LEGAL GUIDE
Written by attorney Kathleen M. Dunne | Sep 25, 2012

How to Rebuild Your Credit After Bankruptcy

Many people ask how they can rebuild their credit after bankruptcy. Here are some simple tips that can be implemented almost immediately after filing:

· Get a secured credit card. FICO doesn't distinguish between secured and unsecured cards, so it will look like you have new credit. But not all secured cards are created equal. Some have prohibitive fees, do not report to all three credit bureaus, charge obscene finance charges, or otherwise contain bad clauses for the consumer. Your local bank probably does not deal in secured credit cards. I know my local bank doesn't. But my local bank offers a different credit-building product, where they essentially put money into a certificate of deposit in your name, and then you "repay" the bank for the money that was put in the CD. Those "loan repayments" will be favorably reported on your credit report, and when they're fully paid back, you'll have a CD that you can cash in or continue saving with. That's not a bad option, but I like the credit card better because it gives you more bang for your buck (in terms of revolving credit when you need it).

PNC Bank is a national bank that has a good secured Visa card. They charge an annual administrative fee of $36, which is billed to your card at $3/month. They report to all three credit bureaus (Equifax, Experian & TransUnion) - I believe on a quarterly basis. Their finance charge is prime + 15.74%, currently 18.99%. You establish your credit limit ($250 to $5,000) by depositing that amount of money with the bank. They hold the money as security until the account is eventually closed, or you apply for an unsecured card with them. But after that, it looks and feels like a regular credit card. And if you use it as a cash substitute (i.e., you use it to buy gas and groceries), and pay it off each month, you get two boosts to your credit score: one for maintaining a margin of unused credit, and one for making on-time monthly payments. You can't apply online or by phone, and the bank does not promote this card on the internet. Instead, you have to go into a local branch and apply. Go to www.pnc.comto find a branch near you. You might also try asking the customer service repnot to run a credit report with your application (since they are accepting your deposit as security and they will not deny you based on your credit score, there's no reason to pull a score and cause your rating to go down based on the inquiry). You can use the credit card everywhere, so it won't matter if you relocate later.

· Ask your local bank about any credit-rebuilding products they offer. Make sure that the terms are reasonable, and see if they report to all three major credit bureaus. If they only report to one bureau, you're not getting as much value from their product as you might from other products.

· Ask your utilities to report on-time payments. If you’re not already aware of the fact, credit reporting is a voluntary system. No creditor is required to report, and a lot don't. But if you ask your utilities to report your positive payment history, they might. More and more often, I am seeing DTE, Consumers, Comcast, Charter, and other utilities and cell-phone companies reporting negative credit. So they do have a reporting system in place. The only question is whether they're as willing to report positive payment history as they are negative payment history. It can never hurt to ask -- but you can't force them to do it.

· Keep making on-time payments on any debts that were reaffirmed or continued through the bankruptcy. And when you work on your credit report cleanup, make sure those creditors are reporting your accounts as "Paid as Agreed" rather than "Discharged in Bankruptcy." Sometimes they screw up and convert it to bankruptcy status once they receive the notice. But if you've continued to make on-time payments throughout and after the bankruptcy, it should be reported in good standing, rather than as a bankrupt account.

· Get new car loans as needed in the future. They don't have to be large, and you don't have to get expensive cars. Just get sufficient credit to keep you in a newer, used car. Even if you have to pay a slightly higher interest rate, it's worth it to keep rebuilding your credit -- as long as you're not agreeing to higher payments than you can afford. About a year after I filed bankruptcy, I had to pay a 15% interest rate. Three years later, I got another auto loan with a 5.6% interest rate.

The big thing is to go about getting a car loan the right way. Know how much car payment you can afford, and pull your credit scores first. Then talk to the Finance guy at the dealership. Before you allow them to pull your credit, ask what bureau they pull their credit reports from and what is the minimum score you have to have to get approved for credit. You might also ask what score you need to get their "best rates." Then, based on those answers, you can decide whether you'll be able to qualify for credit there and whether you should keep looking at cars on their lot. If you can't qualify there, just go somewhere else.

As much as I hate credit unions, sometimes they're more willing to give auto loans to people with bad or no credit. So you might ask, in advance, who the car dealership uses for auto financing. They usually shop around to several finance companies. Generally, your credit rating will be higher if you get financing from one of the big, mainstream companies, such as GMAC, rather than from a smaller, high-risk lender. Never let a lender pull your credit unless you're sure that you'll be approved first (based on your score). That way, you don't have to take a hit to your score and walk away with nothing to show for it.

Also, if your credit is pulled for a major purchase (home or car) and you get denied, you can have an unlimited number of credit inquiries related to the same purchase within 14 days, and it will only count as 1 inquiry. That means that you shouldn't be afraid to shop around once you get started.

· Pull your own credit reports from time to time. Speaking of credit inquiries, you never lose points for checking your own credit. You can pull one free report from each of the three major credit bureaus by going to www.annualcreditreport.com. But you can only get them once a year for free.

After that, you can buy your reports, either directly from the bureaus, or at www.myfico.com. MyFICO is the only place where you can purchase your true FICO credit scores. Anyone else who offers to sell you your credit score is only offering an equivalent, proprietary credit-risk score -- not the FICO score. The problem is that most banks rely on the FICO score, and that's what they'll see when they pull your report during a credit application. You can buy your FICO scores as often as you like, without any penalty to your score. And when you do, you get the full report with the score. So if you're pulling a credit report sometime before you qualify for another free one, I'd recommend that you buy it at MyFICO, along with your score.

Unfortunately, Experian withdrew from MyFICO and no longer makes its score available there. That's because they promote sales of their own score, which is not the same thing. So you really can't get your Experian FICO score. But you can get Equifax and TransUnion. The cost is usually $19.95 per score, but you can get it for 25-30% less if you go online first and do a Google search for MyFICO discount codes. Access the MyFICO website through the link on a website offering the discount coupon, and you'll pay less. But remember, no matter how often you buy your score, it does not hurt your credit score. Only credit inquiries do.

· Check your credit scores regularly and dispute incorrect items promptly. Positive credit reporting isn't immediate. There's usually a 30-60 day delay for your positive efforts to filter up to your credit score. So you shouldn't waste your money pulling your credit scores too often. But I'd recommend pulling thembefore you actively start rebuilding your credit, then about every 6 months thereafter.

Always make sure your personal information is correct (names, addresses, social security number, etc.) That's the best way to make sure you're not getting someone else's information on your report. Then check the way your credit is being reported. For debts that were included in your bankruptcy, the balance should be zero, there should benodelinquent payment history, and it should be listed as "included in bankruptcy" or "discharged in bankruptcy." The credit bureaus may not continue to report balances or negative payment history on discharged debts.

The credit-dispute process requires a lot of persistence and attention to deadlines to be successful. You can pay a credit-repair service to do this, or you can undertake to do it yourself. If you have specific questions about your rights under the Fair Credit Reporting Act or related consumer issues, you can find a lot of information at www.ftc.gov.

You don't have to try all of the steps above, but if you rely on the passage of time to do the job instead of working proactively to rebuild your credit, it's going to be a long, hard slog and you may not be able to get new credit when you need it most.

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