How Do I Start to Rebuild Credit After Bankruptcy?

My husband and I got ourselves in a bad position a few years ago. I lost my job and went from excellent credit to bad credit in just under three months. We couldn't believe we had lost control of our financial future. I know there are many people just like us with the bankrupt blues. How can we get back to the "good standing" that we were so proud of? Is it true we will have this hovering over us for ten years? Goodbye first home!
Carol H.

Carol asks a good question. And she's right. She has plenty of company. There were about 1.5 million bankruptcies last year. So let's take a look at what it takes to regain a good credit rating.

The first thing Carol needs to know is that there's no quick fix. Avoid companies that promise to create a "new credit history" or erase accurate entries in your credit file. In fact, if you knowingly include false information in a credit file you'll be breaking federal law. According to the Fair Credit Reporting Act, the credit bureau can report accurate information on you for up to seven years (ten years for bankruptcy). But that's not a death sentence to obtaining credit. You can begin to rebuild your credit standing immediately after bankruptcy.

The first thing Carol and her husband will want to do is take a look at their use of credit. Borrowing money commits us to repay it, whether we lose a job or have a medical emergency. So we should only commit to payments that we can make even if we are unemployed for a short time or have some other financial crisis.

Let's face it. Some bad things happen to all of us.

Part of the problem that Carol faced was the lack of an emergency fund. And part of regaining good credit is creating that fund. Every family should have between two and six months of normal expenses saved for unexpected hard times. For most of us that's not an easy thing to do. But it's still important. Carol may find that it's best to put $5 or $10 a week into a separate savings account as soon as she gets paid, whether she feels she can afford to or not. Yes, she'll be short on cash by the next paycheck, but it may be the only way to accumulate some savings. It surprising how creative we can be when we need to be. And even $5 a week will add up over time.

The savings will also be necessary for the next step in our project. Once she's accumulated $200 or so she's going to apply for a secured credit card. Talk to the bank where you keep your savings. They should be willing to issue a credit card that's guaranteed by the money in your account. At first, your credit limit will be the amount that you have in the savings account.

The goal here is for Carol to demonstrate the ability to pay her bills on time. So she'll want to use the credit card each month, not for extra purchases but for essentials. Groceries are a good choice. Remember the key here is to pay off the whole balance each month. Do not begin to carry a balance on the account.

As time passes, Carol will begin to build up the savings account. The credit limit on her card should also be increased. That doesn't necessarily mean she should charge more. The fact that her available credit is going up will be reflected on her credit file. The record will also show that she's keeping the account current each month.

After about a year, Carol can app roach the bank about changing her credit card to an unsecured one. If she's been consistent in making payments and has been building her savings account, the bank could make the switch immediately. If not, they should be able to estimate when the change could take place.  In the second year, Carol can begin to apply for additional credit and  gradually build up to a more normal status. She should only apply for one card at a time. An attempt to get numerous cards would be a mistake. Any applications that are rejected will be reflected on the credit file and will make it harder to get additional credit in the future.

After the first couple of years it should get easier for Carol. By then, potential lenders can see that she's been consistent in paying her bills. She might even be able to get a car loan or a home mortgage without an unusually high deposit or interest rate.

The key for Carol is to remember that the lender's primary concern is being repaid, so a lender wants to know whether the bankruptcy was a one-time event or a sign of someone who can't handle credit. The way to demonstrate that credit-worthiness is to handle it properly. The bankruptcy cloud will fade over time and Carol's credit-worthiness will increase.

While it will take time and effort to rebuilt Carol's credit, it is possible. Hopefully her money troubles are behind her and she's on her way to a brighter financial future.