• Heather A. Harwell, Esq.

How to Improve Your Credit After a Chapter 7 Bankruptcy Discharge


Building your credit after bankruptcy requires that accumulate credit. The trick is to do so without falling into the same trap that caused your bankruptcy in the first place. Bottom line, do not use credit to spend more than you earn. Here are some ways to assist you in rebuilding your credit rating:


1. Pay down non-discharged balances. Pay down balances on any accounts that were not discharged in your bankruptcy such as student loans and child support arrears.


2. Small balance credit card. You will receive many offers for credit cards, secured and unsecured. Begin by obtaining a secured credit card if you are unable to obtain an unsecured card. Start with a small limit account. Use the card only for purchases of groceries and gasoline then use the money you would have used to pay for your groceries and gasoline to pay the balance on the card every month.


3. Co-signer. If you are unable to obtain a credit card yourself, you could become an authorized user on someone else's card. However, this person will need to be responsible enough for you to know that the account will be paid on-time, not maxed out or over-charged. You may be better off obtaining a low limit charge account with another responsible person you trust and maintain control over its use with timely payments and spending limits. Make sure that the card requires authority from both of you to increase the limit.


4. Creditor reporting. Request that your regular creditors such as your landlord, phone company and utility company report your account.


5. Pay bills on time. Pay all bills on-time or a few days early. Paying what is owed and paying on time is the most crucial tool in building and maintaining good credit. If you anticipate being late for any reason, let your creditor know to see if they will accept a late payment without reporting the payment as late.


6. Small secured loan. Once you have demonstrated a pattern of payment responsibility for at least 12 months, apply for a small, secured personal loan from your bank. Place the loan in savings and pay back the loan as scheduled; if there is no early payment penalties, pay off the loan after a minimum of 12 months.


7. Monitor credit reports. Regularly check your credit reports using a credit monitoring service. Make sure that all of your accounts and information are accurately reported. If not, dispute the information and request the appropriate changes.


8. Making saving a habit. Create and follow a budget based upon necessities; set aside money every month in saving, even if it is only $25.00. You will find that you won't miss it if you make it a habit. If you are unable to do so, take advantage of savings plans or retirement funds with loan capability through your employer. In an ideal world, you would contribute to a savings plan and a retirement fund but if that is not an option, do what you can but do something!


9. Avoid frequent credit applications. After you have opened your first low-limit credit account, avoid inquiring about loans or opening new credit accounts for at least 12 months. Every time you initiate a new credit inquiry, the potential creditor makes a hard inquiry into your credit which brings your rate down. Also, if you are doing too soon after a bankruptcy, that can signal to a potential creditor that you are anxious to fall back into your same bad financial habits.


10. Diversify your credit. Your credit score improves when you have different types of credit accounts such as a mortgage, car payment and credit cards. It will take a couple years of diligence and financial responsibility to bring your score up to a respectable level that will garner those low-interest loan and credit card rates but the longer you demonstrate financial responsibility, the less weight your bankruptcy will have in the eyes of your potential creditors.


11. Avoid frequent moves and job changes. Avoid frequent changes in employment or residences. Potential lenders favor stability. If you move or change jobs frequently - that is more than every 4 years - you are perceived as less reliable and less responsible. If you are required to move frequently due to your job, you may want to add a note to your reports that states that requirements of a particular employer or college resulted in the multiple addresses. Also, if you are able to maintain and use a second address, such as your parents' home, consistently for the same period, this may help.


The status of your credit prior to your bankruptcy discharge will have minimal effect on your credit rating after a discharge. Your focus should be on following the 11 steps above. The discharge remains on your report for 10 years and all discharged creditors should be reporting the account as "discharged in bankruptcy". Your diligence in improving your credit following your bankruptcy will make the bankruptcy itself less relevant to your potential creditors over time.