Dear Bankruptcy Adviser,
What is the best way to begin to rebuild your credit after a bankruptcy? No one will give you credit because of bankruptcy.
You are very worried about your credit score, as you should be. Nearly everything -- jobs, insurance, purchasing a house or car, and even renting an apartment -- is based on your credit.
The good news is that you can and will have excellent credit again. In fact, even before the bankruptcy mark falls off your credit report, you could and should have a 750 credit score. This will take hard work, and you will have to start immediately after your bankruptcy is over.
Most of the time, you will have to wait until you receive the official notice from the bankruptcy court. This notification will say some variation of "Discharge of Debtor." That is the document that future creditors will want to see before offering you new lines of credit.
As I said in a previous column, you don't want unnecessary credit inquiries appearing on your credit report after the bankruptcy. You will want to know whether you have a chance for the loan before you even fill out an application.
Secured credit card
The easiest way to begin re-establishing credit is with a secured credit card with a local credit union or bank. A secured card means that you give the bank some money to hold and the bank gives you a credit limit equaling that amount. For example, you give the bank $500 and you get a credit limit of $500 on a credit card.
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Watch for outrageous upfront fees. Some clients have told me that the bank charged $200 in fees to open the secured card. That means $200 of your $500 limit is used up before making your first purchase.
Ask if the bank will report the card to all three major credit bureaus -- Experian, Equifax and TransUnion. If not, you'll need to find another bank that does report activity to all three bureaus.
Also, ask the bank how soon you can you boost the limit on the card. Some banks will have secured cards up to $10,000. Obviously, you would have to deposit that much money, but over time you can increase the card's limit. The higher the limit and the lower the balance, the faster your credit score will improve.
Finally, you want to work with a bank or credit union that will eventually give you an unsecured credit card. Some institutions will want to see at least 12 to 24 months of good payment history before offering you an unsecured card. You should know this information prior to opening the account.
You may start to receive many credit card offers after you have filed. Some will be unsecured, which means you don't have to give the lending institution anything to open the card.
The higher the limit, the better -- but be careful of upfront fees. As with a secured card, you want to know whether the lender reports your card to all three credit bureaus.