Ask Stacy: How Can I Rebuild My Credit?

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Here’s a question familiar to millions of Americans…

Stacy,
My wife and I recently filed for bankruptcy due to high medical bills we were unable to pay. We purposefully didn’t add our Wells Fargo credit card to the bankruptcy so we could keep using it. The day it was final, Wells Fargo cancelled it, and won’t give us another one.

I’ve applied to other companies and have been turned down.

If I get a credit card that is savings-based, does my credit score know the difference between a credit card with or without a savings-based account? And, will a credit card of this type help my score?
Thanks for your help,
Steve

According to Creditcards.com, there were more than 900,000 individual bankruptcy filings for the first nine months of 2012. Sound high? It’s a decrease of 14 percent from the same period in 2011.

While filing bankruptcy isn’t easy, it’s often a relief. How do you know when it’s time to file? That’s a question I asked a bankruptcy lawyer and his client a few years ago for the following news story. Check it out…

Rebuilding credit after a bankruptcy isn’t easy, but it is simple. I’ll answer Steve’s questions as I lay out the steps.

Step 1: Recognize you’re on a long road

While there are techniques you can use to begin re-establishing credit immediately after a bankruptcy, getting back to a great history and score is going to take time.

Chapter 7 and Chapter 11 bankruptcies remain on your credit history for up to 10 years, while a discharged Chapter 13 will fall off after a maximum of seven. That doesn’t mean you won’t get credit for 10 years – you might be able to get it today. And as time passes and the negative effect on your credit fades, it will get easier.

But it’s important to know there’s no trick that will magically erase your bankruptcy or instantly give your credit score a significant boost. Rule of thumb: If anyone promises a quick fix, they’re lying.

Step 2: Get whatever credit you can

It’s no surprise Wells Fargo cancelled Steve’s credit card the instant his bankruptcy became final. But that doesn’t mean getting new credit will be impossible, even right away.

When you’re ready to get back in the saddle, a secured card will be your easiest ride. As the name implies, secured cards require a security deposit matching your credit limit. So if you get a card with a $500 credit limit, you’ll put up $500 as collateral. Since your deposit guarantees your credit line, it’s very low risk for the bank, which means you’ll have high odds of being approved. After successfully using a secured card for a period of time, that issuer or another one may offer more traditional plastic.

Before you get a secured card, however, make sure it will report your transactions to credit reporting agencies (CRAs) like Equifax, Experian, and TransUnion. No bank is required to report your payment history, and some secured credit cards don’t – which makes them useless in rebuilding credit.

The Capital One Secured card is one to consider. You can see by checking their FAQs they report to all three CRAs. You’ll find more options in the “Secured” section of our credit card page.

Now, for Steve’s questions: First, “Does my credit score know the difference between a credit card with or without a savings-based account?” Answer: No. Your credit score will improve as on-time payments are recorded in your credit history. Next, “Will a credit card of this type help my score?” Answer: Any credit accounts reflecting on-time payments will improve your credit score, just as any accounts reflecting late payments will lower it. So if you use this account and make on-time payments, a secured card will help your score.

Another thing Steve might consider is opening an account with a credit union. In addition to offering lower rates on loans and higher rates on savings (See 7 Reasons You Should Join a Credit Union This Week), credit unions sometimes (but not always) are more flexible with lending standards. So it might be easier to get a credit card, car loan, or signature loan there than at a big national bank. Don’t expect miracles, however, and do expect to begin your credit union relationship with a savings deposit.

One final idea for positive additions to a credit history: ask utility and other companies to report your on-time behavior. Some companies like wireless providers, cable and Internet providers, and phone companies might report your payments if you ask. See our recent story 8 Little-Known Ways to Raise Your Credit Score for more on that, as well as other ideas.

Step 3: Pay your bills on time, all the time, for a long time

I know what you’re thinking – duh. But I mention this because it’s the single most important thing you’ll do to rebuild your credit, and it’s often left out in favor of things that don’t matter nearly as much – like getting a secured credit card.

It takes time to build a bad credit history, and even longer to rebuild your credit. So be patient, get what credit you can, then pay on time. As your bankruptcy fades into the past, your credit score will rise. And as you learn to live without credit, by the time it’s back where it used to be, you may not care all that much about it anyway.

Got a money-related question you’d like answered?

Drop me a line! Just try to make sure your question would be of interest to our other readers – don’t ask for personal or super-specific advice. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

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