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Boost your credit score after bankruptcy

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.

Nevertheless, more than 1 million consumers filed for bankruptcy during the 12-month period ending Sept. 30, 2008, according to federal court statistics released in December. This compares to 775,344 filings over the same period the year before.

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.

7 steps to a higher credit score
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.

One caveat is that although these cards are still around, their numbers may be declining.

JP Morgan Chase announced it is discontinuing the secured credit card program initiated by Washington Mutual and closing those accounts.

"Secured credit cards are not a product currently offered by Chase," says Stephanie Jacobson, a JP Morgan Chase spokeswoman. JP Morgan Chase acquired the deposits, assets and certain liabilities of Washington Mutual back in September 2008.

Jacobson says customers with funds in these accounts will receive a refund as well as a credit for a portion of the annual fee.

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."

"The whole idea in getting a credit card after bankruptcy is to prove that you are creditworthy again and to get as high a credit limit as possible with the lowest interest rate. You're not really going to accomplish that with some of those unsecured card offers."

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.

-- Posted: Feb. 18, 2009
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