Improving your credit after bankruptcy

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Dear Bankruptcy Adviser,
I have read that the first step to improving your credit after bankruptcy is to obtain a credit card or passport loan and pay it off in a timely manner. I have also heard that applying for a credit card after bankruptcy can appear negatively on your credit report. Can you please clarify this and explain which is correct?
— Liz

Dear Liz,
I think you ask an interesting question because life after bankruptcy does require new credit applications. There is no other way to rebuild credit.

You have a reason to be interested in how to keep your credit score from going any lower after you file bankruptcy. But that should not be your biggest concern. You need to be more concerned with re-establishing positive lines of credit, post filing. In order to do that, you do need to get new credit cards or personal loans. That can only happen when you apply for credit.

When you complete a credit application, the lender makes an “inquiry” on your credit report. That shows the name of the lender or finance company with whom you have applied for credit.

One inquiry should not have much, if any, impact on your credit score. The credit bureaus understand that everyone must apply for credit and your credit score should not be harmed from a few inquiries.

In fact, most credit bureaus understand that most people shop around and look for loans like a mortgage loan or a car loan with numerous different companies. You can have numerous inquiries in a short period of time without seeing a negative impact on your credit.

Now, some people reading this might wonder why someone who is filing or has filed bankruptcy would be concerned about any additional negative marks on their credit. It is true that a bankruptcy takes a major toll on your credit score. Your score could be reduced by as much as 200 points.

However, in order to rebuild, you must reapply. And that means you’ll get a few rejections until you start getting new loans or credit cards. It is important that you begin the process immediately after your case is over. You don’t want to delay the rebuilding process.

Most clients say to me, “I never want a credit card again.” While I understand this thinking, it is counterproductive. Your goal should be never to have a credit card balance again. While that too might be wishful thinking, it is important that you recognize the need to re-establish yourself.If you ever want a house or a new car again, you will have to show post-bankruptcy credit activity.

As with many things in life, you might have to take two steps back before taking three steps forward.

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