Rebuilding credit after filing for bankruptcy seems like a daunting task, but it doesn’t need to be. I filed for bankruptcy in 2010. My bankruptcy was finalized and discharged in December of 2010. Once discharged, I immediately went to work rebuilding my credit. To my surprise, it wasn’t difficult to do. All rebuilding credit took was a detailed plan and focused execution. I was able to go from a horrible credit score of 423 to an impressive 737 in less than two years. If I can do it anyone can. A great credit score can save you tens to hundreds of thousands of dollars over your lifetime. Because of this, I see credit score as being directly linked to net worth. The less interest you pay, the more money you can invest. In this post I’ll outline the exact steps I took to quickly rebuild my credit.
Rebuilding Credit – The Process
Follow these steps to quickly re-establish your credit. These steps don’t need to be completed in the order below, but I’ve listed them in this order based on how easy it was to carry out each step.
- Become an Authorized User
- Open Secured Credit Cards
- Get a Car Loan (no new car needed)
- Leverage CDs
- Remove Delinquencies
Rebuilding Credit – Become an Authorized User
Odds are you know someone you trust who happens to have excellent credit. Partner with that person. For me, it was my brother. I asked him to add me to 3 of his credit cards. He added me to three cards, the ones with the longest credit history. Of the three accounts two were traditional credit cards. The third card was a store card. Something like a Macy’s, Sears or Old Navy will do. This third card is very important. Credit reporting agencies look at traditional credit cards and store credit as a different credit class. Because of this, a mix of traditional and store cards helps to boost your credit score.
Be sure to get added to your partner’s three oldest cards. Length of credit is really important, because you’re starting over. Your credit history is zero. The older the cards, the better your score will be.
Risk to You – The primary account holder could miss payments or default. This will hurt you. Once a bankruptcy is discharged, you never want a late payment reported on your credit. Only partner with someone you absolutely trust to pay on-time.
Risk to your Partner – None. I say this because the credit cards never need to be in your possession. I let my brother activate my cards and lock them away. I had no chance of running up his credit balances.
Rebuilding Credit – Open Secured Credit Cards
The day after my bankruptcy discharge, I opened two secured credit card accounts. What’s a secured credit card? It looks and feels like a real credit card because it is. The only difference is that you fund the card with a savings account. Reputable secured credit companies report to all three major credit reporting agencies on a monthly basis. I put $500 for each card into the credit card companies accounts. This amount became my credit limit. If I wanted to increase it, I could by depositing more money but I don’t recommend doing so. You’ll start getting real credit card offers within months of paying your secured cards on-time. These cards will come with higher limits and will not require a security deposit.
Rules to Follow – Setup automatic payments to make sure you’re never late. Don’t carry the cards with you. Setup one re-occurring monthly bill to be paid by each of your credit cards. Then hide the cards in a dresser and don’t touch them. Make sure the bill is small. Credit utilization is a very important part of a credit score. With a $500 limit, monthly balances should never go over 30% utilization. This means, $166 is the highest you ever want your balance get to. This is why I suggest not carrying these cards on your person. It’s too easy to run a balance up above $166.
Risk to You – None. As long as you make payments on-time your credit will start rebuilding. One drawback is that secured cards usually come with an annual fee. It’s the price you have to pay to play the game. They also have high APRs, but this shouldn’t matter. Your goal is to make one payment each month. APR, only matters if a balance is carried over.
Rebuilding Credit – Get a Car Loan
Maybe you’re thinking, I don’t want a new car or I’m trying to get out of debt. If you need a car buy one, but you don’t need to buy a car. I had a car that was already paid off. It was a piece of crap, but KBB said it was worth $2,500. I went to my local bank and took out a loan against my car. Think of it just like a home equity line of credit, except for cars. I could’ve gone to a title loan place, but why do that when a real bank was willing to fund my paid off car.
I took out a 24-month loan of $1,500 using my car as collateral. This came with a steep interest rate, but not too bad considering I’d just filed bankruptcy. The loan had a 7.9% APR. I paid the loan every month for 12-months, then I paid it off. Then I did the same thing. I took out a loan for $1,000 against my car. This second loan was 24-months, but the APR was much less, a 3.3 APR. This happened because my score was improving :-). I paid monthly for one year, then paid off the loan. I could’ve let the loans run their course, but I found more value in having two auto loans paid off on my credit.
Risk to You – None. The only downside is that you’re paying interest, but it’s a price you pay to rebuild credit.
Rebuilding Credit – Leverage CDs
Leveraging CDs is easy to do. Finding a bank to do it is a challenge though. This is a trick that many don’t know is possible, but it’s a sure-fire way to rebuild credit. Did you know that you can open a Certificate of Deposit with a bank, then take a loan out against the CD? Neither did I. Neither did several banks that I talked to :-). But after a lot of pounding the pavement, Wells Fargo understood what I was trying to do.
I opened three 12-month CDs over an 18-month period (a new CD every 6-months). Then I borrowed against each CD. Actually this was handled in one transaction each time. I opened the CDs and took the loans out the same day. I never used the money, I took the cash and put it right back into my bank account. For 12-months, I made monthly payments, then closed each CD when the loans were paid off. This did come with an APR of 5.5%, but I didn’t care. My goal was to rebuild credit quickly. All three CD loans were reported as personal bank loans to the big three credit reporting agencies.
I opened a fourth CD with $1,000 at a 36-month term. This last CD, will run it’s course at the this year. I chose to not pay the last CD early. This was done to establish a 3-year payment history on one loan.
Risk to You – None. As long as you pay on-time.
Risk to the Bank – None. The bank already has your money sitting in a CD. The bank can only lose interest if you default.
Rebuilding Credit – Remove Delinquencies
This step must be done last because a creditor isn’t willing to talk to you unless you’ve shown progress. The best advice I can give here is that the squeaky wheel gets the grease. After 1-year, and after I’d started all four steps above, I tried to remove delinquencies from my credit profile. I called every creditor that had posted delinquencies on my credit report and begged for forgiveness. Guess what happened? Nothing. They all told me to get lost. But I didn’t. I started calling every week for 2-months. It got to a point where I had direct phone line access to the people at each institution with the power to help me. After persistent bothering, I had a few wins. I wasn’t able to get all delinquencies removed, but 4 creditors agreed to either remove my blemish completely or cut my default from 150 days late and a BK, to 30 days late. I believe that this was the catalyst that took my score above 720.
Risk to You – None. This just takes time and persistence
Risks to the Creditor – Fear that you will call everyday until they do what you want them to do.
Rebuilding Credit Takeaways
There you have it. This is the exact 24-month plan I put into action. In 24-months I was able to take my credit score up by 314 points! What’s really amazing is that I took my score above 720, which meant that I could get preferred loans on homes, cars, etc. Most people who go through a bankruptcy take 5-10 years to get a credit score above 720. It takes 10 years for a bankruptcy and all bankruptcy related defaults to leave your record. These dings are still on my credit, but I was able get a great score even with these dings.
Bankruptcy doesn’t have to define the next 10-years of your credit life. Following these 5 steps, I proved that good credit is possible, even with a recent bankruptcy.
Have ever had to file bankruptcy? What’s your secret for rebuilding credit?
Monitoring your credit score is crucial to the success of credit rebuilding. Here’s a link to MyFico. What’sgreat about this service is that it covers all three of your credit bureaus Fico scores.