you owe money to someone who’s not in your bank’s system (like your doctor), paying online takes forever because your bank generates a paper check (in a day or two) and puts it in the mail. I’ve had people pay me that way and waited three weeks for the check.

Make more than the minimum payment

• If you make only the minimum payment each month, you’re digging yourself deeper into debt. Not only will it take forever to pay it all off, but the interest charges will be way more than the cost of what you charged.
• Pay your credit cards off every month and you won’t pay any interest.
• When you are trying to build or improve your credit score, paying your credit cards off each month doesn’t help much because the algorithm that calculates your credit score gives points for “credit utilization.” It looks like the ideal utilization is around 50% of your available credit. So leaving a small balance on all of your credit cards is probably the best thing to do if you’re in re-building mode.
• I try to pay off most of my credit cards every month, carrying a balance on a couple. For those, I try to pay off current purchases, plus interest, plus a little extra each month.

Monitor your credit score and make corrections where necessary

• There are three credit agencies (Experian, Transunion, and Equifax) and you’re entitled to one free credit report from each of them, each year. For those of us who aren’t organized enough to do it that way, your bank may give you your score (for free), or you can subscribe to a credit monitoring service like Credit Karma. You can also download all three from annualcreditreport.com.
• When you find a mistake on your credit report, challenge the error, and ask each of the reporting agencies to correct the mistake. If it’s not corrected, you have the right to add a note to the report describing why you dispute the negative report.
• Remember that when you apply for credit anywhere, a “credit inquiry” is usually added to your report. Too many inquiries add up to a ding on your score.
• Apparently, too much credit also drops your score. This one is different than your “credit usage.” I’m not sure how it works, but there is a point when creditors don’t consider you a good risk, no matter your score. I suspect it has something to do with your debt-to-income ratio.

Know how to use your credit

• One good way to build a credit rating if you don’t have one is to get a secured credit card. You’ll deposit money with the card company (like a savings account). The amount you deposit becomes your credit limit, and the deposit will be retained by the bank to guarantee your payments. Your payment history will be reported to the credit companies and like magic, you’ll have a credit score. If you don’t make your payments, the company can apply your security deposit to pay off your debt. Ideally, once you have a good payment record, the company will raise your credit limit, or you can apply somewhere else for a regular credit card.
• Keep your credit card balances well below the credit limit (the percentage of utilized credit is your “credit usage”).
• There are plenty of credit cards that don’t carry annual fees; you don’t need to pay for one.
• If you have credit cards that you don’t need or aren’t using, don’t close the account. These unused credit cards show up as a positive for the length of your credit history.
• Many credit cards offer some type of reward points or cash back on purchases. Pick credit cards where those points can be used for something you would buy anyway. If you travel a lot, travel rewards can be an attractive benefit. But cash back is always useful. I like the Amazon Prime card. The points I earn for things I charge on the card can be used to reduce the cost of things I buy on Amazon. Many cards will also allow you to use your rewards to pay a portion of your monthly bill. Bank of America and Wells Fargo are two of the banks that do.
• Interest-free balance transfers can be used to reduce your interest costs. You can use them to transfer a portion of what you owe on a high interest card to one that offers a 12, 18, or 24-month period with no interest. You’ll pay between 3 and 5% of the amount you transfer as a fee, but if you’re not planning on paying the transferred amount off anyway, it can be a good deal. When I see one of my balances creeping up, I’ll do a balance transfer as an easy and inexpensive way to pay down my total debt. But be sure you pay that amount in full before the end of the interest-free period or you’ll get hit with a big interest penalty at the other end. I always divide the amount of my transfer by the number of interest-free months, then round it up a little and make sure that I pay at least that much each month.
• Some credit counseling providers offer a free credit building course if you use them for both of the credit counseling courses that are required as part of your bankruptcy. Check out Evergreenclass.com. It offers a free credit building course when you come out of bankruptcy.

What to do if you get in over your head and can’t see a way out.

When you are drowning in debt and can’t see a way out (and none of these strategies are working), you have lots of options. Because I am a bankruptcy attorney, that’s always the first one I recommend. But it’s not the only option. There are licensed credit counselors that can help you figure out a plan to get out of debt. There are books and courses. There are also debt consolidation programs and loans that can put your debts together in a package and give you one monthly payment to get everything paid off. These, of course, come with a cost and, in my experience, rarely work. Most people end up filing bankruptcy eventually.

Bankruptcy Options

If you are eligible for a chapter 7 bankruptcy, you will likely be able to hold onto all your assets (house, car, etc.) and wipe out your credit card and some or all of your other unsecured debt. If you are not eligible for chapter 7, you can file a chapter 13 and pay a portion of your debts off over 3-5 years. You can find lots of information about bankruptcy online (Google), on the bankruptcy court’s website (us.courts.gov), or on this website’s Home Page.

Your credit score does go down when you file for bankruptcy. But for most people, their credit score is already at rock bottom. And there is life after bankruptcy and most people can start re-establishing their credit almost immediately. Lots of people even report that it goes right back up after they file. Probably because, if they file a chapter 7, creditors know they no longer have much other debt they need to pay.

None of the information in this post is rocket science. It can all be found on the internet by looking at various financial and credit information sites. And while I am an attorney, none of the information on this website is legal advice and it cannot be relied on as such. Many bankruptcy attorneys (including me) offer free consultations. Take advantage of the opportunity to get all of your questions answered and find out what’s best for your financial situation.

Would you like a free consultation?

I have over 40 years of experience in consumer bankruptcy law so if you’d like to schedule a free consultation, email me at martha@bankruptcysage.com to set up an appointment.

I’d love to hear from you about your experiences with rebuilding your credit after your bankruptcy (or anything else you’d like to share with me).