After any bankruptcy, your credit score will be damaged and will be reset. Living on a cash-only (debit card) basis is necessary for some time. In fact, one of the best lessons from bankruptcy is that if you are unable to afford something, save for it. Do not incur new debt. But, eventually you will want to reestablish credit to qualify for better loan rates for a major purchase such as a car or home. To do that, you will need to rebuild your creditworthiness.
Rebuilding credit is a process that takes time and there is no shortcut. Avoid credit repair fraud schemes and payday loans; they are not an easy way out. Worse, these options often cause more harm to your credit score in the long run.
The first step is to pay your ordinary and necessary bills on time, every month without fail. Avoiding any late payment reports is crucial to successfully reestablishing credit.
The next step is to apply for new credit after your bankruptcy discharge. You will be invited to do so by credit card companies, but expect to pay high interest rates. It is important to moderate the amount of credit as well as the period between applications. Take care so that you do not again risk too much debt, and balance the time between applications so that your credit report does not look overly active.
- Apply for a credit card from the bank where you have established checking and savings accounts. It may be more flexible to in-house customers.
- Use your credit card regularly up to about 1/3 of the available credit. Pay the balance off in full each month; there is no advantage to carrying over a balance from month to month.
- Get an installment loan, such as an auto loan, even though you will pay a higher interest rate. Buy a used vehicle to avoid the steep depreciation of a new car during the critical first few years before you can refinance to a better rate.
The final step is to regularly check your credit report to make sure that discharged accounts are shown as “closed” or “discharged in bankruptcy.” If the old accounts still show as “open” or “delinquent,” it will be more difficult to rebuild and improve your credit standing.