Many overburdened Americans chose to file bankruptcy to ease the stress and financial strain during the recent recession. If you discharged debt in Chapter 7 bankruptcy, you may wonder how to best rebuild credit. To reclaim your status as a trustworthy borrower, and reopen the road to car loans and home mortgages, there are ways back. Here are some steps along that road.
Your first task is to reestablish your credibility as someone who lives within your means and can be relied upon to pay debts promptly. The best way to do that is to apply for a "secured" credit card, preferably one without annual fees.
A secured card means you deposit cash in a savings account as collateral; then you can borrow up to that amount. You can't go over your credit line, and you're still at risk of overdrawing and getting a bad report from the credit-scoring agencies. But you're careful. You use the card only for small purchases, making it easy to pay them off every month. Before long, your scores will begin to look impressive.
Some financial advisors suggest taking out "overlapping" secured accounts to multiply their effect on the ratings. You use, say, $1,000 to get a secured card. With it, you get a cash advance of 60% of your credit limit. With that cash, you open a second secured card. Then you get another cash advance and repeat the process, getting a third card and another cash advance. With that advance, you open a new checking account-but you use this account only for making payments on your credit cards. If you pay timely each month, your credit score will rise quickly, because each time, you have three new perfect-payment records. (If you miss a month, of course, you'll get a triple bad score.)
Meanwhile, you augment your position by opening a savings account. No, the tiny interest rates won't make you rich. But even if you can squirrel away a few bucks a month, you'll build a reserve fund that can see you through an unexpected crisis such as an auto repair. You'll also have fall-back funds if you need them for your secured credit card. And you'll gain valuable experience in budgeting realistically.
Along the way, you'll want to keep an eye on your credit score. Here is how to contact the three major credit-reporting agencies:
Trans Union www.transunion.com (800) 888-4213
Equifax www.Equifax.com (888) 397-3742
Experian www.experian.com (800) 997-2493
If you have questions about bankruptcy or credit-account law, contact an experienced attorney in your area.
