How to Rebuild Your Credit After Bankruptcy
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
It’s a common misconception.
Most people conclude that no one will give them credit after a bankruptcy. But this isn’t true. You simply have to look in the right places — and go about it the right way.
As you may know, your credit can affect your ability to get a job — buy insurance — buy a home — buy a car — even rent an apartment. This means rebuilding your credit is very important.
Fortunately, you can build an excellent credit report. Believe it or not, you could even build your credit score to 750 while the bankruptcy notice still appears in your credit history. The time to start rebuilding your credit is immediately after you finalize your bankruptcy.
Here’s the key: When you start thinking about getting a new loan — and before you fill out the application — find out whether the lender is likely to approve your loan. This will help you minimize the number of new credit inquiries, which appear on your credit history after a bankruptcy. Make sure you show the lender the bankruptcy court’s discharge notice, which tells the lender you are no longer obligated to pay past debts. This increases the likelihood that a new lender will offer you credit.
Here are 5 ways you can re-establish your credit after a bankruptcy:
GET A SECURED CREDIT CARD
Contact your local bank or credit union and explain that you want to re-establish your credit by getting a secured credit card. For this type of card, you must deposit money in the bank and the bank gives you a credit card with that same amount of credit. If you deposit $750, then your new credit card will have a $750 limit.
Beware: Banks often try to take advantage of people who need secured credit cards by charging huge fees to open the account. If you deposit $750 with the bank, the bank might give you only $500 in credit because they took $250 in setup fees.
BEFORE setting up a secured credit card account, ask the bank these questions:
Question #1: Will you report my secured credit card to Experian, Equifax and TransUnion, the three largest credit reporting agencies? If they won’t, then look for another bank because you obviously want this new secured card to show up on your credit report.
Question #2: How soon can I deposit more money and increase the credit limit on my secured card? A bank might allow you to have a limit of $5,000 or even $10,000, as long as you have that much money on deposit with the bank. You want to increase your limit as often as the bank allows. Why? Because the higher your credit limit and lower your account balance, the sooner you’ll see your credit score improve.
Question #3: How long do I need to have a secured credit card before you will give me an unsecured card? Most banks require a good, reliable payment record of 12 to 24 months.
GET AN UNSECURED CREDIT CARD
After you file for bankruptcy, you may start receiving credit card offers. And some of those will be unsecured. This means you don’t need to have money on deposit with the bank.
Before accepting any credit cards, make sure the lender reports your credit card to the three major credit reporting agencies. And get the highest limit the bank will give you. However, beware of costly setup charges and fees.
Next, ask the bank to increase your credit limit at least once a year. Then make sure you pay the credit card balance in full every month, or at least within a few months. This is a good way to improve your credit report.
Right after you receive your bankruptcy discharge, you might be able to get a secured or unsecured loan. Follow the same steps you use with secured and unsecured credit cards.
GET GAS AND STORE CREDIT CARDS
Depending on the economy and your credit history, you may have to rebuild your credit before a retail store or oil company will offer you a credit card. But this isn’t always true.
When possible, set up credit card accounts at department stores, electronics stores, office supply stores, oil companies and at other places where you do business.
Note: When applying for new credit cards, you might call attention to your previous past-due accounts. And while bankruptcy erased your legal obligation to pay them, they could still appear on your credit report with a $0 balance. As a result, the new lender might deny your application, and this denial will show up on your credit report as another inquiry, which hurts your credit.
Even so, don’t be discouraged when you receive credit denials. Just continue applying for credit with the safeguards described above and you will continue to improve your credit reports.
AVOID FINANCE COMPANY LOANS
Finance companies are known for their outrageous interest and fees. So avoid them if you can. In addition, because they are not as respected as banks and credit unions, finance company accounts that appear on your credit report will not be as favorable as accounts from more mainstream lenders.
What’s more, as you start rebuilding your credit after bankruptcy, you want to show future lenders that you have rebuilt your credit with major financial institutions, such as banks and credit unions. So directing your effort toward them and away from finance companies is in your best interests.
Should you have any questions or concerns about your financial situation and how to rebuild a good credit score, Chicago bankruptcy lawyer, Rich Fonfrias of The Fonfrias Law Group, will be happy to speak with you over the phone or to meet with you in person at is Chicago law office. Your initial consultation is always free. Fonfrias Law offers a complete range of financial legal services in the greater Chicago area, including bankruptcy, bankruptcy repair, financial rescue, Illinois credit repair, financial legal services, tax reduction and tax lien services, and the expertise of an experienced Chicago bankruptcy attorney.