How to Rebuild Credit After Bankruptcy

There is a common misconception that once you file for Bankruptcy, you can never get credit again. Not true, and in fact, if you have a low credit score before you file for Bankruptcy, chances are that your credit score will dramatically improve after the Bankruptcy case has been approved and closed. In fact, believe it or not, simply filing the Bankruptcy petition with the court leads to an immediate, albeit small, increase in your credit score!

So why do you need good credit? Many of my clients tell me that they never want to have a credit card again after Bankruptcy. My advice: having a few credit cards is a good thing, as long as you don’t fall into the credit card “trap” again. After the Bankruptcy case is approved by the court, you will begin getting letters from credit card companies offering small lines of credit. I advise my clients to get a credit card and charge small amounts throughout the month, such as gas or food shopping and paying back the balance in full, on time, at the end of the month. If you have a mortgage payment or a car loan or lease, be sure to make your payments on time. Good credit is needed for the future, for unexpected expenses, for mortgages or auto loans, and good credit allows you to get the best available interest rates and terms. Good credit scores can also affect how much you pay for insurance, and whether a utility company asks for a security deposit before starting new service for you if you move.

There are several factors that influence credit scores. Some of the most common credit scoring factors are:

• Payment history — a record of on-time payments you make as well as late or missed payments.
• Total debt — the total amount of debt you have, including credit cards, mortgages, car loans, unsecured loans, collections, and other credit accounts.
• Credit utilization ratio — The total amount of credit you have available to you compared with how much credit you currently use.
• Credit Mix — the types of credit accounts you have.
• Public records — such as bankruptcy cases or civil judgments from lawsuits against you from any creditors.
• Age of Account — how old your credit accounts are.
• Hard inquiries — any recent applications for new credit.

You should check your credit scores to see which of the above factors are affecting your credit. I recommend checking once a year and you can do so for free by contacting one of the credit reporting bureaus such as Experian, Equifax or Transunion. You will get a list of the credit score factors that are impacting your credit score and if you want to improve your credit score, you should tackle these factors first.

1. Pay your bills on time is by far the best and easier way to start rebuilding your credit.

• Pay all your bills on time, every month.
• Bring current any past due accounts and make on-time payments in the future.
• Setting up automatic payments so that you are never late with a payment.

2. Check Your Credit Utilization Ratio

Try not to “max-out” your credit cards. Your credit ratio compares the total amount of credit you have to how much of your available credit you're actually using. The lower your credit utilization ratio, the better and most experts recommend that you keep this score below 30%.

You can reduce your credit utilization ratio by paying off your credit card debt, keeping low or zero balances.

A secured credit card can also help build positive credit history. With a secured account, you deposit collateral and then borrow a percentage of that amount for credit. Your use of a secured credit account is reported to credit bureaus, so your good payment history can help you rebuild credit.

3. Family and Friend Assistance

Your family and friends can help you rebuild your credit. They can allow you to become an authorized user on one of their credit accounts. Someone with good credit can open a joint account with you or become a cosigner on a loan.

4. Be Careful Opening New Accounts

Applying for new credit accounts can have a negative affect on your credit score. Each credit card application appears as a “hard inquiry” on your credit report, and too many hard inquiries can negatively affect your credit scores. Too many credit card applications can indicate to a creditor that you may be experiencing financial troubles.

Filing for Bankruptcy is usually a last resort. If you are simply unable to re-establish credit, or if you simply cannot pay back what you owe, filing for Bankruptcy will help you in the long run. There will be a short period of time when you cannot get credit, and you will typically pay a higher interest rate on future credit. However, after your debt is discharged, you can take the steps outlined above to rebuild your credit. A large majority of my clients have told me that they put off filing for Bankruptcy for so long, and after the process was over, that they wished they had filed for Bankruptcy years before.

Call us for a FREE consultation and we would be happy to discuss your situation to see if filing for Bankruptcy may be right for you. Since 1999, we have assisted thousands of clients get back on their feet and achieve financial freedom.