Ask Stacy — How Can I Rebuild My Credit After a Bankruptcy?

Man in suit walking on long road towards sun.
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Here’s a question that could sound 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 canceled 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 the American Bankruptcy Institute, during the first six months of 2017, there were about 400,000 non-business bankruptcy filings in the United States. Sound high? During the first six months of 2009, there were nearly 700,000 filings.

While filing bankruptcy isn’t easy, it’s often a relief. It begins when you determine it’s time to file, (a question I address in “Ask Stacy: When Should You File Bankruptcy?”) and ends after the dust settles and you’re on the road to rebuilding your credit.

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 credit 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 seven or 10 years — you might be able to get it the same day your filing goes through. 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 canceled 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, the credit card Steve described — 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 like Equifax, Experian and TransUnion. Banks are not required to report your payment history, and some secured credit cards don’t — which makes them useless in rebuilding credit.

We offer some options for secured cards in the “Secured” section of our credit card page.

Now, for Steve’s questions:

  • “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.
  • “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 “12 Great Reasons to Drop Your Bank and Join a Credit Union”), 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: You can ask utilities and other companies to report your on-time behavior.

In February 2017, the Consumer Financial Protection Bureau began seeking public feedback on “the benefits and risks of tapping alternative data sources such as bills for mobile phones and rent payments to make lending decisions about consumers whose lack of credit history might otherwise block opportunities.”

So maybe someday soon these types of payments will be counted in credit scores. In the meantime, these companies might report your payments if you ask. But don’t hold your breath. See our stories “8 Little-Known Ways to Raise Your Credit Score” and “Credit Scores Hit New Highs — Learn How to Boost Yours.”

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 create a bad credit history, but not as long as it takes to create a good one. 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 question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here.

The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. 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.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got any words of wisdom you can offer for this week’s question? Share your knowledge and experiences on our Facebook page.

Got more money questions? Browse lots more Ask Stacy answers here.

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