A common question we get asked by our clients in Manhattan and other boroughs of New York is whether they will be able to get any credit after filing bankruptcy.
1. Alternatives to Credit. First of all, although credit can be convenient there are many alternatives to credit. Many of the alternatives to using credit from a financial planning and budgeting perspective are better because people who buy things using credit often spend more than people who don’t. So, the first alternative to credit is to pay cash. This may require the financial discipline of saving up enough money to buy a new or used TV before making a purchase, rather than just “paying with plastic”. People paying cash will often compare prices more carefully than those paying with credit. Another classic alternative to credit is the “lay-a-way plan.” Many retail stores and department stores offer this option. You select an item and put down a deposit and make payments each month until you have paid in full. Once you have paid in full the store gives you the item.
Sometimes you may need to use a credit card not because you are buying something, but more as a form of security deposit — such as if you are renting a car or reserving a hotel room. They want you to use a credit card to hold a reservation, although they will let you pay the charges in cash. However, many rental car companies and hotels will accept a cash deposit in lieu of credit card. Also, if you make rental car or hotel arrangements through a travel agent or reseller (such as Expedia, Orbitz, etc.) since you have pre-paid the purchase prior to travel you don’t even face this problem.
2. Secured Credit Card. A good way to rebuild your credit after bankruptcy is to obtain a secured credit card. A secured credit card requires you to put up a deposit, for example $1,000 and then gives you a smaller credit line, for example $500. As you deposit more money with the credit card company they will increase your credit line. The most important thing in selecting a secured credit card, in addition to the interest rate and fees applicable to the card, is that the credit card company will report to the credit bureaus. There are some so called secured credit cards that aren’t really credit cards –they are just debit accounts and don’t report to credit bureaus. These are not useful in rebuilding credit (although they may be useful for other reasons).
3. Open a Bank Account. Some people who file bankruptcy have not maintained a bank account in a long time because their creditors had judgment against them and they were worried about the creditor freezing the account or executing upon it (see our prior Blog post on this topic). Once you obtain your bankruptcy discharge your liability for any discharged (i.e., wiped out) debts will be eliminated. You should open a bank account. A checking account and debit card will be helpful for you in making payments. In terms of rebuilding credit in selecting a bank account you should try to find a local community based bank that will work with you in helping you rebuild your credit. Speak with a bank officer and find out if you can obtain a secured credit card. Talk with him or her about how soon you can expect to be eligible to obtain a car loan or home mortgage in the future and explain you are interested in rebuilding your credit after bankruptcy.
4. Understand Your Credit Score. Although some people who file bankruptcy have a good understanding of what a credit score is and the factors that affect it, others do not. To rebuild your credit it is critical that you educate yourself about how credit reports and credit scoring work. The three main credit bureaus are Experian, Trans Union and Equifax. Although each of them has its own credit scoring model, the most widely cited credit score is your FICO score available at www.fico.com. The key factors that affect your overall credit score are payment history (35%), total credit (30%), length of credit history (15%), new credit (10%), and type of credit (10%). You should order your credit report at least once a year and review it carefully and report any errors. You need to make sure that all of the debts that were included in your bankruptcy are properly listed on your credit report as discharged in bankruptcy. You can get a free copy once a year in New York. You may also want to pay to obtain your FICO score.
4. To Rebuild Your Credit You Need to Use Credit. You won’t be able to rebuild your credit if you pay cash for everything. To rebuild your credit you need to make responsible use of credit. However, this doesn’t mean you need to run large balances and only pay the minimums. One way to rebuild your credit it to make charges and pay them off in full in 2-3 months. Doing this over and over will rebuild your credit and over time your credit score will go up and your credit granters will extend you more credit.
5. Obtain Co-signer. If your own personal credit is not good enough for you to obtain credit in your own name after bankruptcy, an immediate way to obtain credit again is if a relative or friend allows you to be an authorized user on their credit card.