Many of my clients declare that they will swear off all credit cards after their bankruptcy filing. They are so disgusted by the high interest rates, and so anguished by the stress of their financial troubles that they never want to find themselves in the same position again. That is not necessarily a bad thing at all to have that moment of gratitude that a bankruptcy can give you a fresh start, and a promise to yourself to be more careful if life circumstances permit.
BUT many of us cannot buy reliable vehicles for cash only, and cannot buy habitable homes for cash only. Sadly, you must get back on the saddle.
After a bankruptcy filing, your old debts that were included in your bankruptcy should show a $0 balance and a note that the debt was included in your bankruptcy. Which is a good thing. But if you use no credit whatsoever, even if you are 3 years or 5 years out of your bankruptcy, your credit-worthiness and score will not be as good as you’d think. Your prospective lenders can’t judge you if you don’t get back in the game. If you have one credit card only for emergencies, you’d think that would be good enough, but it usually isn’t. To those lenders, you only have one credit item and they can’t tell if you are a good consumer.
There are many reputable sources out there that can tell you what you can and should do (for example myfico.com). It’s not a bad idea to put your monthly necessities on a credit card BUT pay off the balance in full each month.
Another strategy is to open a few credit cards but do not use any of the available credit. That way, it appears that you have credit and that you do not have to make use of it. There are so many counter intuitive ways in which your prospective lender is judging you. Squeaky clean credit with no entries is BAD. Several entries with good behavior – on time payments and unused available credit – is BEST.
A negative warning point – your income can be a much larger factor than any good credit behavior if you’re looking for a house loan or a car loan. If your income is too low, no amount of good credit report positioning can make you more credit-worthy. So make sure you are taking steps to increase your income too if you are planning to buy a house.
On a positive note – your credit health can’t be worse post-bankruptcy than what it was a few moments before you filed. Immediately after your bankruptcy discharge, you are one of very few consumers out there with $0 in debt. If you were a lender, who would you prefer – the you before filing, or the you after filing? The answer is clear. So chin up, you will recover from this, and remember, you have to play the game to bump up your credit score.
By Karen Maxcy, W M Law Attorney
