After a bankruptcy, time and an excellent payment history are the best ways to improve your credit score.
Filing for bankruptcy is not a decision most people take lightly, especially because it affects access to new credit, home loans and even employment opportunities, not to mention the emotional impact filing for bankruptcy can have.
Bankruptcies can remain on your credit report for up to 10 years and can decimate your credit score by hundreds of points. But by adopting these strategies, you could boost your credit score and become creditworthy several years before the bankruptcy drops off your credit report.
1. Take a reality check
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Rebuilding your credit score after a bankruptcy is far from being pain-free. It entails making an honest assessment of the reasons you filed in the first place then taking action to establish positive lines of credit.
People claim bankruptcy for a number of reasons. Job loss, serious illness and relying too much on credit all rank high.
Regardless of the reason you wind up filing for bankruptcy, if you don’t do a thorough self-assessment of what went wrong, you could end up repeating the behavior that got you into trouble — especially if it was financial mismanagement.
“Filing bankruptcy is supposed to be a fresh start,” says Stephen Snyder, credit expert and author of “Credit After Bankruptcy.”
“To take advantage of the fresh start, you need to say, ‘OK, I overextended myself. I bought a Mercedes when I should have bought a Ford. My lifestyle was out of proportion. I need to scale back and live within my means.’ “
Although there’s not much you can do when an unexpected illness or job loss drains your finances, certain voluntary spending habits should be avoided.
Compulsive behaviors that involve wagering sometimes get people into trouble and can precipitate a bankruptcy.
“When I ask people what got you into this problem and they say ‘gambling’ and they live in Las Vegas, I tell them, ‘You need to move somewhere else. Because it’s just a matter of time that you’re back in the same place,’ ” Snyder says.
Similarly, the serial entrepreneur, who, despite repeated failure, insists on managing his own business to the detriment of his financial well-being, should probably assess the alternatives.
That individual, Snyder says, would probably do well to “consider getting a regular full-time job.”
“If they don’t fix that [source of financial problems], it’s just going to be a vicious circle that’s going to get worse and worse and worse.”
2. Check your credit reports
After a bankruptcy discharge, make sure your credit report is accurate. After all, your goal is to boost your credit score quickly, and inaccurate information will only prolong the time it takes to score high enough for conventional credit.
“Make sure that lenders are no longer updating your account every month, making it appear as though the delinquency just happened last month,” says Ethan Dornhelm, principal scientist at FICO Scoring Solutions Division.
Debts that were discharged through bankruptcy should be accurately reported along with “good items,” including accounts that were “paid as agreed” and any other accounts that you continue to pay on time that were not discharged in the bankruptcy.
For example, you typically cannot discharge federal student loans in bankruptcy.
Get a copy of your credit report and make sure everything is accurate. You are entitled to one free credit report every 12 months from each of the three national credit bureaus.
You can get them all at once, or better yet, stagger them every four months so you can your report more frequently.
“If it’s not accurate, consumers have to contact the credit bureaus themselves and the bureau in turn investigates and contacts the creditor,” Dornhelm says.
Credit bureaus generally have 30 to 45 days to investigate your claim.
You can request a free copy of your credit report at www.annualcreditreport.com or by contacting Equifax, Experian and TransUnion directly.
3. Obtain a secured credit card
“After you go through any kind of major negative [financial] event, the most important thing is to get back on the horse and not just abandon the credit system entirely,” says personal-finance expert Emily Peters of Credit.com.
One of the most effective ways to boost your credit score after bankruptcy is to obtain a secured credit card, she says.
Secured cards are credit cards secured by a deposit account (usually a savings account) owned by the cardholder.
The credit line is typically based on the amount deposited into the account. Deposits range from a few hundred dollars to a few thousand dollars, depending on the card.
Bank of America and Wells Fargo, for example, accept deposits from $300 to $10,000.
Here are some key features to look for in a secured credit card:
• Understand eligibility requirements. Some card issuers may not give you a card if your bankruptcy is too recent.
• Look for low annual fees, reasonable interest rates and reasonable service charges.
• Make sure the card reports to at least one of the three major credit bureaus. A card that reports to all three is better.
• Deposits should be FDIC-insured.
Consumers should also be wary of unsecured credit-card offers that come in the mail. Many of those are likely to have unfavorable terms and may not help boost your credit score in the long term.
“Those cards were designed for people with bad credit to remain in very low-credit-limit situations for a long period of time at a high interest rate,” says Stephen Snyder, author of “Credit After Bankruptcy.”
With a positive payment history and no other negative credit blemishes, you could graduate to an unsecured credit card in a few years, according to Snyder.
4. Get an auto loan
Getting a post-bankruptcy auto loan without an exorbitant interest rate can be tricky, but if you’ve been repaying your credit accounts on time and keeping your overall utilization ratio low, experts say it’s possible to rebuild your credit score to a respectable level within two or three years.
Auto loans are a logical next step toward rebuilding your credit because the loan is secured by the car, and lately, some auto lenders are more willing to give loans to people with less than perfect scores, Peters says.
But consumers still need to be as wary about auto-loan terms as they are with credit-card terms because it doesn’t necessarily mean you’ll be getting a great deal. Be sure to shop around.
5. Bide your time
Generally, the more time that has elapsed since your bankruptcy discharge and the faster you establish a positive payment history, the quicker your credit score will start inching out of the basement.
6. Mix it up with multiple credit lines
Having more than one type of credit line will help boost your credit score.
“You want to have a nice mix of revolving charges and installment charges,” says Dee E. Hoffman, executive director of the National Credit Restoration Alliance in Conroe, Texas.
“The point is most people with great credit scores probably have two credit cards from well-known, well-respected banks, a house payment, maybe a boat payment, and they keep those balances below 15 percent [of available credit] every month.”
About 10 percent of your credit score is calculated based on the types of credit you use (i.e., credit cards, mortgages, installment loans and retail accounts), according to MyFICO.com.
Another 10 percent is based on new credit accounts — which can include credit lines established after your bankruptcy. However, exercise caution when opening too many new accounts at once because you could potentially lower your credit score by lowering the average age of your credit accounts.
Post-bankruptcy consumers may want to avoid retail accounts because they usually have low credit limits and can get the cardholder into high utilization ratios very quickly, according to Hoffman.
“Unless that’s the only card you can get, I would advise not getting it unless you can go in there and charge a cheap item and pay it off each month,” he says.
Snyder believes retail cards may be useful.
“I’ve always pooh-poohed retail credit because it’s a small part of the credit mix and the interest rates are high, but it’s important to have the right mix for your scores,” says Snyder.
Once your financial house is in order and your credit score goes up, you could qualify for an FHA loan. Generally, it takes about two years after a bankruptcy discharge to qualify for an FHA loan.
“It’s a great time to mortgage a home because FHA limits are the highest they’ve ever been and government is certainly the way to go for a more recent [bankruptcy] filer,” Snyder says.
Although the FHA program does not officially use credit scores to qualify a loan, individual lenders may.
“Most of the lenders now require at least a 580 score to get an FHA mortgage and some go down as far as 550,” he says.
7. Be wary of credit-repair services
Some credit-repair and credit “doctor” companies make grandiose claims that they can clean the slate and repair your credit file, often for a substantial fee.
However, many of these organizations turn out to be scams that will take your money and leave you with a still-damaged credit file, according to the Federal Trade Commission.
Some of these companies claim they can remove negative information from your credit file. This is untrue if the information is accurate. Only time will cause those entries to drop off your credit reports.
“I think a lot of them are actually aligned with the creditors, and they will work with you as long as you are paying,” says Hoffman. “But the moment you are in distress, you’ll find they have the same face as the creditors.”