Bankruptcy is just about the best thing you can do to repair poor credit. After a BK, you have the opportunity for a fresh start, and a way to put your past behind you. However, simply filing for Bankruptcy will not improve your credit.
This past week I’ve had 3 conversations with different people that went through the bankruptcy process only to find out years later that their credit has not recovered. After asking a couple of questions, I realized it was a good opportunity to shed some light on the steps required to increase credit scores and get in a position to buy a home.
It’s actually much easier to improve your credit scores after BK due to the fact that delinquent payment histories, collections and charge offs are all wiped out.
Building Good Credit
I learned this one the hard way. In the early 90′s I owned a business that eventually failed. I believed, like many people that go through credit hardships that if I just don’t take out any credit cards, and pay everything with cash, that my credit can’t get any worse.
I couldn’t have been more wrong! The number one reason why people have bad credit is because they do not proactively build good credit. It’s natural to shy away from something that’s hurt you in the past, but this is not the case with credit repair.
Revolving Credit Lines
Revolving Credit is the most effective way to build up your credit score. A revolving credit line is a fancy word for credit cards. The term “revolving” comes from the fact that you have a high credit limit, a minimum payment, and interest is assessed on the outstanding balance each month.
Immediately after a bankruptcy, you may have to apply for a secured credit card to start building up your credit. A secured credit card means that you make an initial payment to the credit card company, and then you have a high credit limit in that amount.
My first secured credit card was for $200. After making on-time payments for 6 months or so, you’ll begin to get credit card offers from other companies that will offer you unsecured credit limits.
Best Practices for Using Credit Cards
Simply having a credit card will not automatically improve your credit scores. You have to manage your revolving credit in accordance with credit scoring models guidelines.
Here are some best practices that will increase your scores quicker:
Build your revolving credit lines to no more than 3 credit cards
When you get a new card, charge it up then pay it off
Do not make minimum payments on credit cards
Maintain a balance of $25-50 on cards
Do not move balances or consolidate to “no interest” cards
How Long Will it Take to Improve Credit Scores?
If you are diligent with acquiring revolving credit lines and follow these best practices, and continue to pay your other credit lines like student loans or reaffirmed automobile loans on time, you can realistically expect an improvement in your credit scores within 12 months.
There are many factors that go into building good credit, this is just one approach. You should always do your research and learn from the credit bureaus how to responsibly build good credit.
Have questions or comments about improving credit after bankruptcy? Leave a comment or question below, give us a call or shoot me an email and we can talk about your specific situation.