Rebuilding Your Credit Score

After filing for bankruptcy some people swear off credit in its entirety and assume that the reason they have a low credit score several years after their bankruptcy is because of the bankruptcy filing itself. That simply is not true. You don’t improve your credit score by avoid credit altogether, but only by using credit responsibly over a period of time.

If you filed a Chapter 7 Bankruptcy and receiving a discharge, you have the opportunity to rebuild your credit from the ground up. Meaning, all of your past late payments (30, 60, 90, ect.) will be wiped clean (reflecting only “included in bankruptcy” or “discharged in bankruptcy”) and collection accounts dings will no longer affect your credit score, likely raising your score after discharge. Also, your debt utilization rates and debt to income ratios will improve as well, making you a less of a credit risk to lenders due to your newly freed disposable income.

Your credit score is something that you don’t think about until you need it. If you want to buy a new car, you can likely get a car loan after receiving your discharge (assuming you have income), but the interest rate will likely be very high if your credit score is low. If you want to purchase a home, you will be denied outright if your credit score isn’t above a certain threshold (700 or above for some lenders). Further, your insurance rates are often affected by your credit score. So, swearing off credit may seem like the rational thing to do, but it will make your life more difficult by giving you fewer and more expensive options than having a high credit score would.

I would like to set out three steps for rebuilding your credit within a year following bankruptcy, in particular, though the principals apply generally.

  1. Establish 3 revolving lines of credit (not store charge cards): You will likely have a hard time obtaining a traditional unsecured credit card right after bankruptcy, but a “no annual fee” secured credit card will fit the bill (if you find an unsecured card, be sure there are no fees and the credit limit is high enough to use it for your intended purpose [paying a particular bill]). The limit on the secured card is not as important to your credit score as much as the utilization rate (the percentage of the available credit that is used [and was used throughout the life of the card]). I continually check out deals for credit cards and a good resource for me has been www.bankrate.com (we have no financial relationship with them). I would avoid credit cards with fees and stick with larger, more reputable banks.
    • Ways to use the cards responsibly and rebuild your credit: Only use your credit cards for recurring living expenses (i.e. water bill, internet, mobile phone, electric, ect.) and setup automatic bill payments. It might be useful to download their app (if they have one) to receive notices when there is a charge to monitor for fraudulent activity and the accuracy of whatever bill you will be using the card to pay.
  2. Establish an installment loan: Nowadays, most people have student loans. These loans if paid on-time, or in forbearance, will be sufficient for rebuilding your credit. If you do not have student loans, a good way to establish an installment loan with little to no risk is a savings secured loan.
    • A savings secured loan is a loan that a bank (most often a credit union [Georgia’s Own for instance]) that allows you to borrow funds secured by money in your savings account. For instance, you have $250 in a savings account with a particular bank, the bank would lend you up to $250 and deposit it into your checking account and freeze the $250 in your savings. A good strategy would be to use this type of loan and just leave the money in your checking account and establish an automatic payment of the loan from the checking account. Be sure to monitor this process, but it should not require much work or effort to have these payments steadily improve your credit score over time.
  3. Monitor your credit report for errors and inaccuracies: Inaccuracies and errors in your credit report can drastically affect your credit score. There is a great segment that 60 Minutes did titled, “40 Million Americans Have Mistakes on Their Credit Reports”, that speaks for itself. It is the credit bureaus responsibility to ensure that your credit report is accurate.
    • The first thing you should do is retrieve your credit report, for free, through www.annualcreditreport.com the only official site explicitly direct by Federal law to provide them. This report does not include a credit score, but Credit Karma is a good source for a free credit score and is genuinely free as well. If there are inaccuracies, physically mail in disputes, doing so online can waive certain rights that you will want later. There is a separate article in how to dispute these inaccuracies, please search for it on our site. If, after a reasonable amount of time, usually 45 days, the errors are not corrected. Contact us and we can investigate whether or not a violation of the Fair Credit Reporting Act has occurred and whether or not we can pursue a claim.
    • For sake of your credit score, it is important to focus on certain errors: Post-bankruptcy account information is not reported accurately (should either disappear, or simply state “included in bankruptcy” or “discharged in bankruptcy.” Also, duplicate derogatory items and incorrect personal information, account information, payment history and someone else’s credit information attributed to you mistakenly should be focused on correcting.

If you follow the above steps, you will be sure to improve your credit score and all of the things connected to it (loan interest rates [monthly payment amount], insurance rates, and loan acceptance rates) over time and likely much faster than you think. So, don’t swear away debt, just use debt to your advantage in a way that is virtually fool proof by using credit cards to pay ordinary monthly expenses that you pay off monthly and a savings secured loan (or student loans) that are all paid with automatic payments as they become due.

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