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5 ways to rebuild credit after bankruptcy
If you're one of the 1.5 million people who filed for bankruptcy in 2010, the dark financial cloud may seem unending. But take heart: As time crawls on, if you don't suffer additional money missteps, your financial picture will improve.
Rest assured that you are not alone. The recession ushered in a tidal wave of bankruptcies, with the number of new filers nearly doubling from 850,912 in 2007 to 1.5 million in 2010, according to the American Bankruptcy Institute. While a bankruptcy will cause credit score damage, there are steps you can take to turn things around.
"Becoming creditworthy after bankruptcy is a major concern to millions of Americans right now," says Karen Carlson, director of education for InCharge Debt Solutions, a credit counseling organization in Orlando, Fla. After all, a bankruptcy can hurt your chances of getting a mortgage and make credit, in general, more expensive, with car loans sometimes costing consumers as much as 29 percent in interest after a bankruptcy, Carlson says.
The damage to your credit score can be substantial. In fact, a FICO score in the mid-to-upper 700s could fall by 200 points or more as a result of a bankruptcy filing, says Barry Paperno, consumer operations manager for MyFICO.com. Though bankruptcy remains on your credit report for seven to 10 years, you can start to turn your credit around in 12 to 18 months, experts say, by considering the following options.
Option No. 1: Correct reporting errors. While the last thing you may want to do is pull a copy of your credit report to see the bankruptcy's damage firsthand, it's important to make sure inaccuracies don't drag your score down even more. "Get a copy of your credit report free from AnnualCreditReport.com and make sure everything that should have been discharged in your bankruptcy shows a zero balance," says Carlson. If it doesn't, contact those creditors and the credit bureau to make sure the information gets updated.
Option No. 2: Take advantage of current obligations. Many people mistakenly believe that a bankruptcy will wipe out all debts, but some, such as student loans, child support and, in many cases, mortgages will not be discharged, says Barry J. Roy, a bankruptcy attorney with Rabinowitz, Lubetkin & Tully in Livingston, N.J. By keeping on top of payments on those remaining loans, you'll receive a credit boost for paying your bills over time.
Option No. 3: Rent your way to better credit. Earlier this year,, credit reporting agency Experian announced it would include rental histories in its credit profiles to get a more accurate reflection of consumers' financial pictures. "We included consumers' mortgages, auto loans, credit loans and student loans before, but we were missing the largest monthly expenditure for a third of the country -- namely their rent payments," says Brannan Johnston, vice president and managing director of Experian RentBureau.
Since the collection of rental data requires leasing companies to be part of a national network of property management companies and use special software, most individual landlords and small rental companies aren't equipped to report rent payments at this time. But if you plan to lease an apartment from a midsized to large rental company, check with the leasing office to see if they're reporting their data to Experian RentBureau, Johnston says. Though Fair Isaac's FICO score (which can range from 300 to 850) doesn't include the rental data in its credit scoring system, VantageScore (whose scores range from 501 to 990) does, and a record of paying your rent on time can make a difference. In fact, for those consumers who have rental data reported, 45 percent of them with Vantage Scores in the 500s and lower found their scores increased to 600 or above, RentBureau's Johnston says.
Option No. 4: Take a slow and 'secure' approach. Secured credit cards let you take baby steps back into the credit game. To offset the card issuer's risk, secured cards require a deposit that serves as your credit line, so if you put down $1,000, you'll have $1,000 in credit available. Apply for a secured credit card through a local bank or credit union, suggests Katie Ross, education and development manager for Auburndale, Mass.-based American Consumer Credit Counseling. Avoid secured cards with high fees, and make sure the card issuer reports your payments to the credit bureaus, Ross adds.
Option No. 5: Explore unsecured offers with caution. While some people who find themselves in financial straits may swear off credit entirely, doing so won't help your cause. Jacqueline Gikow of New York found this out the hard way after she filed for bankruptcy and then decided to operate solely with cash. "For about 10 years, I just used debit cards," the 64-year-old says. Since she hadn't built up her credit, she still had trouble getting credit cards after the bankruptcy had fallen off of her credit report. Though department store and gasoline credit cards tend to have high interest rates, they're typically among the easiest types of credit cards to qualify for. A high interest card with no annual fee, in general, can be advantageous if you use it regularly and pay it off immediately so you rack up no interest charges, Ross says. "By doing this, it will be reported to the credit reporting agencies and will show that you are making payments in a timely manner," Ross adds. Once you've shown your ability to pay on time and your credit score has risen accordingly, ask the card issuer to lower your rate, or apply for a card with better terms.
There's no one-size-fits-all approach to rebuilding credit after bankruptcy, but with consistent financial discipline and a little patience, you will get easier access to credit again, says Roy. "You'll be able to get a car loan, you'll be able to get a lease and eventually you'll be able to get a mortgage."
More responsible way to Re-establish credit after bankruptcy
Most responsible consumers who go through bankruptcy hope to borrow money again at reasonable rates. It can be done. Here's how.
After a bankruptcy, experts recommend these four strategies:
- Get a high-rate card
For consumers who want to rebuild damaged credit, showing you can be trusted with borrowed money is the main way to rebuild your credit. But consumers should not expect to get the same type of credit offers after a bankruptcy discharge that they did before, and should be aware that it is up to each issuer to decide how long after a filing they will approve someone for a credit card. The initial credit card offers directed at consumers will most likely include high interest rates and fees and very limited lines of credit.
Shortly after bankruptcy, it makes sense to apply for bad credit cards, rather than to get turned down for offers that are out of your reach. Be sure to carefully read all available material on a credit card before applying.
"Read the fine print very carefully and look at what the fees are. If the rate sounds reasonable, when can they raise the rate?" says Sandy Shore, a senior counselor with Novadebt in Freehold, N.J. She suggests that consumers have their credit offers evaluated by a good credit counseling agency.
Once consumers apply for and are then approved for credit, "Borrow the money and pay it back on time or ahead of time, and start re-establishing your credit report," says Eloy Ortega, president and CEO of Promerica Bank, the first Latino bank to start in Los Angeles in 30 years.
Get a secured credit card
Secured credit cards are a good choice for consumers who feel they will be turned down for a regular credit card. Secured cards require applicants to open a savings account that secures the credit limit on that plastic. This protects the issuer in case the cardholders cannot pay their balances.
However, consumers should be aware that payment history on a secured credit card isn't always reported to the credit bureaus, and when it is reported, it can actually alert future creditors to a troubled credit past if designated as a secured card: "It's not helping the person if it's not reported. They need to make sure the card is going to be reported to the credit bureau and that it isn't going to be reported as a secured card," Shore says. Ideally, the secured credit card issuer will report responsible credit card behavior without specifying that the payments were made on a secured card.
Open a CD
Novadebt's Sandy Shore recommends consumers use a certificate of deposit as a way to rebuild their credit while earning some money. She recommends that consumers take out a small personal loan, which they use to open a CD.
Consumers should choose a reasonable length of time to lock up money in the CD, such as a year, and make all loan payments on time or ahead of time. Shore suggests guaranteeing on-time payments by setting up an automatic payment system. By the time your CD has matured, she says, the borrower will have not only have shown a good credit history over the length of the certificate, they will also have earned some money. This allows consumers to re-establish their credit without the temptation of a credit card.
Go credit-free
Although most consumers want to have a credit history, some may be willing to try a more extreme approach -- to abandon the world of credit altogether post-bankruptcy. With the credit slate wiped clean in the wake of a discharge, "Bankruptcy is an opportunity to live without credit," says bankruptcy attorney and author Stephen Elias. He urges consumers to consider re-evaluating their need for credit, viewing bankruptcy as means to freedom. Of course, without credit cards, consumers will have to give up the conveniences they offer -- renting a car or buying a plane ticket, among other things, becomes difficult without them.
Regardless of the method consumers take, experts agree that consumers who have gone through bankruptcy should view credit with new eyes, and use the second chance to responsibly use credit so that they don't end up in trouble again.
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