When you’re rebuilding your creditworthiness after a bankruptcy, you want to start fresh with good credit habits. The best way to do this is by committing to do two things: First, pay all your bills on time. Second, make sure that any lenders you engage with are reporting your monthly payment status.
“The repercussions of having negatives on your credit report can stay with you for a very long time,” says Dara Duguay, author of several books on personal finance and executive director of the Credit Builders Alliance in Washington, D.C. However, “The further away you are from the negative instance, the less it is weighted.”
Review your credit report to see where you stand
Consider using the period following a bankruptcy to understand and modify any behavior that contributed to the bankruptcy, Duguay says. A good first move is to review your credit report, which she recommends obtaining for free from AnnualCreditReport.com.
Once you have your report, make sure it’s current and does not contain any discrepancies, says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling (NFCC) based in Washington, D.C. If any old debts have been uncovered, pay them off. Cunningham notes that Chapter 7 bankruptcy will stay on your credit report for 10 years, and Chapter 13 will stay on for seven years.
Once you know where you stand, it’s time to establish new habits to restore your creditworthiness. This can be achieved through a few basic steps:
1. Pay your bills on time. Duguay and Cunningham agree that paying your bills on time is the best way to begin to restore good credit. “This is because the highest weighted element of the credit scoring model is paying bills on time,” Cunningham says.
2. Know that not all cards are created equal. After a bankruptcy, you may want to use a debit card. But be aware that activity on debit cards is not reported to the credit bureaus, so it cannot help you rebuild your credit, Duguay says.
Cunningham recommends applying for a retail or gas credit card, which are often the easiest to obtain.
Also consider getting a secured credit card, which allows you to load money onto a card that can be used just like a credit card. You can spend only the amount loaded onto the card, so it supports strong budgeting and spending habits. And perhaps most important, your responsible use of this card is reported to the credit bureaus, which enables you to rebuild a positive credit history.
3. Diversify your credit. Adding an installment loan can diversify your credit, which can strengthen your credit report. “Installment loans are those which have the same payment every month for a set term—think vehicles, as opposed to revolving credit, which has a different balance and payment each month,” Cunningham says.
4. Solicit the help of family and friends. One way to build credit more quickly is called piggybacking, Duguay says. A family member or spouse with good credit can add you as an authorized user to his or her account. When you’re added, your use of credit is reported in both your name and the primary account holder’s name. But be aware that since the credit is linked, both parties can either benefit or be harmed by behavior, Duguay says.
You can also ask a friend or relative to act as your co-signer, effectively partnering with you on a loan. You are considered the primary borrower and the payment is yours to make, but your payments are reflected on both yours and your co-signer’s credit histories, Cunningham says.
5. Start small. In all cases, when borrowing, be realistic in your expectations. Depending on your situation, when new credit is extended, it is likely that your line of credit will be low, maybe in the $300 to $500 range. Borrow to your capacity to pay back and be mindful of the credit histories of those who agree to assist you.
Ultimately, recovering from a financial setback requires time and patience. But by rebuilding good spending habits early on, you’ll be in a much better position to enjoy healthy finances in the future.
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If you notice an unexpected change to your credit score, don’t panic—it’s probably not because you’ve been accidentally neglecting to pay your cell phone bill or an anonymous benefactor paid off your mortgage