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.
During the 12 months ending June 30, 2005, more than 1.6 million people filed for personal bankruptcy according to the Administrative Office of the U.S. Courts.
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 University of Missouri Office for Financial Success.
1. Make a budget. “Track your expenses for three months to get an idea of how much you’re spending and where that money is going. Then create a realistic budget that fits within your monthly income. The first step to saving is to set boundaries on your spending,” says Greg McBride, CFA, senior financial analyst for Bankrate.com.
2. Learn to love cash. One of the benefits of bankruptcy: Many people who’ve been through it develop a “depression-era mindset,” 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.
“But don’t fear credit. You must re-establish credit after bankruptcy unless you plan to buy everything in cash — including a house or cars. Even future landlords or employers will want to see that you have rebuild credit after bankruptcy. Love cash, but learn to manage and respect credit,” says Justin Harelik, Bankrate’s Bankruptcy Adviser.
3. Pay all your bills on time. Even the small ones. Also important: your bank. “If you are bouncing checks, have overdrafts or are incurring bank fees, that will show up (on your credit report) as well,”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.”
- 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. Commonsense 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 read 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 Bankrate’s search 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, like gas.
- 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 in full.
6. Re-establish credit through a line of credit.
Your bank may offer a personal line of credit that can be secured by a savings account. This is known as a secured loan. While this may help you re-establish your credit, the interest you pay on the line of credit will far outweigh the interest you earn on the savings.
“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.”
Harelik has one caveat.
“But you must re-establish credit during that two-year waiting period. Merely waiting two years does not mean your credit score will improve. Future lenders will still want to see that you spent the two years rebuilding a positive post-bankruptcy filing credit history,” he says.
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. Re-establishing 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,” says Edelman.
Tip off 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 regulatory agency.