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

Man in suit walking on long road towards sun.
Photo by Ollyy / Shutterstock.com

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
15 Ways Retirees Can Make Their Savings Last Longer
15 Ways Retirees Can Make Their Savings Last Longer

Study these strategies to make your golden years gleam.

10 Ways to Nail Savings on Your Remodeling Project
10 Ways to Nail Savings on Your Remodeling Project

Here’s how to save on your next remodeling project with discounted materials and more tips and tricks.

9 Ways to Get Affordable Vet Care
9 Ways to Get Affordable Vet Care

Medical care for your furry friends can be expensive. Here are some tips to get affordable vet care.

12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t
12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t

Thinking of trying to deduct a few of these things on your federal tax return? That could be a costly mistake.

5 Ways Retirees Can Lower Their Income Taxes
5 Ways Retirees Can Lower Their Income Taxes

Here’s how to keep Uncle Sam’s mitts away from your nest egg.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

21 Items to Cut From Your Budget That You Won’t Even Miss
21 Items to Cut From Your Budget That You Won’t Even Miss

Start off the new year by implementing these small-but-smart savings strategies. They’ll soon add up.

This Is America’s New Favorite Grocery Store
This Is America’s New Favorite Grocery Store

Consumers say a familiar name has become their go-to source of grocery items.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

10 Cars You Are Most Likely to Keep for 15 Years
10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

The 10 Golden Rules of Becoming a Millionaire
The 10 Golden Rules of Becoming a Millionaire

I’m a millionaire several times over. I got here the same way you can — by following these simple steps.

5 States Lowering Taxes This Year — and 2 Raising Them
5 States Lowering Taxes This Year — and 2 Raising Them

State personal income tax rates, brackets and deductions just changed in these places.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.