In 2010, over 1.5 Million people filed bankruptcy, and 2011 is expected to bring much of the same. Filing bankruptcy is one of the most damaging things to a credit score, potentially dropping your score by 150 points or more, reducing your credit creditworthiness and costing you more in increased finance charges and interest rates. Though bankruptcy remains on your credit report for 7 to 10 years, there are steps you can take to start turning your credit around in 12-18 months.
Check your credit report: This is probably the last thing you want to do, but it’s important to know exactly your current credit status, while also confirming all information is correct. The longer incorrect information stays on your credit report the longer it could possibly negatively affect your credit score.
Go to http://www.annualcreditreport.com and pull your credit report. This free report will not contain a credit score, but you just want to make sure everything that should have been discharged in your bankruptcy shows a zero balance. If it doesn’t, contact those creditors and the credit bureau to make sure the information gets updated.
Make on-time payments to remaining debts: Many people mistakenly believe that a bankruptcy will wipe out all debts, but some, such as student loans, child support and, in many cases, mortgages will not be discharged. By keeping on top of payments on those remaining loans, you’ll receive a credit boost for paying your bills over time.
Get a Secured Credit Card: Secured credit cards let you take baby steps back into the credit game. To offset the card issuer’s risk, secured cards require a deposit that serves as your credit line, so if you put down $1,000, you’ll have $1,000 in credit available. Apply for a secured credit card through a local bank or credit union, but make sure you do your research first. Many secured credit cards have extremely high fees, and not all report to the bureaus. Make sure the card you are using has the lowest APR, low fees and most importantly reports to the credit bureaus.
Obtain a small loan with your bank or credit union: Many banks and credit unions will allow you to take out a personal installment loan based on the money in your savings account. FICO likes to see a “healthy mix” of credit lines, such as both revolving and installment. Getting an installment loan that is secured by your savings will allow you to start building credit through another resource other than the secured credit card. Remember to ask your bank or credit union if this loan will be reported to all 3 bureaus. The key is to build credit and increase your credit score. If the hard work you are doing is not being reported, you will not see any of the benefit.
And lastly, after several months of responsibly using your secured credit card, (paying on time, keeping balances low, etc) and making your monthly installments on your secured loan on time, you should be able to get approved for an unsecured credit card. Apply for a small gas card, or a department store card, as these are typically easier to obtain.
Once you’ve shown your ability to pay on time and your credit score has raised accordingly, ask the card issuer to lower your rate, or apply for a card with better terms. There’s no one-size-fits-all approach to rebuilding credit after bankruptcy, but with consistent financial discipline and a little patience, you will get easier access to credit again.