Q&A: How Can I Rebuild My Credit After a Bankruptcy?

Question: I declared Chapter 13 bankruptcy a year ago. What should I do to rebuild my credit? - Gail

Answer: Hi Gail,

The first thing I want to tell you is that after a bankruptcy, your score suffers the most during the first two years. You're already into the second year, so hang in there. Soon you'll see a light at the end of this dark tunnel. And if you just keep a few things in mind, your credit score will start to rebound.

Follow a Budget and Pay Your Bills on Time

This is a big one. Everyone needs a budget and a way to track their spending. If you don't know how much you've spent, or where you've spent it, you'll likely overspend. It's that simple. You always want to be on top of your finances, but it's especially important while you're rebuilding your credit. You're already in a sticky situation and you want to make sure you make good decisions and avoid anything that makes your credit score go down.

Set up a budget that's very detailed and make it your business to know where every penny goes. This sounds tedious, but trust me, you'll feel very empowered because you'll be in control of your money. This is very important after a bankruptcy. Many folks feel a little less confident in themselves. But set up a budget and show your money that you're the boss!

There are many free budgeting options online that you can use, such as Mint or Quicken. Do a little research and see which one feels right to you. There are also a lot of smart phone apps if you prefer to use your phone to track your expenses and maintain your budget.

Use a Secured Credit Card

If your bankruptcy was due to a shopping addiction, then this is not a good idea unless you've been through credit counseling. But even if you've been through counseling, do not use credit cards again if you feel at all uncomfortable with the idea.

But if you feel ready, a secured credit card can be a safe way to get back into the credit game. With a secured card, you make a security deposit in an account and this "secures" the card. You get a credit card that looks just like any other credit card. You'll use your secured card to make purchases. Your deposit stays in your designated bank account so you really are making purchases on credit.

You want to keep a low balance on your card. Your utilization ratio should be a maximum of 30 percent, but keeping it closer to 10 percent or less helps your score more.

Here's an example: You have a secured credit card with a $500 credit limit. If have a $50 balance, then you have a credit utilization ratio of 10 percent (50/500 = .10, or 10 percent). If your utilization gets over 30 percent, which is $150 in this example (500 x .30 = 150), then your score will start to suffer. We want to keep your score going in the right direction – up! – so keep your balance as close to 10 percent as you can.

Pay All of Your Bills on Time

Okay, you've got a budget and maybe even a secured credit card. You are also tracking your spending and making sure you don't carry a balance on your credit card. Some people think that your credit will be fine if you take care of the "big items" like your credit card bill and your mortgage. But it's vital that you pay every single bill that you owe on time. Even a long-forgotten cell phone bill could end up on your credit report if you neglect it long enough.

Your money management program most likely has a way to set up text or email reminders when due dates are approaching. Or you can even set up automatic payments with your bank. Choose a method that you feel comfortable with. It doesn't matter what your brother, aunt, or neighbor uses. Establish a reminder system that works with the way you like to handle things, whether it's a text or an appointment in your Google calendar.

Monitor Your Credit Reports

You should check your credit reports every year and make sure they are error-free. You're working hard to improve your score and rebuild your history. It would be a shame if an error got in the way of your success.

Every 12 months, you're entitled to a free credit report from each of the major bureaus: Equifax, Experian, and TransUnion. You can get your reports at AnnualCreditReport.com.

Note the filing date of your bankruptcy so you can make sure the bankruptcy is removed from your credit reports in a timely manner. A Chapter 7 bankruptcy stays on your report for 10 years because most of your financial obligations are eliminated. A Chapter 13 bankruptcy, as you've done, falls off your report after seven years from the date filed. A Chapter 13 doesn't release you from all of your obligations, so that's one reason you can recover more quickly than you would with a Chapter 7.

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