When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn’t think he had a chance to even get a credit card.
Charlie’s bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.
It didn’t take long for him to realize that his financial life was not over. Within a couple of months, he’d gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you’re considered an even better risk than someone who still has a mountain of debt because you can’t file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.
Many people think, That’s exactly what got me into trouble in the first place, so I’m going to avoid plastic in my life forever. That’s a huge mistake if you want to buy a house. You need to rebuild your credit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history. With my help, Charlie’s credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today’s rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.
The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don’t have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.
Fix Your Credit Report
The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.
When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.
In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.
But as a negative mark ages on your credit report its impact on your credit score because less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.
You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.
Rebuild Your Credit History
While you’re working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.
You’ll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they’re not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.
You also may be able to get a retail credit card. Don’t go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.
Monitor Your Credit Score
As you’re rebuilding your credit score, you may want to monitor your progress. One of the best ways to do that is through MyFico.com, which offers a quarterly monitoring service for $4.95 per month. That way you can see whether you are making any progress. If your score continues to go up, you’re on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you’ll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.
Six months before applying for a mortgage, don’t take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.
Lita Epstein has written more than 25 books including The Complete Idiot’s Guide to Personal Bankruptcy and The Complete Idiot’s Guide to Improving Your Credit Score.