Rebuilding Credit With Credit Cards

Building credit after bankruptcy can be a challenging process. Bankruptcy can stay on your credit report for ten years, making it hard to qualify for a mortgage or car loan and making the cost of borrowing money much higher. However, it is possible to rebuild your credit after bankruptcy by following a few simple tips and tricks. Get a Card As Soon As Possible
It is impossible to rebuild your credit without a credit card. This paradox may appear to make rebuilding your credit difficult, but fortunately there are many lenders out there who are willing to offer a credit card to those who have declared bankruptcy.

Secured Cards
You may need to opt for a secured credit card, in which you keep a sum of money in an account and are given a credit limit equal to that sum of money. The debt is a secured debt, because the money in the account acts as collateral. If you don’t pay your bills, the credit card company can seize the “security” you posted. When you apply for a secured card, make sure that the lender reports to the major credit bureaus (Equifax, Experian and TransUnion). If they don’t, applying for the card will do nothing to improve your score, since lenders won’t receive a record of your responsible behavior. Also, watch for a card that doesn’t charge a huge fee (not all do) and one that will convert to an unsecured card after a period of responsible borrowing behavior (usually after about a year to eighteen months).

Unsecured Cards
If you qualify for a card that isn’t a secured card, it may have a high interest rate, and you're probably not going to qualify for any of the best credit cards. However, if you don’t carry a balance, the high interest rate won’t be a detriment to you. Apply for the card and begin to use it responsibly in order to rebuild your credit.

When applying for new cards, however, refrain from applying for multiple different loans. 10 percent of your credit score is determined by the number of inquiries on your report. Each time you apply for new credit, (or a credit line increase) the company makes an inquiry. Too many cards can drag this component of your score down. Furthermore, too many new cards can lower the average age of your credit history, which also accounts for ten percent of your score.

Use Your Card Wisely
When you have a card- whether secured or unsecured- make sure to use it wisely. Make one or more small purchases on the card each month and make payments on time. Contrary to a popular myth, you don’t need to carry a balance in order to build your credit- you just need to use the card and pay it off. Charging $100 worth of gas each month- which you would need anyway- and paying it off immediately is a great way to begin rebuilding your credit. A history of on time payments is essential to rebuilding your credit. Payment history accounts for 35 percent of your credit score. By making a small charge monthly and paying it off religiously, you’ll begin to rebuild this section of your credit report and can improve your score dramatically as you continue to pay on time. Using your card wisely can also help in another way. If you keep your balance low, this can have a positive affect on your debt-to-credit ratio. The amount of available credit you use accounts for roughly 30 percent of your credit score. If you have a low debt-to-credit ratio, or only use a small portion of the credit available to you (most experts recommend about 30 percent at most), this will reflect favorably on your credit report.

Become an Authorized Signer
If you have a willing friend or relative, you may be able to take advantage of their good credit behavior to help your post-bankruptcy credit score recover. When you become an authorized signer on an account, that account displays on your credit report as if it were your own. This means the card’s history of on time payments can make your payment history look better. If the card has a high limit and low balance, this can also be favorable as far as your debt to credit ratio. Finally, if the card is an older card, this can extend the average age of your accounts. To become an authorized signer, the friend need never even give you access to the actual card or account. They just need to list you on it. You don’t need to apply, and you don’t need to provide your social security number or any personal details.

Cleaning Up Your Report
In addition to opening a new account and improving your credit score, you will also want to check your credit report and make sure everything is as it should be. If debts were discharged in bankruptcy, they should not be showing as open or overdue on your credit report. If they are, contact both the lender and the credit bureau to correct the mistakes. You may need to show proof of the discharge, so keep all papers associated with your bankruptcy handy to send to lenders or collectors who may unscrupulously try to collect on a discharged debt.

Responsible Borrowing Behavior
If you use credit wisely and practice responsible borrowing behavior, you should be able to improve your credit after a bankruptcy. While it will take time and effort, ultimately you’ll be glad you did.