How do I improve my credit after bankruptcy?
I am often asked how to improve a credit score after bankruptcy*. I want to note that the entire concept of a "credit score" and our obsession with it is an entirely American contraption. Most other countries do not use credit scores. American marketing has done a very good job convincing people that they MUST have a credit score or that their credit score is a measure of their self-worth. This is simply not the case. In a perfect world, people would buy things with cash or a debit card.
What is it? A credit score can be described as an "I borrowed money" score. It measures whether you have taken out credit, what the balance of that credit is, how much of it is used and how you are doing paying it back. So if you take out a credit card with a limit of $1000 and then immediately charge up $1000, this would leave no available credit and would decrease your credit score. If you started making regular payments on this $1000, say you're paying $25 per month on this debt, a portion of that payment would go to pay interest and a portion would go to pay off the balance. Making this small minimum payment on the debt would have a moderate effect on increasing your credit score, but you would be paying interest for this moderate improvement. If you miss payments entirely, this will decrease your credit score as it would show that you are not responsibly making payments on your debt.
If you are still determined to "improve" your credit score, based on my observations, below are some options:
Take out a small, low limit, credit card: When you finish a bankruptcy case, contrary to most people's assumptions, you are a great credit risk! This is because you have just discharged all of your debt and should have no debt remaining. Most debtors will get credit offers in the mail, almost immediately. I suggest you take out ONE of these small, low limit, cards. This may be a high interest credit card, but that doesn't matter, because you're not going to pay any interest! I suggest you charge $20-50 a month to this card, then pay it off, in full, every month, on time. NEVER carry a balance. If you do not carry a balance and pay it off in full every month, you will not pay any interest. This creates a good credit history of borrowing money and paying it off in full every month, improving your credit score quickly.
Secured Credit Card: This is often recommended by financial advisors, however, many of these cards do NOT report to credit bureaus. While a secured card may improve your standing with the issuing bank, it may not help you with other credit issuers. So you may have a secured card with ABC Bank, use it for a year responsibly, but after a year, the only bank willing to give you a card is ABC Bank since they're the only ones that know you have used it responsibly. If you go this route, make sure you know whether this card will only be used for this particular bank's records or if this information will be reported to the credit bureaus.
Beware not to charge up a credit card after bankruptcy and NOT pay it off. Post-bankruptcy credit cards often have high interest rates and this can be a quick trip back into debt. Beware of co-signing for friends or children's vehicle loans, this is often a fast track route to financial mess and ruined family relationships. Use your fresh start responsibly! See the 3 most common mistakes people make.
Attorney Allison Greenlee Korr handles cases in Kalamazoo, Battle Creek and all surrounding counties, call today for a consultation. 269-381-4471
*The above information is based solely on my personal credit observations. I am not employed by any credit bureaus and I am not a financial advisor. The above is not intended as legal or financial advice.