10 ways to bounce back after bankruptcy
If you've been through bankruptcy, you probably think your credit
is as shattered as Humpty Dumpty's shell. It may be, but the difference
is you can put it together again.
Credit after bankruptcy is difficult to obtain. You will likely
end up paying higher interest rates when you can find it, and you
could be targeted by unscrupulous lenders who believe that desperation
makes you an easy target.
Despite the difficulties, there are some simple things you can
do to start re-establishing your good credit.
"Regardless of your situation, your goal after filing bankruptcy
should be to straighten things out and start establishing good credit,"
says Mark Oleson, director of the Iowa State University Financial
1. Make a budget. "Compare your
monthly expenses against your income and set priorities for spending
and saving," says Lydia Sermons-Ward, senior vice president
of marketing and communications for the National
Foundation for Credit Counseling Inc. "It's always better
to control your money rather than letting it control you."
2. Learn to love cash. One of
the benefits of bankruptcy: Many people who've been through it develop
a "depression-era mind-set," says Chris Farrell, host
of the nationally syndicated television show "Right on the
Money!" and author of "Right
on the Money: Taking Control of Your Personal Finances."
"And that's not a bad thing." The result: You pay with
cash, buy only what you need and save more.
3. Pay all your bills on time. Even
the small ones. "The phone company and the power company are
two creditors that most people don't realize are creditors,"
says Ric Edelman, author of "Discover the Wealth Within You."
4. Watch your credit report. You've
been through a bankruptcy to get a clean slate, and you need to
make sure this is accurately reflected in your credit reports. You
also want to take control of your finances and start making some
smart moves, which means monitoring your report regularly for errors.
"Most people are scared of credit and finances because of the
numbers, and they don't understand it," says Oleson. "But
you ought to know what people are seeing when they look at you."
5. Get a credit card. "The best
way (to establish good credit) is to get a credit card," says
Oleson. "It's ironic because the best way to help yourself
is also the best way to damage yourself."
A secured card. This is a no-lose
option for the credit card company, but personal finance experts
are divided on whether these cards are helpful to consumers looking
to re-establish credit. How it works: A bank holds your money
and gives you a charge card with a limit for the same amount.
When you close the account, you get your deposit back. Common-sense
advice: If all you can get is a secured card, shop for one with
the best rates and least fees. Get out a magnifying glass, and
all the fine print before you sign. Use it sparingly for six
months to a year -- then try to renegotiate with the company for
an unsecured card.
An unsecured card. Even after
bankruptcy, you might still be able to get a card. Some banks
or lenders may actually consider you a decent risk because you're
not carrying any debt and may not be able to file a bankruptcy
for years. But you likely will pay dearly for the privilege. Act
just like you would if you had tons of money: Shop around. Check
feature to find the right card for you.
Be careful not to apply for too many cards. Each time you make
an application for credit -- and a creditor checks you out -- it
can potentially lower your credit score.
Card tricks: To establish a record of
borrowing and repaying (the heart of the old credit system), you
need to use your card. At the same time, you can't run up the charges
because you need to pay it off -- in full -- every month to show
you have truly reformed. (Plus, you didn't go through bankruptcy
and back just to rack up piles of debt again.) Oleson's solution:
Get a credit card but use it only for one specific thing, such as
Extra credit tip: When you use the card,
deduct the purchase amount from your checking account balance. Then,
when the bill comes in, you already have the money to pay the bill
6. Re-establish credit through a line of credit.
Check with your banking institution to see if you can establish
a line of credit by using a savings account to secure the loan,
says Sermons-Ward. "Be sure to maintain enough money in the
account to cover monthly payments back to the bank."
7. Put off buying a car, if possible.
While you can probably find a lender or auto dealer willing to make
the loan, you'll do better if you have a few years of credit-building
practice behind you.
"Nothing's out of the question," says Oleson. "I
think the problem people run into is just their level of desperation.
Wait two years. You can still apply for mortgages and other types
of loans if you can show you're responsible and can be trusted."
8. Nurture those long-term relationships.
"Time heals," says Farrell. "And if you have a steady
income and a steady job, that shows up."
The same is true for charge cards and credit relationships. While
card hopping may help you keep a better rate, it won't do good things
for your credit rating. But a long-term record with one or two cards
will help you build your credit.
9. Don't forget the human touch.
Having trouble getting a lender to take a chance on you after a
bankruptcy? Try writing a letter explaining the circumstances of
your bankruptcy situation, says Edelman. "Surprisingly, the
lending business is a very human one," he says. "Maturely
and responsibly explaining that this was a one-time situation, and
you have moved on does go far in a lender's decision. They recognize
that bad things happen to good people."
10. Steer clear of scams. Beware
of anyone promising to "fix" your credit after a bankruptcy.
your credit is hard work -- but it's something you can do yourself.
And it's free. "There is no way to repair it overnight, and
there are a lot of scamsters who will offer to for a fee,"
Tipoff to a rip-off: If someone wants money upfront or if the offer
seems too good to be true, be very careful, says Edelman. When in
doubt, he advises consumers to check with the credit bureau or state
Dana Dratch is a freelance writer
based in Atlanta.