Credit scoring is a game. Once you understand the rules of the game you can easily and quickly achieve excellent credit scores, even if you’ve just recently come completed a Chapter 7 bankruptcy.
It isn’t difficult, but it is easy to screw up unless you have a solid plan and a basic understanding of how credit scores work.
In this post I am going to provide you with a plan that you can use to quickly rebuild your credit after bankruptcy.
I’ve got to warn you in advance, this is going to be a monster of a post, in terms of both length and detail. Save this one for when you have an hour to sit down and focus. If you want a free PDF checklist of the steps described within this post simply shoot me an email to jbrown@Bankruptcy180.com and I’ll get it to you.
How Credit Scores Work
Your credit score is a number which supposedly paints a picture of how well you manage access to different types of credit. Third parties rely on these scores to predict how likely you’ll be to default on a debt obligation in the future.
The higher your credit scores, the more likely you are to timely pay your debt obligations in the future.
Your credit score will dictate how much financing your purchases will cost. If your credit score is high, you will pay less money for car payments, mortgage payments, insurance premiums, etc…
Basically, those with bad credit will pay dearly for any credit they may receive. Those with less money and less financial education pay the most for access to credit.
Generally speaking, you have three FICO scores. The scores are generated by each of the three main agencies compiling your credit history data, Equifax, Experian and Transunion.
Each of these credit bureaus compile credit reports tracking your financial history, and each uses FICO software to prepare your credit score based on the information contained in each of your three credit reports. This is why you likely have different credit scores from each of the three credit bureaus.
The credit scores range from 300 on the low end up to 850 on the high end. The higher the credit score, the less likely you supposedly are to fall behind on your bills over the next two years. Credit scoring relies on using past performance to predict future ability to manage debt.
Your past performance with the recent bankruptcy is not going to be so hot, so you must create a new credit history beginning today.
The following plan is designed for you to create that new credit history over the next twelve months. At the conclusion of the twelve months, you should have a credit score exceeding 700.
So, let’s get started…
Step One: Emergency Fund
The first step is to set yourself up for a certain success. You need to prepare to weather whatever minor financial storm may arise over the next twelve months.
A small emergency fund can be the difference between whether it takes you twelve months to achieve a great credit score, or a much longer time-period than twelve months.
When you are living paycheck to paycheck, even a small auto repair can be the difference between “just getting by” and falling hopelessly behind on your bills.
As you likely already know, falling behind on your bills is really easy to do. Getting caught up after falling behind is much more difficult to accomplish.
For the next twelve months, you are going to be re-establishing your reputation for managing credit. Your reputation for paying your bills and utilizing credit responsibly is being built the minute you get that bankruptcy discharge order in your mail.
Missing one utility payment, or falling behind just one month on a credit card, and you are starting from scratch.
In fact, a slip up after having received a recent bankruptcy discharge is much more harmful to your credit that the bankruptcy itself.
The way we minimize our risk of making a mistake in our rebuilding is by setting up a small emergency fund. There are two specific reasons we need to set this fund up before we begin our twelve month credit rehab.
First, the emergency fund itself is going to be used later to secure new credit in one of your later steps.
Second, this fund will be used should any unexpected financial setbacks occur throughout the year, thereby allowing you to avoid using credit cards for expenditures outside of your plan.
If throughout our twelve months together your car breaks down, the air conditioning unit in your home needs repaired, or your kid breaks their arm playing basketball, you will have some liquid cash available to take care of the out of pocket costs.
When in the past, you may have relied on credit cards to get through these unexpected life events, now you will be sure to plan for these types of inevitable mishaps that arise in everyone’s daily life.
How Much Will You Need?
Good question. I am sure you have read articles by the “financial experts” that suggest you should have 6-12 months of monthly expenses set aside in an emergency fund. That is certainly fantastic advice.
However, like most of people having just received a bankruptcy discharge, I expect you are in a difficult financial position at the moment, and extra cash is hard to come by.
At this point, you are not trying to set aside an emergency fund to finance your life for long periods of unemployment; we are simply trying to prepare ourselves for unexpected expenses that occur during the next twelve months.
I encourage you to set aside $1,000 for your emergency savings fund. This amount is enough to cover most auto deductibles, simple home repairs and medical co-pays. I know that for you, saving even that amount is not an easy task.
Keep in mind, however, you just received your discharge order from your bankruptcy case. You have no more unsecured debt. I expect you are in the best position of your adult life to start saving some money.
Step Two: Credit Score Tracking
You need a way to consistently track your credit score, and the easiest free tool I know for tracking credit scores is Credit Karma.
Credit Karma is great because it provides a free access to your TransUnion and Equifax reports, and also your credit scores based on information contained in each every seven days. This constant updating allows you to accurately track the information contained in your credit reports and the progress you’re making with respect to credit scores.
You do not have to provide them with any credit card information to gain access, as it is completely free. The only problem is Credit Karma does not give you your Experian credit score, but for your purposes the ability of Credit Karma to track your progress makes it an invaluable tool.
Step Two is to signup for Credit Karma and download the app on your phone for convenient reference.
Step Three: Confirm Bankruptcy Discharge Properly Disclosed in Credit Reports
I am sure the decision to file bankruptcy was not a decision you took lightly. In fact, you probably spent many sleepless nights worrying about your finances, and the impact filing bankruptcy would have on your life.
So now that you took the plunge, filed the bankruptcy, and now have the case in your rearview mirror, you must make sure that you are getting the full benefit from the experience.
If your pre-bankruptcy creditors continue to report derogatory remarks on your credit reports, you will not realize the benefit from your bankruptcy that you are entitled to receive.
Your credit will continue to sink long after the bankruptcy, unless you enforce your rights under the bankruptcy law protections.
Once your bankruptcy discharge order is signed by the bankruptcy judge, a discharge injunction automatically kicks in. This injunction prevents all of your pre-bankruptcy creditors from taking any further collection efforts against you.
Collection efforts would include such activities as sending you statements, asking for payment, placing collection calls to you or your family, suing you, and garnishing your income.
Reporting improperly to a credit bureau is also a collection effort that would be in violation of the discharge injunction.
After your bankruptcy is concluded, your creditors are only allowed to report that your account was “included in bankruptcy” or “discharge in bankruptcy.”
If a creditor continues to report your account as derogatory and/or showing an account balance, this information continues to cause your credit to remain low.
This is why it’s very important that you review your credit reports approximately forty-five (45) days following your receiving the discharge order from your bankruptcy case. Carefully review each pre-bankruptcy trade line.
Do any of these accounts report a balance owed? Do any of these accounts state remarks other than “included in bankruptcy” or “discharged in bankruptcy?” If so, these remarks are continuing to cause you problems.
For Step Three, you need to review your credit reports and take appropriate action to resolve any improper reporting of your bankruptcy. To learn how to take action, check this out.
Step Four: Get Credit Card #1
As a former bankruptcy attorney, it is really difficult for me to tell someone to get a credit card. I see families destroyed because of overwhelming credit card debt, and it just seems wrong to encourage folks coming out of a bankruptcy to get a credit card.
Unfortunately, you cannot build your credit score without taking on some debt. Like we discussed earlier, a credit score is simply a numerical value the supposedly describes your ability to manage credit. You cannot demonstrate your ability to manage credit if you do not have any available credit.
So before we begin our discussion on getting that first post-bankruptcy credit card, I want to briefly talk about credit card habits.
Of the hundreds of people I have spoken with over the last several years about debt; almost every one of them carried an unacceptable amount of credit card debt.
Credit cards have their place in our financial lives, but I believe most people misunderstand how credit cards should be used for the intended purpose.
Credit cards are merely a convenience device, and nothing more. They should not be used as an emergency money plan if the car breaks down or air conditioner is on the fritz, and they certainly are not meant for buying useless stuff when there is not enough cash readily available for the purchase.
The only reason to use a credit card is when you already have enough money to make the intended purchase, but the transaction is more easily conducted using a credit card.
You get into trouble with credit cards when you rely on credit cards for emergencies. I hear it all the time, “Well, I want to get a credit card after my bankruptcy case just in case of an emergency.”
This is crazy! That is the same thinking that leads folks to bankruptcy in the first place.
To change outcomes one must change behaviors. Promise yourself you are no longer going to use credit cards to purchase anything unless you have the cash available to immediately payoff the credit card in full.
You should never, ever carry a credit card balance into a new month unless you are strategically doing so as part of your own plan for rebuilding your credit. There is no excuse, do not do it!
Ok, now that my plea is out of the way, let’s discuss the necessary evil that is credit cards. You likely received several credit card offers in the mail the week you received your bankruptcy discharge order. This is not a coincidence.
You have no unsecured debt, and you are not eligible for another chapter 7 discharge for another eight years. You are a much better credit risk now than you were before your bankruptcy.
What we want to do now is select the best credit card option available to help initiate our credit rehab. Ideally, you will be able to get approved for an unsecured credit card.
A secured credit card requires a deposit, and you in exchange receive a line of credit equal to (or sometimes less than) the amount of your deposit.
An unsecured credit card does not require any deposit, and is simply a line of credit without any sort of collateral in favor of the lender.
You want to carefully review all of the credit card options you have available. Compare these options on the basis of annual percentage rate and annual fees.
Obviously, since you are just coming out of bankruptcy, you are not going to qualify for the most attractive credit terms. However, despite the bankruptcy there are credit card options available to you now that are not horrible.
The best unsecured credit card option available to you now (as of this writing) is the Credit One Bank card. This card is the choice for a few specific reasons.
First, the Credit One Bank card has an annual percentage rate (APR) of between 17.9% and 23.9%. Although this interest rate is really high, you really cannot do much better with a very recent bankruptcy.
Also the annual fee of $35 to $99 is not terrible when compared to other available unsecured options for those coming out of bankruptcy.
The Credit One Bank card will report to all three credit bureaus each month. Also, Credit One Bank will automatically review your account at preset intervals of time to consider whether to increase your credit line.
The more credit you have available that you properly manage, the higher your credit score will jump.
Apply for this card at this time after completed our previous steps. You should qualify easily even with the recent bankruptcy, but my advice is to call Credit One Bank prior to applying and speak with one of their credit specialists.
Explain your situation that you just completed a bankruptcy case, and you are looking to re-establish your credit by starting with the Credit One Bank card.
Sometimes you will get a helpful representative that will tell you outright whether your particular situation contains automatically disqualifying characteristics.
Every time you apply for credit an inquiry will be made by the lender institution, and this inquiry will be reported to the credit bureaus. Too many inquiries can be really damaging to your credit score, and can take a great deal of time to drop off your credit report.
This is why it is extremely important to not jump into applying for several credit cards immediately after your bankruptcy is concluded.
With that said, you will almost certainly be approved for the Credit One Bank card with a credit line likely around $300 to $400 initially.
Complete the application and you will most likely receive an instant approval online. The card will be mailed to you, and you should receive it in two to three weeks. In the meantime, you will move onto the next step.
(DO NOT USE THE CARD UNTIL YOU HAVE COMPLETED THE FIFTH STEP).
If for some reason you are not approved for the Credit One Bank card, then you should not apply for any additional unsecured credit cards. You will instead seek out a secured credit card, like this Open Sky credit card from Capital Bank.
This Open Sky card comes with a 17.5% APR and a $29 annual fee. In most cases, they will give you an initial credit line of $200 with a $200 deposit.
Not a great credit card option, but this is about as good an option as is available at this point. Regardless, you must get a credit card at this point to begin our credit rehab.
Step 5: Local Credit Union Account
In addition to revolving debt like credit card debt, demonstrating your ability to managing installment debt is also very important for improving your credit score.
Installment debt is simply a loan that is repaid in installment payments over time. Revolving debt is definitely more important it terms of credit score impact, but installment debt does certainly play a role in determining credit score.
Many times credit unions have opportunities for those struggling with poor credit that banks do not possess.
Credit unions are simply nonprofit organizations that offer all of the same products and services that most banks offer, but they tend to be more sympathetic to those with less than perfect credit.
We need to first open a checking and/or savings account with a credit union. In all likelihood there are credit unions in your local area.
If not, I would suggest looking into Alliant Credit Union. Alliant is a Chicago-based credit union, however anyone is eligible to join provided the new member donates at least $10 to the charity, Foster Care for Success.
Whichever credit union you choose, make sure they offer a credit rebuilder type loan program for those with poor credit.
A credit rebuilder loan is simply an installment loan, secured by an account at the lender credit union, which is reported to all three credit bureaus each month and allows for predetermined credit line increases at set intervals of time.
You will fund your account with your emergency savings that we set aside in the First Step. So you will have either a checking and/or savings account at a new credit union that contains your emergency fund, at least $1,000.
When you open the new account, the representative may ask if you want to get pre-approved for a credit card or auto loan.
You do not want to do any credit application at this time. Doing so will through our rehab plan off track, disrupting the order things have to occur to achieve our target credit score within the twelve month period.
Once your credit union account is open, go ahead and activate your Credit One Bank card and setup an automatic monthly charge of around $10 to the Credit One Bank card. So, for example, make your Netflix monthly fee a charge on the new Credit One Bank credit card.
Obviously, if you don’t subscribe to Netflix, then simply choose another recurring monthly expense that you have around $10.
Do not use this card for anything else at this point.
Check your credit report thirty (30) days after the date you activate the Credit One Bank card. If you see that the new card is being reported to all three credit bureaus, go ahead and proceed to the next step.
Otherwise, keep pulling the credit report every couple of weeks until the Credit One Bank card is being showed on your credit reports before proceeding further.
Step Six: Credit Rebuilder Loan
After you confirm your new Credit One Bank card is being reported to all three credit bureaus, the next step is to apply for participation in your new credit union’s credit rebuilder loan program.
The credit rebuilder loan program will be used to establish your ability to manage installment debt, and is necessary to further boost your credit score coming out of bankruptcy.
One Important Caveat: Reaffirmation Agreements
During your Chapter 7 bankruptcy case, you may have reaffirmed a note in order to keep collateral securing a note.
For example, if you have a car loan that is secured by your car, in bankruptcy you must either surrender that car back to the lender, or reaffirm (“re-obligate”) yourself on that note thereby allowing you to keep the collateral.
If you entered into a reaffirmation agreement that was properly filed with the court in your case, you can skip this step altogether.
Your reaffirmed debt will continue to be reported to the credit bureaus after your bankruptcy case, and will be sufficient to establish your creditworthiness with respect to installment debt.
Furthermore, if a secured claim is a part of your Chapter 13 payment plan, you can also skip this step. The claim will continue to be reported to the credit bureaus during your Chapter 13 case.
However, if you did not reaffirm debt as part of your bankruptcy case, you will need to get a credit rebuilder loan through your new credit union.
The loan will be secured by the emergency savings you placed into the credit union account(s) you opened. Ideally you will have a loan of $1,000, secured by the money you deposited with the credit union.
Do not use any of the loan money; just put the loan proceeds into your new credit union account. Make sure to make each and every loan payment two (2) weeks ahead of the due date.
Also, it is helpful to make payments in an amount 20% greater than the minimum payment amount due. For example, if the loan payments each month are set at $100, then make payments of $120 instead.
Making payments greater than the amount required for the required payment will reduce the amount of interest paid, and allow you to pay off the loan more quickly.
This is a recommended practice for every loan you incur in the future, whether it is an auto loan or a home mortgage.
Step Seven: Credit Card #2
At strategic times throughout our twelve month plan we will add credit lines. We do this for two main reasons. First, with the increased credit availability we improve your ability to demonstrate your ability to managing an increasing amount of credit. Second, you strengthen the credit scoring benefits that come from increased credit card utilization.
Essentially, we want to provide an appearance that we are using an increasing number of credit cards, without increasing the total credit card balances beyond 30% of total available credit. Strange…I know…but this is how the game is played.
So now we will tackle the next step. Four (4) months after the date you activated your Credit One Bank card it is time to get another unsecured credit card.
Do not apply for any credit during this four month waiting period. I will recommend the next card you go after to be the Capital One Platinum credit card.
This Capital One card comes with a higher APR of 24.9%, but a $0 first year annual fee followed by just a $19 annual fee. When applying, you will be asked whether your credit is poor, average or good.
You will want to state your credit as average, even if your credit would have been considered “poor” prior to the bankruptcy.
Although in all likelihood you will be approved for this card, if for some reason you are not approved, Capital One offers a secured credit card option that you will instead choose to get.
Once you get the Capital One card in the mail and activate the card, you will change your monthly Netflix charge to this new card instead of the Credit One Bank card you previously reserved for the charge.
From this point forward, you will make a small charge (around $1.00) on the Credit One Bank card each month, and then payoff both the Credit One Bank card and the Capital One card in full each and every month.
Important Caveat: Make sure to always make your credit card payments immediately when you receive the statements, NOT when on the due date. This will help improve the balances being reported to the credit bureaus due to the timing of the payment.
Step Eight: Credit Rebuilder Loan Credit Line Increase
One of the great benefits of credit unions’ credit builder loan programs are predetermined, scheduled reviews for credit line increases.
Typically, after six months of positive payment history the credit union will slightly increase the credit line available on the credit builder loan.
This is why it is important to learn ahead of time whether the credit builder program offered by the credit union offers these sorts of predetermined reviews.
If not, then after six months of positive payment history, contact the credit union and ask for a small increase in the credit line.
Once the credit builder line of credit is increased, you will immediately stop using the Credit One Bank card altogether.
You are not going to close the account at this time; however you will simply stop incurring the small monthly charge you were implementing from the Seventh Step.
With respect to the Capital One card, you will want to maintain a $10 balance from month-to-month. Keep using the card for the Netflix payment. Just make sure to pay the balance down to $10 each month as soon as you receive the monthly statement from Capital One.
So at this point let’s evaluate where we stand. You have a credit line with the credit union, secured by the emergency funds you have deposited into your new credit union account, you have a Credit One Bank card with a zero balance and about six months of positive payment history, and you have a Capital One card with two months of positive payment history and a $10 monthly balance.
At this time your credit score should be improving dramatically from where we started six months ago.
The progress over the next six months will be more dramatic from the credit score progress you have experienced in the first six months of our credit rehab program.
Over the next five months you will continue making the payments ahead of schedule for the credit builder loan, maintain a $10 balance on your Capital One card by making payments necessary to do so immediately once you receive your Capital One statement, and maintain a zero balance on the Credit One Bank card by not using the card at all.
Step Nine: Credit Card #3
This step is set to occur eleven (11) months after the date you first activated your Credit One Bank card. Once you reached this target date, you will apply for the next unsecured credit card.
If your credit score is at least 677 at this point, I am going to suggest applying for the Discover IT card.
The Discover IT card is an upgrade over the cards we have been approved for thus far. This card offers a 0% introductory APR, and then subsequent years from 10.99% to 22.9%.
Furthermore, you can get access to your FICO score for free each month on the statement. Plus, for the first time we will have a card that offers a cash back program for qualifying purchases.
Do not worry – getting the Apple card does not mean you have to start buying Apple products, you just want the available credit to complete your credit rebuilding plan.
The Discover IT, GEMB Walmart card and the Apple cards will come with increasing credit lines and better terms that the cards we have received thus far in our journey.
These are cards you would not have been approved for eleven months ago, but because of your progress they are now within reach.
Once you get this new card, use it for very small purchases every month and then payoff the card in full immediately after receiving the monthly statement.
Once you get and activate this new card, you will make sure the Credit One Bank card is being reported as a zero balance.
If being reported at zero balance, cancel the Credit One Bank card at this time to avoid the annual fee hitting in the beginning of the twelve month.
Now you will have a Capital One Card maintaining a $10 monthly balance, a Discover IT card (or alternatively, GEMB Walmart or Barclays Apple card), and the credit builder loan with the credit union.
Your credit builder loan should end at the twelve month mark. Once the loan concludes, we want to either secure an unsecured credit line with the credit union, or alternatively, another secured credit line using the money contained in your credit union account(s). Ideally, we want a 2-year $2,000 credit line through our credit union.
Finally, pull all three credit reports. We want to review again for accuracy of your post-bankruptcy reporting, and also to check for pre-bankruptcy claims being reported properly.
Remember, your pre-bankruptcy creditors can only make the following reports to the credit bureaus:
- Zero balance
- Trade line: “Discharged in Bankruptcy” or “Included in Bankruptcy”
- Not report at all.
If your pre-bankruptcy creditors have resumed reporting negative information, any balances owed, or other derogatory remarks, contact your bankruptcy attorney immediately. This information will hurt your credit score.
After concluding all of the steps in our twelve month program correctly, you should have a credit score between 680 and 720.
Going forward you will want to closely follow all of our credit commandments found earlier in our text, and if you do your credit score will continue to rise.
You are now on your way to enjoying high credit scores, even after having filed for bankruptcy relief.
Those who follow the steps in this text will have likely have credit scores between 680 and 720 in twelve months following the bankruptcy discharge.
There are certainly other ways to improve your credit score after a bankruptcy, even ways that may bring you to a 700 credit score in just twelve months.
However this plan is proven to work effectively and you can use this credit rehab program as the blueprint to re-establish your creditworthiness.
Twelve months are going to pass whether you are working a plan toward good credit or not, so you may as well do the work. Good luck!
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