Rebuilding Your Credit

Feb 14, 2011

By Staff writer State Farm™ Employee

If your credit has taken a hit because of bankruptcy, youíre not alone. According to the American Bankruptcy Institute, 1.5 million people filed for bankruptcy in 2010 ó and their credit scores were most likely impacted as a result.

A bankruptcy remains an item of public record for either seven or ten years, depending on whether you declared Chapter 13, 11 or 7. Accounts included in a bankruptcy filing arenít removed from a credit report for seven years. But if you work at rebuilding your credit, you may lessen the impact of bankruptcy on your credit score sooner.

Rebuilding Credit Takes Time

Unfortunately, rebuilding credit can be far more difficult than establishing it was. The process takes time, and there are no shortcuts. Be wary of companies that promise to fix or even ďeraseĒ credit problems by removing negative but accurate information from your credit report, ask for a fee upfront, or want to recreate your credit identity with an Employer Identification Number. These companies can do more harm than good by employing illegal tactics that could land you in more trouble.

Start Using Credit Again

The good news is that you can easily rebuild credit on your own for free. Begin by responsibly using credit again. Credit cards are the easiest way to use credit; although, if overuse of credit cards helped lead you down the bankruptcy path, this may seem like a dangerous proposition. But credit use is essential for helping improve your credit score because you prove to creditors that you are able to use credit responsibly.

Qualifying for a standard, unsecured credit card is difficult after bankruptcy, so donít be surprised if your application is rejected. Your best and only option may be a secured credit card. Secured credit cards work like unsecured credit cards but require a deposit in the issuing bank. The credit limit is generally set at the same amount of the deposit. Donít worry about coming up with a large amount of cash for the deposit ó you donít want or need a high credit limit during your financial recovery period.

Choose A Secured Credit Card Carefully And Use It Wisely

Youíll want to choose your secured credit card carefully; some issuers may try to take advantage of people in poor financial situations through high application and annual fees. Look for a secured credit card with no application fee and a low annual fee. Most importantly, your secured credit card must report to all three credit bureaus: Equifax, Experian and TransUnion. You canít rebuild credit if your credit report isnít being updated with your new, good credit habits.

Once you have a secured credit card in hand, use it carefully. Your goal isnít to carry a balance or charge a significant amount ó neither will increase your credit score. A couple of minor purchases a month and on-time payments will produce a consistent positive feed on your credit report.

Itís important to remember that you still need to make payments despite your deposit. Secured credit cards arenít the same as prepaid cards, which are reloadable and donít report to the major credit bureaus. Your deposit only ensures youíre risk-free to the creditor, and it earns interest in a savings account, money market or certificate of deposit while your account is open. Your deposit is returned when you close your account or your responsible usage qualifies you for an unsecured credit card with the same issuer.

Qualify For An Installment Loan

Besides a credit card, an installment loan can also help rebuild your credit ó although you may have a difficult time qualifying for one soon after bankruptcy. If you are able to get an auto loan, mortgage or home equity loan, be prepared for a higher interest rate than you would like.

And be careful to not get yourself back into financial trouble by financing more than you can afford. Make all payments on time and, when possible, pay more than the amount due.

Monitor Your Credit Report

Youíll need to monitor your credit report while youíre rebuilding credit. First, check for errors. Accounts included in your bankruptcy should be reported as such, not as open and delinquent. If you find a misreported account, contact each credit bureau in writing about the inaccurate information and include copies of supporting documents from your bankruptcy filings. Then follow up to ensure the disputed accounts are corrected.

Second, keep an eye on your new credit. All your hard work needs to be reported properly in order to help raise your credit score.

Finally, watch those accounts involved in your bankruptcy. Negative records should drop off your credit report in 7 to 10 years. Under the Fair Credit Reporting Act, the credit bureaus are responsible for correcting errors on your credit report. The Federal Trade Commission website has detailed steps for correcting errors, as well as a sample dispute letter.

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