Bankruptcy is meant to offer financially devastated consumers the change of a fresh start. However, this clean slate comes with a few hidden catches. The process of rebuilding your credit history after a bankruptcy isn’t always simple. Melinda wrote in with a question about building her credit:
I have been discharged from my bankruptcy for about 2 months now. What can I do or should I begin to build "good" credit through any particular practices? How? I have been thinking just to stay away from buying/financing another car, getting any credit cards or anything like that forever.
Melinda’s desire to avoid credit "forever" is understandable, but not reasonable. She is actually in a fairly good position to open a new account now that her bankruptcy has been discharged. (Lenders and creditors won’t usually issue new accounts to consumers who haven’t been discharged yet because there is a risk that the account could be included in the filing). Ironically, her email signature included a very appropriate quote:
"The future depends on what we do in the present"
- Mahatma Gandhi
This is really the key to rebuilding credit! Your credit future post-bankruptcy depends on what you do in the present. Opening new accounts and using them responsibly will help add new positive information to your credit report. Slowly, this positive information will begin to outweigh the negative records from your past. With a few years of work, Melinda could have a fairly good credit score.
Opening a credit card is a good first step toward establishing credit post-bankruptcy. Instead of accepting one of the many offers she’s probably receiving in the mail, Melinda should look online for an offer that meets her needs. I recommend a secured credit card because the rates and fees are often much lower than a traditional unsecured subprime credit card.
Secured credit cards work by having the customer deposit money into a savings account as collateral for the credit limit. If you put $500 into the savings account, you’ll get a $500 credit limit. When you close the account or it transfers to being unsecured, you’ll get the $500 back with interest. Unlike a pre-paid credit card, secured credit cards report to the credit bureaus and can help you build up your credit history.
Auto lenders often market to post-bankruptcy consumers as a good way for them to rebuild their credit. But beware of these loans that often come with extremely high interest rates. It’s much safer to start with a credit card and then apply for a loan once your credit is improve and you really need a new car. This article on rebuilding credit has more tips to help Melinda get started.
Emily Davidson
is editor of CreditBloggers.com and a former credit expert for the
credit bureau, TransUnion. She writes about credit and personal finance
topics.
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As a bankruptcy lawyer, I tell people to focus on their balance sheet, and better credit will follow. Also, check your credit report and make sure that all discharged debt shows as having a zero balance.
how can i get a discharged bankruptcy reoved from my credit ho wloing will it take
Hi Yvette,
Bankruptcy records come off your credit reports after 10 years (or 7 years from the discharge date for Chapter 13, and no longer than 10 years)