You need two types of credit to quickly rebuild your credit score after a bankruptcy.
- Installment: auto loans, student loans or mortgages
- Revolving: credit cards or home equity lines of credit
Most recent bankrupts have trouble qualifying for a regular, unsecured credit card. The best solution usually is a secured card, which generally gives you a credit limit that is equal to an amount you deposit at the issuing bank. Typically, that's $200 to $500, which may seem like a pittance compared with the credit limits you enjoyed before your bankruptcy. But do not make the mistake of using your available credit. Maxing out your credit cards hurts your credit score.
You do not want to charge more than 30% or so of your credit limit, and you want to pay the balance off in full each month. Light, regular use of a credit card is what helps build your credit.
And contrary to what you might have heard, you typically do not need to carry a balance or pay credit card interest to build your credit score, since the leading credit scoring formula does not distinguish between balances that are paid off and balances that are carried month to month. Get in the habit now of not charging more than you can pay off every month; your credit score and your finances will be the better for it.
Not Every Credit Card Is A Good Deal - Even After Bankruptcy
No application fee and reasonable annual fee are good options and available. Some secured cards tack huge upfront and annual charges onto their accounts; you do not need to pay these to build your credit.
Reports to the major credit bureaus. You are not doing your credit score any good unless your payment history is being reported to the three major bureaus: Equifax, Experian and TransUnion. Ask if the card issuer regularly reports to all three before you apply.
Convert to an unsecured card after 12-18 months of on-time payments. Good behavior should get you upgraded to a regular credit card within a year or two.
Get An Installment Loan After A Bankruptcy
If you still have student loans, which typically are not dischargeable in bankruptcy, you can use them to rebuild your credit score. Make your payments on time, all the time, and try to pay more than you owe whenever possible. Next to making on-time payments, paying down your existing debt is one of the best ways to improve your credit score.
Another option: a mortgage. Interestingly, it can sometimes be easier to get a mortgage after a bankruptcy than to get other types of installment loans.
You may be able to qualify for a high-rate loan as little as six months after a bankruptcy, but you are probably better off waiting until you can qualify for an FHA loan. You can typically get one just two years after your bankruptcy case has closed, as long as you have maintained good credit habits since then. FHA loans have interest rates that are usually only half a percentage point higher than regular mortgage rates.
Make sure you really can afford a home before you buy one. Many people wind up in bankruptcy court because they stretched too far to buy a house and can not keep up with all the attendant costs of homeownership. Auto loans can also help you rebuild your credit - just be prepared to pay very high rates at first.
Remember: The key is to make sure all your payments are made on time, all the time.
