If you have bad credit due to a string of missed or late payments, collections, or even a bankruptcy, you know how much of a toll a simple mistake can take on your credit. No matter how long it’s been since negative information showed up on your credit report, it is never too early to start rebuilding your credit. Taking the right steps today can lead to thousands of dollars in interest savings in the future, so no matter how it happened, don’t delay in starting on the path to fixing your bad credit.
Starting Over without a Fresh Slate
While bankruptcy might appear like a path to a fresh start, for your credit score it is anything but. When you declare bankruptcy, some of your debts are forgiven in exchange for a big, bad mark on your credit report.
Depending on the type of bankruptcy, it will show on your credit report for seven or ten years. As long as the bankruptcy is present on your credit report, you may struggle to get approved for new credit and should expect higher interest rates than you had before bankruptcy. However, even though you do not have a fresh slate on your credit history, you can take steps to start over with credit.
If you can commit to taking the right steps with credit from this point forward, you are setting yourself up for personal finance success when the bankruptcy eventually ages off of your credit report. The best place to start with credit post-bankruptcy is with a secured credit card.
What is a Secured Credit Card?
A regular credit card is issued on credit with the assumption that you will pay back any funds you borrow. With negative information on your credit report, banks and other credit card issuers are less likely to offer you a credit card because they are worried they won’t be paid back.
With a secured credit card, you are required to make a refundable deposit equal to your credit limit. If you want a new card with a $1,000 limit, you have to deposit $1,000. If you want a $2,000 limit, you must deposit $2,000, and so on for bigger credit lines.
Once your account is open, it works like any other credit card. You can make purchases and pay your bill each month without impacting your deposit. If you ever stop making payments, the bank can seize the deposit and use it to cover your unpaid balance. If you keep the account in good standing, you will get your full deposit back when you close your account in the future.
How Can I Use a Secured Credit Card to Rebuild Credit?
When you file for bankruptcy, most, if not all, of your existing credit card accounts will be closed. It takes seven years for old credit card accounts to age off of your credit report. That’s a good thing for you, as those accounts are typically filled with a negative payment history. In the meantime, you can use a secured card to ensure that only positive information is left behind when the negative accounts eventually fall off your report.
You can open a new secured credit card account as long as you can afford the deposit. These accounts are designed specifically for people with bad credit, and in some cases no credit check is required.
Once you open the new account, take advantage of the opportunity to start fresh with good credit habits. Contrary to a popular myth, you don’t have to carry a balance or even use the card regularly to have it improve your credit score. Just make sure to always pay your bill on time every month to start improving your credit score. Go a step further and pay off the balance in full every month to avoid expensive interest charges.
Other Options to Improve Your Credit
Getting a new credit card is not your only option to improve your credit after a bankruptcy. Here are some additional ideas you can use to boost your credit score and improve your credit report, even after a series of negative events on your report.
Authorized User – If you have a parent or other relative willing to add you to their credit card account, you can be added as an authorized user on someone else’s account and their activity can boost your credit score. However, be aware that authorized users are reported differently than your own accounts on your credit report, so they may not improve your score as much as a secured credit card. Also be aware that if there are any issues or late payments with the account, you share in the negative reporting as well as the positive.
Credit Builder Loans – Offered by some credit unions, credit builder loans are small consumer loans that you can use to build your credit. The loans are reported as a regular loan on your credit report, and making 100 percent on-time payments is sure to boost your credit. Even with a small loan, an on-time payment is an on-time payment.
Joint Credit Accounts – Some banks and credit unions allow you to open a joint credit account. Mortgages, auto loans, student loans, and personal loans may be available for you with a cosigner. While your cosigner bears equal responsibility and liability for what happens with the account, if it is handled appropriately with all on-time payments, it will improve your credit all the same.
Store Credit Cards – Store credit cards can hurt your credit, but if you already have bad credit, opening a store card and making 100 percent on-time payments should ultimately help your credit. That is, of course, if you can get approved. Remember that there is no good or bad credit card or loan. Debt is a tool that when used responsibly can offer a lot of advantages.
Create Good Credit Habits Today for Long-Term Success
Look at bankruptcy or a string of bad items on your credit as a chance to get restarted. Going forward, never miss a payment. Never make a late payment. Only spend what you can afford to pay back in full every month. If you follow those guidelines, you’ll be on track for great credit.
It can take a whole decade to recover from a serious credit blunder. Don’t get into trouble with credit again in the future. Take advantage of a secured credit card and other tools at your disposal to get on the path to excellent credit. Your future self will thank you.