Credit is somewhat of an ironic thing. The best way to get it is if you already have it. If you don’t have it, it can be difficult to obtain. Bad credit begets bad credit, which makes it harder to get loans, and the ones you do get can have expensive payments, leading to you falling behind on payments, leading to – you guessed it – worse credit. It is a black hole that can suck you in if you are not attentive to it, and like black holes, it can be impossible to pull yourself out once you’re in too deep.
Bankruptcy can make a bad credit problem worse – for a long while. So, how does one dig themselves out of a credit pit after exiting bankruptcy?
- Start small. Credit cards are an excellent way to rebuild credit long-term, as long as you know how to be responsible with them. Immediately post-bankruptcy, you will probably not be able to get a card with a high limit. But virtually everyone is qualified for a low-limit secured credit card. These cards require a deposit (usually no more than $200 depending on your credit) which eliminates much of the risk for the issuer. Using this card once or twice and paying it off every month is an excellent step one to restore your credit. Another tip: when searching for cards, look for ones with no annual fee. You should not need to pay an annual fee on a secured card.
- Try to keep your card utilization below 30 percent. This means that if you have a $200 card, try not to put more than $60 on it. Low utilization benefits your credit. You could use it, for example, as a gas card or to pay for recurring bills like cable and Internet.
- Pay the statement balance every month before the due date. This lets you use the card without incurring interest.
- Ask for credit limit increases every six to 12 months, depending on your issuer’s policy. Having higher credit limits but keeping your utilization low shows the issuer that you are able to be responsible with a large credit limit.
As you follow these steps and time passes, your bankruptcy will become less and less important to your credit score. You may find that even within a year, your score has improved dramatically. And seven years after bankruptcy, you will not have to worry about it, as it will have dropped off your credit score. But seven years is a long time, so it is best to start soon – you never know when you’ll need a new car or to purchase a home.