credit

Buy a car to rebuild credit post-bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
A woman at my bank said I should buy a car to build credit after my bankruptcy. Is this a good idea? What is the best way to rebuild my credit?
-- Jamie

Dear Jamie,
While you can use a car loan as a way to build your credit after bankruptcy, it might not be the best way to go about it.

Obviously, you may need a new vehicle if your old one is becoming too expensive to maintain. But if you just want to improve your credit, I don't think it's necessary to buy a car to do so. While you may want something new, even a newer used vehicle, you may not need it yet. Before signing a contract, you need to honestly assess your financial picture.

A car payment that's too expensive is a common reason people end up in bankruptcy. Many clients believe they can afford the payment only to learn that their budget was much tighter than they realized. As a result, credit card balances go up or go unpaid because of the car loan.

Car dealers are always looking for new buyers. You can't rely on the dealer's assessment of whether you can afford the loan.

Before buying a new or used car after bankruptcy, answer the following questions.

Does your current car cost you more than $300 a month to maintain? Your current vehicle may be operating just fine or it may be in need of new brakes, a timing belt or other costly maintenance. If the costs to repair your car cost more than the car itself, it might be time to look into getting another one.

How much can you afford per month? You must take into account your monthly budget, cost of car insurance with the newer car and the cost of fuel.

Is your current employment situation stable? This is important. People who have been at a job for at least five years are in a stable work situation. That means they can plan a little more into the future since they can anticipate future cash flow. You don't want to get a new car when you just started a new job or if the company is not stable.

Are you just itching for something new? That is never a good reason to buy a vehicle. If your friend just bought a new car, you may just have to deal with the jealousy for a while.

You can establish credit after bankruptcy without the risks associated with a car loan. Bankrate's search tools can help you find unsecured credit cards. Look for one specifically for people who have recently filed bankruptcy. The interest rate and fees may be high, but you must expect that right after bankruptcy. You can also get a secured card. A secured card means you deposit money into an account with the bank and receive a credit card with a limit equal to your deposit. Just make sure the issuer reports to all three credit reporting agencies.

Whatever you decide, make sure you take emotion out of the decision-making process. You can establish credit after bankruptcy without the risks associated with a car loan.

Ask the adviser

To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

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