How to Improve Your Credit Score After Bankruptcy

If you've filed bankruptcy, you know it's not the end of the world. In fact, for many people, it's the start of a brighter future that will help them finally reach their financial goals.

While bankruptcy is the first step in re-establishing good credit, you can't just file a case and expect significant movement. You've got to work at it. The process will demand your attention, and it's going to take time, but it can be done. 

What Makes Up Your Credit Score?

Credit scores are based on data collected over months and years. Credit scores move slowly. One month—even six months—of data may not be enough to sway the credit scoring company to improve your score significantly. Instead, look to see improvements after a year or two.

Various factors influence your credit score. Those factors are weighted to put the most emphasis on your payment history and level of debt. Other aspects of your financial life that go into your credit score include how long you've been borrowing, the diversity of your debt type (mortgages, credit cards, student loans, etc.), and the average age of your lines of credit (how recently you applied for a loan or credit card).

Pay Your Ongoing Obligations on Time

Bankruptcy does not necessarily eliminate all debt. Some debt, especially debt that is secured, can survive bankruptcy because the lender is entitled to at least the value of the collateral. These are commonly known as reaffirmations. 

Normally, a reaffirmation survives the bankruptcy with the same terms the loan had going in. Therefore, if you have a car loan when you file for Chapter 7 bankruptcy, and you want to keep the car, you will continue making the payments as spelled out in the loan documents.

Because this debt is reaffirmed, or not discharged, the lender will continue to report the debt and your payments to the credit reporting agencies. This debt can be an opportunity to build your credit score back up. Reaffirmations can go a long way toward rebuilding a credit score. However, they only work if you make the payments on time.

Consider a Secured Credit Card

With a secured credit card, you make a deposit to the lender in an amount equal or nearly equal to the maximum credit line on the card. If you stop making payments, the lender can keep the deposit to make up for what you didn't pay.

On the surface, this can seem similar to using a debit card linked to a bank account. As with a debit card, a cash deposit backs up expenses charged to the card. However, there are some important differences.

On the negative side, you'll pay extra fees for the privilege of using a secured credit card. Usually, the lender will charge an annual fee, perhaps an administrative fee for the setup of the account, and a high annual percentage rate. Those fees are usually charged directly to the account, and credit limits on secured cards are usually low ($300 to $500 to start). When you get your first statement, you could easily find that half of your credit availability has gone toward covering fees.

On the plus side, your payment history for the secured card will be reported to the credit reporting agencies. That means, unlike a debit card, using a secured credit card will help build credit. On your credit report, the secured card will look like any other credit account. If you pay according to the terms of the account, your credit score will rise. But keep in mind, if you fail to follow the card's terms, your credit score will fall.

Employing Other Types of Credit

Car dealerships may actively market to people who have recently emerged from bankruptcy. A few months after receiving their bankruptcy discharge, consumers may start receiving letters from dealerships offering to help them re-establish credit through the purchase of a new car (along with a new car loan). The terms on these types of loans may fall in line with the terms offered in other parts of the subprime market—they aren't good, but they are not horrible, either. Since you recently filed for bankruptcy, you're considered a risky borrower.

Whereas folks with a decent credit score might get loans at a rate of 5%, these loans could come with rates as high as 18% or more. If you can afford to stick to payments with such high rates, you could use these loans as a way of building credit.

However, this strategy is generally not advisable unless you have the cash or income to support such a high-interest payment. A good rule of thumb for interest payments is that you should try to avoid any interest rate that is higher than the rate you could reasonably expect to earn by investing your money in the stock market (a 7% return is generally considered a normal rate).

Some people have had luck obtaining credit cards from retailers. This is not as easy as it once was. Department stores used to be local establishments, and they operated independently without ties to a multi-market chain. That allowed them to carry charge accounts in-house, which provided greater flexibility for consumers who were able to get a face-to-face meeting with the people in charge of approvals. Now, national chains offer credit cards that are approved or denied in a separate department—usually located far away from the building where you buy your groceries or other goods.

Avoid Credit Repair Agencies

First of all, there's nothing a credit repair agency can do that you can't do for yourself. If you're at a loss and need help, you can instead turn to any number of web-based resources or books on credit repair. If incorrect or outdated information appears on your credit report, there are steps you can take to have it corrected. If the information on your credit report is negative, but still accurate, it cannot be permanently removed. 

Despite this, credit repair scams abound. These scammers usually take advantage of the fact that a credit reporting agency will remove disputed information for some time while the dispute is being investigated. The credit repair agency may dispute negative information, even though it's accurate. With the disputed negative information temporarily removed from the report, your credit history can look much cleaner than it should look.

However, if the information is accurate, it will reappear on your report when the investigation is complete. Credit repair agencies make their money by charging ongoing fees, often by monthly subscription. While you're subscribing, the agency will continue to dispute negative information on your file, but this isn't a permanent fix unless the information is truly inaccurate.

It Just Takes Time

Here's the bottom line: It just takes time. Eventually, the negative information will drop off of your credit report, but that's just one step in rebuilding your credit. The second step is to fill your report with positive information. The more accounts you add, the faster you can replace those negative entries with positive ones, and the higher your credit score will rise. Just remember to keep up with all your payments and never borrow more than you can afford to, otherwise, you could end up in another debt spiral.