You’re ready for a fresh start. The bankruptcy filings are over, and now you’re focused on rebuilding your credit. Where to begin?
We sat down with Dara Duguay, author of several books on personal finance and executive director of the Credit Builders Alliance, and Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling (NFCC), to discuss tips that you can use to help establish new habits and restore your creditworthiness.
1. Review your credit report to see where you stand.
Once you have your report, make sure it’s current and does not contain any discrepancies, says Cunningham. If you uncover any old debts, 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.
2. 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.
One way to pay your bills on time is by setting up automatic bill payments. Have confidence that the funds are in place for your automatic payments by building (and sticking to) a realistic budget. Minimizing new debt can also help you stay on budget.
3. Know that not all cards are created equal.
After a bankruptcy, you may be inclined to use a debit card so you don't rack up any new debt. But Duguay emphasizes that, because activity on debit cards is not reported to the credit bureaus, responsible use won’t help you rebuild your credit.
Cunningham recommends a retail or gas credit card, as these options are often the easiest to obtain.
You may also consider a secured credit card, which is a type of credit card that typically requires a cash deposit to open the account. Your deposit will often equal your credit limit, and the issuer holds your deposit as collateral. Your secured card activity is then regularly reported to the credit bureaus, so when you use a secured card responsibly, you can begin to rebuild a positive credit history. It is important to note that some issuers (including SunTrust, now Truist) may require that a certain amount of time to have passed since a bankruptcy before they will extend credit.
4. Diversify your credit.
When used responsibly, adding an installment loan can diversify your credit and help strengthen your credit profile. “Installment loans are loans that 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. Installment loans can be easier to budget for each month since the amount due stays the same. Be sure to pay the full amount off by the end of the loan’s term, though.
5. Talk to your family (or 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 credit use is reported in both your name and the primary account holder’s name. But Duguay cautions that since the credit is linked, both parties can either benefit or be harmed by behavior associated with that account.
You can also ask a relative or friend to act as your co-signer. If they agree, this effectively means they are partnering with you on a loan. Your payments are reflected on both yours and your co-signer’s credit histories, Cunningham says. Again, be mindful that while you are considered the primary borrower and the payment is yours to make, your co-signer is liable for the entire amount of the loan.
Think carefully about these options and talk honestly and openly with your loved ones before making any decisions.
6. Start small.
Have realistic expectations when borrowing. It is likely that any new line of credit you qualify for will be low, maybe in the $300 to $500 range. And make sure to only borrow what you’re comfortable (and able) to pay back.
Ultimately, recovering from a financial setback requires time, patience and consistent hard work.
“The repercussions of having negatives on your credit report can stay with you for a long time,” says Duguay, but, “The further away you are from the negative instance, the less it is weighted.”
By rebuilding good spending habits early on, you’ll be in a much better position to establish and enjoy financial confidence in the future.