Credit Inquiries After Bankruptcy
If your credit score is trashed, the last thing you probably want on your credit report is a bunch of credit inquiries after bankruptcy. Won’t this tell the credit-reporting bureaus that you are planning on returning to your old habits?
To some extent, yes. Each time you apply for credit, a creditor makes an inquiry into your credit report, and this causes your score to drop. One of the bankruptcy facts is that the credit-scoring systems will be keeping an eagle-eye on your behavior, and applying for credit is a big warning sign that you are up to your old habits.
So what are your supposed to do? Live as a cash-only citizen? This might sound good in theory, but it is highly impractical. You can barely get a cell phone without a credit card, much less reserve a hotel room or a rental car.
The truth of the matter is that credit inquiries after bankruptcy are a necessary part of building credit. The key is to be strategic about how you open new lines of credit and deal with credit inquiries.
The strategy might shock you. In short, your strategy should be to get it over with. Apply for all the credit you will need, and get all the credit inquiries on your credit report at once. I have three reasons for this:
Credit Inquiries After Bankruptcy—Fact #1: You need to start to repair credit after bankruptcy as soon as possible. This means you need to open credit cards, and you need to start building a positive credit history that shows the credit-scoring bureaus that your bankruptcy allowed you to start anew.
Credit Inquiries After Bankruptcy—Fact #2: Credit inquiries stay on a person’s credit report for only two years, but they affect a person’s score for only one year. If you have declared bankruptcy, your credit score is already trashed. Get the credit inquiries over and done with now rather than waiting to tarnish your credit report later. In fact, the only way to get your score to increase is to apply for credit and use it wisely.
Credit Inquiries After Bankruptcy—Fact #3: Every time you open a new account, the average age of your credit history drops. And credit-scoring bureaus like older accounts more than they like newer accounts. If you apply for new credit today, the accounts will be a year old this time next year. If you wait to apply for new credit, the accounts cannot start growing old because they do not exist.
Let’s take a look at how this works by considering Andy and Bob. Both of them have declared bankruptcy. Both of them decide to open three new credit cards as part of their plan to rebuild credit. But they go about it differently.
Andy decides to just get it over with, so in 2010, he opens three credit cards. By 2013, the inquiries had fallen off his credit report. And the average age of his credit accounts was three years.
Bob decided to open the credit cards in stages. He knew that credit inquiries count for about 10 percent of a person’s credit score, so he wanted to space out the damage. By 2013, he had three credit cards: one that was a month old, one that was 13 months old, and one that was 25 months old. The average age of his accounts was just 13 months. And he had a recent credit inquiry that was being factored into his score.
And guess who had the better score? Andy, who knew that credit inquiries after bankruptcy were necessary.
One thing to keep in mind about credit inquiries after bankruptcy: Your score will never be damaged if you pull your own credit report. The credit-scoring bureaus know that people need to monitor their own credit scores, and they consider this responsible behavior. If you need to pull your credit score, be sure to read this article about the credit score scale.