Credit After Bankruptcy – How to Get Credit and Manage New Credit Accounts
This article is part one of a three part series that takes an in-depth look at getting credit after bankruptcy, and the best ways to raise your credit score.
Bankruptcy can be devastating to your credit score. Especially if you had a number of late payments, charge offs, or settlements prior to your bankruptcy. So how do you start to rebuild your credit? How do you know which credit cards to choose? How do you raise your credit rating?
There are a series of very simple steps that you can take after your bankruptcy to get back on track. It is possible to get credit and loans after a bankruptcy – even in the current economy.
Step 1: Find out what your credit score is
The first, and very important step to rebuilding your credit after bankruptcy is to know where you are starting from. The best thing you can do is to pull your credit scores at MyFICO.com. Once you know what your credit score is, you can decide which types of credit you would like to apply for.
If your credit score is:
- 400-500 – A credit score in this range means that you are going to have to apply for a secured credit card, or a prepaid credit card in order to start rebuilding your credit.
- 500-600 – A credit score between 500 and 600 means that you will qualify for most sub prime or “bad credit” credit cards
- 600-700 – A credit score between 600 and 700 means that you might be able to qualify for a slightly better credit card, depending on the policy of the lending company, and how they view bankruptcy. You may be eligible for credit cards with a slightly lower interest rate, or lower fees.
Step 2: Pull all three of your credit reports
Before you apply for credit anywhere, please pull your credit reports at all three credit bureaus. Take the time to challenge any incorrect, or negative information. Check up on your past due accounts, and make sure that they all say “included in bankruptcy”.
You can check your credit reports for free once each year by visiting Annual Credit Report.com
You can check out our complete guide to challenging information on your credit reports for a step – by – step walk through.
A word of caution: Do not challenge too many accounts at once. If you do, then you could unintentionally freeze your credit report for a month (because you have too many things being challenged for the credit bureau to compute your score). This will keep you from being able to get credit because the credit card companies will not be able to view your credit score until your disputes are resolved. So, just pick a couple of items each month, and dispute them that way.
Alternately, you can dispute everything at once, just expect to wait a couple of months before you apply for any type of credit card.
Step 3: Make Sure You’re Ready to Use Credit Correctly
Bankruptcies are caused by a number of things – not just credit card debt. Only you know what your situation is though. So if you are fresh out of a bankruptcy, take a long hard look at your finances. Are you ready to pay several hundred dollars for each new line of credit that you open up? One way or another, you can expect each credit card to cost you that much after you declare bankruptcy. At least at first.
Make sure that you are able to make regular payments – Are you regularly employed? Will you be able to make your credit card payments in time each month? Are you ready to learn how credit works, and use that knowledge to raise your own credit score? When you can answer yes to all of those questions, then you are ready to start exploring your credit options.
If your bankruptcy was caused by credit cards, be extra careful when you start applying for credit again. After my bankruptcy, I took this view of my credit cards:
“My new credit cards after bankruptcy are tools. They are tools that I am paying a lot of money for because they are raising my credit score. I know that if I raise my credit score I will have an easier time getting loans in the future on a house, or a car. “
In order to manage your credit well after your bankruptcy it is important to look at your credit cards as an investment. You are investing your time, and your money into your credit score so that life will be a little easier several years down the road. Just remember that raising your credit score after a bankruptcy takes time.
Time, and lots and lots of good behavior, and on time payments.
The one thing you cannot do is look at your credit cards as “free money”. If you think that you will not be able to stop yourself from charging your new credit cards to the limit, then you are better off waiting to get credit until you can keep all of your balances under 20% of your available credit. In other words, if you have a $100 limit on your credit cards, you can never charge more than $20 on that card, etc.
The hard truth about credit after bankruptcy is that for the first year at least, you will pay paying a fair amount of money just for the privilege of having a credit card, and a chance to rebuild your credit score. It is worth the investment of your time and money if it does actually raise your credit score to have the cards.
When you apply for credit after bankruptcy, just be sure that you can change the financial habits that led you to bankruptcy in the first place. You may not have owed a ton of money on credit cards prior to your bankruptcy. (I didn’t – I had overwhelming medical debt. Each bankruptcy situation is different). But you will still have to admit that something you were doing was destructive financially, even if there were other factors involved. In my case, not carrying health insurance was one of the financial mistakes I made.
So, just take the time to sit down with your finances, and do a quick checkup before you take the plunge. If you have already done these first three steps, congratulations! In part two of this series we’ll take an in-depth look at the process of acquiring new credit after bankruptcy, and what to do once you have it.
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