Part II of the series: Getting Credit 

You’ve declared bankruptcy. Your debts have been discharged. Now what? Well, the good news (unless you have student debt, owe recent taxes or have a similar non-dischargeable debt) is that you should have a fairly clean slate, which means you don’t owe anything. As long as you have some income coming in and live within your means you should get some major financial breathing room after bankruptcy. Eventually though, especially if you will continue to live in the western world where credit is pretty much a necessity, you will NEED to rebuild your credit history. Before you do anything make sure you’ve read my post above about your “financial blueprint”. Once you’ve done that proceed….

Step 1 is to figure out where you are at now and ensure your report is as “clean” as possible. This means getting a financial snapshot of what your credit report looks like. So I say about 4 months after your bankruptcy pull your credit report (available free once a year from www.annualcreditreport.com) and take a look at what it says. After a Chapter 7 bankruptcy your previous credit card and personal debts should now be discharged and there should be a notation saying so next to each debt. If for some reason a creditor is still showing a debt (and you included this in your bankruptcy) contact them immediately. Send them a copy of your discharge notice with a letter explaining the status. You can’t as easily get post-bankruptcy credit if some pre-bankruptcy debt is still showing on your report so take care of it.

Step 2 is to apply for credit and get a line of credit. I know, I know, it seems counter-intuitive that only a few months back you had to declare bankruptcy only to now be looking for more credit. Remember, unless you plan on living strictly off cash for the rest of your life the world pretty much operates on credit. This means that if you plan on buying a house in the future or a car, unless you can pay for it with cash, you’ll need to finance it. To do so you need to have re-established your credit history. So yes, seems crazy but start getting credit. You may already have received offers in the mail and if that’s the case you already know that a lot of these offers just don’t seem that great. Because they are not in some ways. Many companies (remember you are recently out of a bankruptcy) will limit the line of credit they are willing to give you (some may give you as little as $250, maybe $500 if you’re lucky). Not only that but many credit card companies will charge you an upfront “annual fee” (around $89 is not too uncommon) plus there might even be a “maintenance fee” of some kind (another $35 or so dollars). “What????!!!” you might be saying. Yes unfortunately rebuilding your credit is going to take a little investment up front. Do it responsibly and it will pay off down the line. My suggestion is you go on-line to get the best deal by visiting www.bankrate.com and searching for a credit card company that can give you the best deal based given your recent bankruptcy. BEWARE, there are unfortunately a lot of scams out there and so you want to make sure you do a bit of research. If it seems too good to be true, guess what? Yes, it probably is too good to be true. Here’s a recent FTC alert about such scams www.ftc.gov/bcp/edu/pubs/consumer/credit/cre25.shtm. Also, getting a secured credit card is a great idea. That’s where you basically deposit a specific amount with the credit card company (say $500) and they then in turn give you a credit line for at least that much. They know they’ve got your money already up front and so they may be more flexible with you. Again, www.bankrate.com is a reliable, trusted source for secured credit cards. How many credit cards should you get? I say at least one, preferably two so that you can manage multiple lines of credit. Secured or unsecured?

Step 3 is to manage your line of credit.  Because you’ve been burned by credit card debt in the past you don’t want to experience that ever again and so the key will be in managing effectively your new line of credit. My suggestion is that you pick a category of something (like gas or groceries) that you know more or less how much you spend on a monthly basis. So now, instead of paying cash or debit for that category put it on your credit card AND pay it off at the end of each month. So for example, say you know you spend about $150 of gas on your car each month. Each time you pump, put it on your credit card, and when the bill comes due PAY IT IN FULL. You do this consistently and at some point in the future (maybe a year, maybe less depending on the credit card company) they will increase your credit line. At the same time your FICO score should be going up every few months. I suggest you pay the few dollars to get your FICO score (www.myficoscore.com) and review your FICO every 6 months. You should see small but incremental improvements. By the way, unless you’re willing to pay a monthly fee that can quickly add up I don’t think some of the “monitoring services” a lot of companies provide is worth the cost.  That’s one of those packages they sell you where they say they’ll monitor your credit score, send you e-mails, alert you of fraud, etc. Sounds nice but ultimately I don’t think necessary.

Step 4 is to begin negotiating a year or so after your bankruptcy with your credit card companies to reduce the APR, waive the annual fee and/or increase your line of credit. If you’ve paid consistently and have paid in full each month they should be flexible. If they are not flexible take your business elsewhere. This means you repeat Step 2 above. By now you should see improvements in the offer (such as no annual fee) and though you may jump from one credit card company to another a couple times the first couple of years (and reducing your FICO score temporarily because that’s one of the factors that impacts your score) after a bankruptcy I believe that ultimately a better line of credit and terms more than makes up for this. By the way, if you do leave a credit card company, make sure you request in writing that any accounts you want closed are “closed at the consumer’s request.”

And there you have it. In a nutshell, 4 easy steps to do (and repeat as necessary) as you rebuild a strong and solid financial future.

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