Rebuilding Credit After a Fall

After hitting rock bottom with your finances, it’s easy to abandon all hope of recovering a healthy credit score. Don’t despair – you can improve it. Follow these tips to rebuild your credit after a financial disaster like entering bankruptcy.

Bankruptcy’s effects on credit scores
A credit score is one of the most important grades that you get in life. It affects your eligibility for car and home loans, and can even affect job opportunities. If you bomb a test in school, your overall grade for the class does not automatically fall to an F. Credit works the same way; one bad mark doesn’t mean you can’t improve the score.

If you seek court protection, you’ll either file a Chapter 7 or a Chapter 13 bankruptcy petition. A Chapter 7 process, or liquidation, wipes out most debts in full and stains your credit report for a decade. A Chapter 13 filing lets you keep your property, but requires modified payments for three to five years on debts and stays on your record for seven years.

Five ways to boost your credit
A credit score rates your riskiness as a borrower based on several factors. It reflects your actions, for better or worse. While your rating might take a hit immediately after a bankruptcy, you can improve your score with these five steps:

1. Build credit with a card
Apply for a secured credit card, which requires putting money up front in a savings account to back any charges you make. The amount usually acts as your credit limit.

2. Pay on time
The best way to improve your credit is to consistently make at least the minimum payments on any debts – credit cards, loans, mortgages – on time. After establishing and maintaining a good track record for six to nine months, you may see a few extra points added to your score.

3. Stay under the limit
Use less than 30% of your credit limit. Maxing out a card or coming close to the limit you can use makes creditors worry that you are in a financial bind.

4. Keep accounts open
Keeping your card and other revolving accounts open adds to the age of your credit lines, which can help demonstrate financial maturity to the ratings bureaus. But don’t open too many new accounts in quick succession, as that can suggest you’re running into financial difficulties and lower your score.

5. Diversify credit
Different types of credit, such as installment loans including monthly car payments and revolving credit such as a card, can boost your score.

Remember to check your credit scores annually to ensure there are no mistakes tanking your risk rating. You are entitled to one free report from each reporting bureau – TransUnion, Equifax and Experian – once a year.

Finally, don’t overlook your lender. Financial institutions like Harris County Federal Credit Union often provide ways to help members improve poor credit histories or overcome difficulties.

Cait Klein, NerdWallet