Contributor Blog: How to Come Back From Bankruptcy
John Ulzheimer is a nationally recognized credit expert and contributor to On the Money. Learn more at Credit.comor JohnUlzheimer.com.
Q. All of my adult life I have had excellent credit. Recently related to a catastrophic illness my husband and myself had to declare bankruptcy. I would like to reestablish my credit and don't know how to start. I believe I will have to get a card with a low amount (credit limit) and with a high interest rate but don't have any idea how to go about doing this. Can you advise please, this is a very uncomfortable place to be. –-Carol
A: Hi Carol, I’m sorry to hear about your credit situation and even more sorry to hear about the medical situations. I hope you and your family are doing well.
Here’s the deal on rebuilding after you’ve filed for a bankruptcy: Believe it or not, it’s not as hard as some people think. My guess is that you filed for a chapter 7 bankruptcy and now you are basically debt free. There are some exceptions though as not all debts are dischargeable such as tax liens, some student loans, and family support obligations. Having said that, being debt free is a nice place to be and is considered by many to be the silver lining of a bankruptcy.
I’d start rebuilding very much as you contemplate. Get yourself a credit card that reports to all three credit reporting agencies. That way you get credit for your good credit management. You can figure this out by doing a little research. Credit.com allows you to sort credit cards by which credit bureaus they report to here.
Or you can simply call the credit card company and ask them which credit bureaus they report to. It’s not a big secret and they’re likely to tell you.
You are correct about not getting a very high credit limit and having to pay a higher interest rate but it doesn’t have to become a problem. A very common myth is that you have to get into debt in order to rebuild your credit. That’s not true. You can rebuild your credit simply by opening new accounts as long as they end up being reported to the credit bureaus. If you do choose to use a new credit card and get into debt then be sure you keep it to a minimum. Shoot for no more than 10% of your credit limit and you’ll be fine.
And always remember -- the interest rate only matters if you revolve a balance. I have 6 credit cards and have no clue what my rates are because I don’t carry a balance from month to month.
Please let me know if I can help further. --John U.
Q: I'm concerned about the potential liability of holding on to a bunch of old, one time use, 0 balance credit cards that show up on my credit report year after year. My impression is that these old cards will just have to linger on my credit report forever. I really want to close them down and get rid of them once and for all, but I heard this could hurt my FICO score. Is this true? --Debra
A: Hi Debra. Yes, it’s very true. You can lower your scores by closing old credit cards. Here’s the truth when it comes to having a lot of old unused cards…
You say that you are worried about liability. However, you have essentially no liability even if those cards get stolen, and used. So I wouldn’t spend a lot of time worrying about that. You can solve that potential problem by simply shredding the cards.
Next, lingering accounts seem to be of concern. Believe it or not, you actually WANT those cards to linger on your credit reports for as long as possible. They are helping your credit scores to remain strong and stable.
If you close any of those cards you will lower the total amount of available credit on your credit reports. And that will almost guarantee that the ratio of your balances-to-limits will increase, and lower your scores. You didn’t get into any more credit card debt and you didn’t really do anything wrong… but it can lower your scores nonetheless. And in the worst case scenario, it can lower your scores significantly.
I’d be very careful when closing accounts. It’s not and has never been a good “score improvement” strategy. Take care. --John U.