How To Repair Your Credit After Bankruptcy

Bankruptcy doesn't have to be the terrible circumstance it is often portrayed to be; it provides welcome debt relief, an end to harassment from your creditors and collection agencies and starts you down the road to financial recovery. Unfortunately, this is not the case as applies to your credit rating. Your FICO score will definitely be negatively impacted from a bankruptcy. The amount of reduction in your score will be in inverse proportion to the amount of time elapsed since your bankruptcy was discharged. So, the further in the past the bankruptcy was discharged, the less it will affect your credit score negatively, and it will disappear from your records after 6 or 7 years depending on where you live.

So time is certainly the sure cure for credit woes resulting from bankruptcy (assuming you don't incur further unpaid debt!) — but who wants to wait up to 7 years before they are able to get credit? Credit repair doesn't have to be a nightmare. If you follow the advice on this site, you'll be back in the black in no time!

It is next to impossible to live in today's society without credit cards. You can't rent a car, you can't stay in a hotel room, rent a video or conduct a whole range of activities that are simply a part of every day life. The good news is you don't have to! The following is a 10 step guide to repairing your credit after bankruptcy.

10 Steps to Repair Credit After Bankruptcy

1. Apply for a secured credit card. Go to a bank and speak to them about obtaining a credit card where you put down a deposit equal to the amount of credit you require in order to 'secure' it. So for example, if you want a credit limit of $500 on your credit card, you would give the bank $500 and they would keep that amount as insurance against any default of payment on your part. After a year or so, of paying your credit card bills on time, you may request that your credit card be unsecured and your deposit returned to you. Ensure you maintain this card and don't close the account as this first credit account will be your oldest (now that your others have been closed as a result of your bankruptcy) which is one of the factors that credit agencies use in calculating your FICO score. For more information on how your score is calculated, see our Frequently Asked Credit Questions.
2. Apply for a secured loan at your bank. Just like the credit card, you give the bank the amount of the loan up-front and then pay it off over the term of the loan. Ensure you get a short term loan, as the bank will make interest from this transaction and you don't want to throw too much money away needlessly. All you are trying to do here is establish a different kind of credit which lenders will look favorably on (assuming you pay it off according to their schedule and don't miss payments) when you apply for unsecured bank loans as well as other forms of credit.
3. Never use above 35% of your available credit on your credit card before paying it off. So for example, if you have a credit limit of $1000, you should never spend more than $350. This practice will ensure that you will get the maximum benefit from using your credit but not depending on it according to FICO. This is a very silly measure that lenders take into account but definitely figures into your credit score. Even if you pay off your credit card in its entirety every month, but you use over 35% of your available credit month to month, it counts against you as lenders see this as dependence on credit versus having the cash on hand. I agree; it's stupid. The next step will however allow you to get around this restriction...
4. As soon as you have an unsecured credit card for a couple of years, apply for a charge card such as American Express. These cards have no set spending limit (they do have limits based on your past spending and payment habits -- don't let the 'no credit limit' fool you. If you all of a sudden attempt to make a large purchase on one that is out of the ordinary for you, don't be surprised to get a call from Amex.) but have to be paid off entirely every month. This is good for you because you can spend as much as you want on it and it doesn't count against the 35% of available credit as explained in #3. This is also a great way to get the most out of loyalty programs these cards offer such as airline miles and so on. Because you have to pay these cards off in full every month, you won't be incurring interest on outstanding debt which would negate the benefit of the loyalty program associated with the card. I go for a free trip anywhere in the world every year as a result of my American Express Aeroplan card and I have no credit card debt... it really works.
5. Of course the #1 tip for repairing your credit is obviously PAY YOUR BILLS ON TIME; however, if you are going to be at all late on any of your payments due to unforeseen circumstances, ensure you contact the lender (be it credit card company or what have you) and explain the situation. Most credit card companies understand that things can sometimes pop up which may delay your payment temporarily. If you assure them of when they are going to be receiving their money and follow through on that agreement, they shouldn't penalize you — assuming the date isn't too far off from the due date. They should also understand you are trying to fix your credit, as they will be aware of your recent bankruptcy and are often more lenient with you if you are honest with them.
6. Understand that despite the fact that we live in a world of instant electronic money transfers, your bank may take up to 5 business days to process your payment. This can often lead to 'late' payments if you pay on or near the due date. Pay early or at least inform the lender that your payment has been made if there is a chance that your bank may not process this payment until after the due date as described in #5. Improve your credit — don't let your bank's late payments count against you!
7. Don't open up too many accounts! Ensure that you aren't penalized for having 'too much available credit'. Just because a credit card company is offering you what seems to be a fantastic deal and more credit doesn't mean that you should take advantage of the offer as it may work against you in terms of your credit score. Two credit cards is ideal and three should be the absolute maximum you should keep. Remember as mentioned in point #1, don't close your first credit account just because you got a 'balance transfer' offer from a competitor. Length of credit history with a particular account figures into your FICO score.
8. Monitor your credit report regularly to ensure there are no errors (it has been estimated that upwards of 60% of credit reports contain factual errors). You can do this online at either Transunion or Equifax. If you don't keep on top of your credit report, you may also never be aware of identity theft before it is too late!
9. If you are renting, get a letter of recommendation from your current landlord (assuming you have made payments on time or at least paid off any monies owing). This way, you may present it to prospective landlords when you are considering moving, as they will more often than not require a credit check before they will rent to you. If you have a recently discharged bankruptcy, you are unlikely to be able to rent a new apartment based on your credit score. In this case, a landlord may well take the letter of recommendation into account and rent to you anyway. Landlords are people too and know that circumstances in people's lives can occur which are unforeseen and lead to bad credit reports. As long as you are up-front with your prospective landlord, you should have a much better chance of obtaining new lodging.
10. Ensure you don't make too many enquiries or applications for credit! This is seen as a sign of financial desperation on the part of lenders. If you are shopping around for the best rate, a few enquiries made in short succession are generally ok, as lenders realize this is normal activity. However, if you have made many applications for credit over the course of a year, you will be penalized on your FICO score, making you less likely to receive the credit you are applying for. Additionally, if your score is lowered as a result of this or any other activity that is viewed in a negative light by lenders, you may find your interest rates on the credit cards you already have go up! This is generally covered in the fine print on the applications for credit cards... be careful!

Manage Your Credit

Transunion and Equifax are both credit agencies that for a low cost, will provide you with online reports on exactly what your credit profile is and will definitely help you manage your credit. Check them out today!