How to Get Good Credit After Bankruptcy
Lost jobs, large medical expenses, or other serious problems often force people to declare bankruptcy. If you're unfortunate enough to find yourself in this position, the next step is to start rebuilding your credit. You can get good credit after bankruptcy, although it will take time. If you begin now, you can have a fairly decent credit score within 2 years. For example, that's long enough to qualify for FHA home mortgage insurance or a VA home loan.
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Instructions
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Learn how bankruptcy actually affects your credit. When you declare bankruptcy a notice is placed on your credit history. However, much of the negative information on your credit report (such as late payments that occurred before the bankruptcy) may be removed. The net effect is that your credit score may not fall much (it may even go up a bit). Also, credit scores are not calculated based on the general population but on how your use of credit compares to others with similar financial characteristics. Your future financial behavior will be judged based on how you compare to people who also have bankruptcies. This means that responsible use of credit in the future will significantly improve your credit, even with the bankruptcy on your record.
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Monitor your credit history. Studies by the PIRG (Public Interest Research Group) show the majority of credit histories have errors, and more than a quarter contain serious mistakes that can cause credit to be denied. You are entitled by law to a free copy of your credit history for each of the major credit reporting agencies once a year (Equifax, TransUnion, and Experian). Make sure damaging mistakes are removed from your credit history. You must order your free credit reports through AnnualCreditReport.com. This is the only provider of free credit reports authorized by the Federal Trade Commission (FTC). You can go online (see "Resources" below) or call (877) 322-8228.
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Pay bills on time. When your credit score is calculated, this is the single most important factor (it counts for 35 percent of a credit score). A record of timely payments will do more to get good credit after a bankruptcy than anything else you can do. If you do have a late payment, contact the lender immediately and make arrangements. If you keep agreements, many lenders won't even report a late payment or two.
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Reduce your outstanding debt, especially unsecured debt. Normally following a bankruptcy you'll have some arrangements with creditors. Follow any such arrangements to the letter, but to the extent you have any leeway, pay off unsecured debt like credit cards first. Lowering your overall debt, especially debt that is not secured by any form of collateral, will help to get good credit after a bankruptcy.
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Begin building a new credit history with a secured credit card. This is an option if you no longer have any open accounts. To get a secured card, you deposit enough money with the lender to cover the initial credit limit. As you make timely payments, the credit limit will be raised. The downside of a secured card is that it is expensive, with annual fees and high interest rates. But it is a good place to start rebuilding if you need one.
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Avoid applying for or closing credit accounts without good reason. Opening an account for a secured credit card or other necessary credit can help build your credit. Applying for too much credit (especially if you are turned down) or closing accounts frequently will lower your credit score and hamper your efforts to get good credit after a bankruptcy.
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Tips & Warnings
Don't try to go it alone. Talk to lenders, your banker, and others who can help you build a sound credit management plan. Sign up with a nonprofit agency like Consumer Credit Counseling Service (CCCS) for free advice and information. A link to their online counseling website is under Resources (below).
