5 ways to rebuild credit after bankruptcy

Justin HarelikQuestionDear Bankruptcy Adviser,
What is the best way to start to rebuild your credit after a bankruptcy? No one will give you credit because of bankruptcy.
-- Phil

AnswerDear Phil,
You are very concerned about your credit score, as you should be. Nearly everything -- jobs, insurance, purchase of home and cars and even apartment rental -- 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 begin 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 prior to offering you new lines of credit.

As I have discussed in a previous column, you don't want unnecessary credit inquiries showing up 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 start 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.

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 whether 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 increase 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.

Unsecured cards

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.

You should request a credit increase every 12 months. It is hoped this time around you can avoid carrying a balance on the cards. Please note, anyone who says you improve your credit score by carrying a balance is wrong! Using the card and paying the balance off in full each month, or within a few months, will improve your credit sooner.

Secured or unsecured loans

You might be able to apply for loans right after you receive your bankruptcy discharge. The procedures will be the same as applying for secured or unsecured credit cards.

Retail and gas credit cards

This option has become more difficult in the past few years. You might have to re-establish credit in one of the above mentioned ways prior to opening up retail cards. You establish retail cards with places such as department stores, hardware stores, office supply stores, appliance and electronics stores, and gas stations.

The reason this has become more difficult is that even though there are many different shops and stores, most have their credit card transactions processed through only a few major lenders. Citibank, GE Money Bank, Chase Bank, HSBC and WFNNB handle the vast majority of consumer stores.

You might already be in the system and applying for a new card could flag your former, delinquent account. Thus, you get a credit inquiry on your credit report and a credit line denial. The inquiry hurts your credit, and the denial hurts your ego and damages your recovery attempts.

Credit from banks and credit unions

Try to avoid high-interest, high-fee finance company loans. Even if you get a secured loan or credit card, these types of accounts on your credit report will not help you as much as accounts from banks and credit unions.

Obviously, something is better than nothing. But as you move forward with your recovery, you want to show future lenders that you have re-established yourself with mainstream lenders.

I will say this again and again -- as Eleanor Roosevelt once said, "No one can make you feel inferior without your consent." You will be denied credit as you start your recovery. But you must remain positive. Don't let a few rejections keep you from the ultimate goal of perfect credit.

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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.

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