5 Ways to bring your credit back from bankruptcy

Shauna Zamarripa

FIRST PERSON | Bankruptcy can wipe the proverbial credit slate clean and stop harassing phone calls and letters, but filing a Chapter 13 bankruptcy or a Chapter 7 bankruptcy sends credit scores plummeting while harming chances for offers of credit in the future. The good news is that bankruptcy is not a permanent financial death sentence. In fact, credit is a cyclical beast. Any consumer can rebuilt and restore his credit after bankruptcy discharge using these 5 basic strategies.

Get a Secured Card

At first, most bankruptcy filers will need to rely on a cash only system for living and routine expenses. After a bankruptcy discharge, it may be difficult to open up a bank account, and it will be impossible to use any other piece of plastic beyond a debit card.

Save $300 to $500 and open up a secured credit card. Secured cards require an upfront deposit—hence their name, a card secured by your deposit. That deposit then becomes your credit limit. For example, if you open up a secured Visa card with a $300 deposit, your credit limit is $300. The security deposit protects the bank, if you default. The bank holds on to the deposit, until you prove your creditworthiness once more. While secured cards usually come with unattractive interest rates and features, they are by far, the best way to rebuilt credit after bankruptcy.

Use it responsibility

For the next six months, use your secured credit card to pay for recurring expenses like gas or groceries. At the end of each month, pay the card off in full. Repeat this strategy for six months and you will see an increase in your credit score as you reestablish a satisfactory payment history. The primary rule to remember here is not to keep a balance. Credit rebuilds much faster if you pay off the balance on a credit card to $0 each cycle.

Ask for credit line increases

Most secured cards will reward users by offering an unsecured credit line increase after six months of on time payments. The denominations for the increase are typically between $50 and $100, but the more of an increase in your credit limit, the faster your rating rebuilds. The key here is not to increase your spending to eclipse your ceiling. Keep a handle on all credit expenditures, and do not exceed what you are able to pay off each month. In other words, if you know you can only afford to pay $300 per month to see your credit card balance zeroed out, don't charge $400.

Apply for unsecured credit

After six months to a year of timely payment history with your secured card, you can move up in the world and apply for an unsecured line of credit. You need to establish a credit mix. In other words, you need to have one credit card, one auto loan and one unsecured line of credit like a personal loan or appliance purchase to achieve the best credit building results. While credit takes time to restore, knowing the recipe for success makes an enormous difference in the timing.

Pay everything off each month

Pay off loans and credit cards immediately. Keep only one credit card on hand, and use it sparingly. For example, once you have an unsecured card with better terms, stop using your secured card; but do not close it. Refrain from closing newly opened credit lines, as this will hurt your credit. The key is to have a variety of open, untapped credit sources.

For most people, filing bankruptcy was a result of overspending and poor money management. After having taken the time and effort to rebuild your credit, don't throw that time and effort away by repeating the same financial mistakes.