This week’s question will be familiar to millions of Americans …
My wife and I 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,
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 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, 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 $500 in a savings account as collateral. This is what Steve referred to in his question when he used the term “savings-based account.”
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. No bank is required to report your payment history, and some secured credit cards don’t, which makes them useless in rebuilding credit.
You can search a list of secured credit cards here. Under “Type of Card” along the left, just click on “Secured.”
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. 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 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.
Step 3: Try with a little help from your friends
There are ways you can improve your credit by piggy-backing on the credit of others. Warning: Doing this will put your friend or family member’s credit at risk. If you don’t pay, they’ll be responsible for your debts. If you don’t pay on time, their credit will be trashed. This is a big favor and something I’ve recommended against many times. So don’t be hurt or surprised if you’re turned down.The first idea is to have yourself added as an authorized user on a friend or relative’s credit card account. This could help build your credit as you pay your bills. Note, however, that as with secured cards, not all card companies report authorized users. Says Experian:
If you are trying to establish your credit history, being an authorized user on an account can help, but only if the company reports it to one or more of the national credit reporting companies. However, not all credit card companies choose to report authorized user accounts.
The second thing you might do is get someone to co-sign a loan for you, like a car loan. This will enable you to qualify for a loan you’d otherwise not be able to get and allow you to build your credit history.
Step 4: 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.
It takes time to destroy your credit, and it takes time to rebuild it. Be patient, get what credit you can, then pay everything on time, every 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 to where it used to be, you may not care all that much about it anyway.
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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 way more questions than I have time to answer.
I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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