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Rebuilding Credit After Bankruptcy

By Philip Tirone

Like a lot of folks who start trying to rebuild credit after bankruptcy, you might be thinking of wiping your hands clean of credit. And it might make sense that the fastest way to move past the bankruptcy is to stop relying on the loans and credit cards that precipitated the bankruptcy.

But contrary to popular belief, using credit appropriately in the wake of a bankruptcy is the best way to rebuild credit after bankruptcy. Of all the bankruptcy facts, this one might be the most important. Indeed, you might be able to build your score to 720 within a couple of years of declaring bankruptcy if you follow a smart plan to re-establish credit.

This twofold plan to learn how to fix credit starts by opening new lines of credit and concludes with paying your bills on time and in full.

Rebuilding Credit After Bankruptcy Rule #1: Open new lines of credit!

You might hear claims that you can have a bankruptcy wiped from your record. Beware of these claims! There is no legal way to wipe a bankruptcy from your credit report. That said, time does heal. The credit-scoring bureaus—Equifax, TransUnion, and Experian—are more concerned with your recent behavior than they are with your past behavior. The trick, then, is to persuade the bureaus to pay more attention to your recent good behavior than to your past behavior. By establishing new credit and using it responsibly, you can prove to the bureaus that you are a new person—that the bankruptcy forced you to change your habits and establish smarter financial strategies.

After you have declared bankruptcy, open three new credit cards (Visa, MasterCard, or American Express) and one installment loan as part of your plan to rebuild credit after bankruptcy. Taking out a car loan is not advisable, in part because of the high interest rates you would assume, but also because of the debt you would add to your credit report. Instead, buy a new appliance, piece of furniture, or electronic using an installment loan. Then pay the loan off within six months.

Keep the credit cards active by using them at least every other month. Make only small charges (preferably less than 10 percent of the limit), and pay the balances in full.

Of course, with both the credit cards and installment loan, be aware of high interest rates. Because of your bankruptcy, you will likely not qualify for the best interest rates, which is why I stress the importance of paying the balances in full as quickly as possible.

Another note about opening new accounts: Insomuch as it is possible, open these accounts all at once and as soon as possible after the bankruptcy. The credit-scoring bureaus respond best to accounts that have been open for long periods of time. Your future credit score will benefit best if you open the accounts now.

By opening these new lines of credit, you can begin to rebuild your credit after bankruptcy by giving the credit bureaus new information on which they can judge your creditworthiness. Show them you have changed your patterns of behavior.

In this way, you can immediately begin proving to the credit bureaus that the bankruptcy allowed you to turn over a new leaf and change your payment behavior.

Rebuilding Credit After Bankruptcy Rule #2: Never, never make a late payment!

After a bankruptcy, the credit-scoring bureaus will have an eye on you, even as your score begins to climb. If you make a payment that is even one day late, the bureaus will assume you are back to your old ways, and your progress will be for naught.

To best rebuild your credit after bankruptcy, you must pay your bills immediately every single month. This means that you must live within your means. Be sure to read our article about how to create a budget, find money, and establish habits that best afford you to bounce back after a bankruptcy.

  • Smith

    Millions of Americans have filed for bankruptcy since the economic crisis began, shedding or restructuring their debt and moving on with their lives. And most, if not all, were concerned with repairing and rebuilding their credit following a bankruptcy filing. Thanks for such nice post which will help us to get more information. I am also one of them, filing for chapter 7.

  • Tracey

    Great points, all. Fascinating topic. I saw this other one that made me think twice: http://blog.wealthhabit.net/2011/02/take-it-to-scissors.html

  • Adelaide

    I had bad credit and I used Installment Loans to get back on track.

    • martin

      How can you possibly be approved for unsecured credit cards like American Express after or roight before a bankruptcy.
      Your credit score would be way too low.
      The best option is to use secured credit cards/

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  • Stanley

    Thanks to your program my credit score went from a 518 to a score of 652.Now I’m in a position to sell my house but the market value is far under what I owe. I would like to do a short sale. How would that affect my credit and can I build it back easier than either foreclosure or bankruptcy?

  • Marcia

    They can’t reaffirm their mortgage debt? Do you mean that they are losing their homes when they wanted to stay in them and continue paying the mortgage? What companies?

    • doris

      No question about chapter 7, it is also a good way to wipe out irs from 3 years all the way back, (not the last 3 yrs). But how could you obtain American Express and Line of Credit within 2 years after discharge? Also can you explain a little farther about lenders not letting you reaffirm mortgage, etc. I will be doing a chapter real soon.
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