One of the biggest questions our clients ask is “How do I rebuild my credit?” While many clients also swear off ever borrowing money again, we typically suggest that clients re-enter the world of credit cautiously, but confidently. It is often necessary to borrow money (for a car, house, etc.), and using credit wisely in the present allows you to rebuild your credit and have access to loans in the future. To assist you in re-establishing credit, we have compiled the following suggestions:
- Use the Credit Report Clean-Up Packet we will send you. You’ve just gone through a huge change, and we know it hasn’t been easy. Don’t let that go to waste! Use the packet we are sending you to ensure that your credit report is accurate. Ensuring the correctness of a credit report is a must if you want to rebuild your credit.
- Review your credit report annually at www.annualcreditreport.com. Always be aware of what is being reported; creditkarma.com is also a good resource, but should be used WITH www.annualcreditreport.com.
- Make a budget and stick to it! An online option is mint.com. You can also use YNAB, quickbooks, the envelope method, or any other tool to track your income and expenses. If you want to rebuild your credit, it’s best to use solid materials and proven strategies.
- Use credit wisely. The best way to rebuild your credit is to use it. If you reaffirmed a debt in a Chapter 7 or have paid for a house through a Chapter 13, you will have some use of credit being reported. However, if you do not have personal liability on any debts after your bankruptcy, your credit report is blank, just like when you graduated high school. So, start over. You will have TONS of credit card offers. DO NOT take all of them. Take the best of them. One credit card. Use it and pay it off. Never use more than 20% of the available balance and pay it off every month. After 6 months or so, apply for another card. If your first credit card had an annual fee or was a secured credit card, close that account. After another 6 months, apply for another credit card, maybe a gas card or store credit card. Finally, after approximately 2 years, your credit score should be substantially higher than it was immediately after filing and is likely higher than it was before you filed!
- Be aware of the credit available to you.
- Getting a secured debt is often easier than an unsecured debt. If you don’t need a car, you may find yourself in need of a secured credit card. For this, you will need to submit a certain amount of money (often $300-$500) and your credit card will be secured by that debt. This can be an expensive option, but can be the starting line of the race to rebuild your credit. Make sure that the creditor reports to the credit bureaus!
- You could have someone add you as an authorized user to a longstanding credit card account. Typically, you are not held responsible for the outstanding debt, there is no credit check, but the card’s payment history is reported on your credit. Do this carefully! If the person has bad credit, it won’t help you to be an authorized user. Do not use the card unless you intend to pay what you borrow.
- You can research credit cards at nerdwallet.com.
- READ and UNDERSTAND your obligations. When you borrow money, you are agreeing to certain terms. These will include fees and interest. The best credit cards tend to charge no fees, have low interest, and offer high rewards and should be available to you after you rebuild your credit. Ideally, when your credit is strong, you will pay off your balances every month and be able to capitalize on the benefits of credit cards. It is highly unlikely that you will ever be able to pay off a mortgage or car loan without ever having to pay fees and/or interest. BEFORE you obtain either type of loan, review and consider carefully how much the debt will cost you. Learn about borrowing, mortgage loans, car loans, compounding, and calculate your own amortization table. Carefully consider your options and the costs!