7 Steps to Better Credit

Deciding to declaring bankruptcy is a decision that affects not only your  personal finances but also your credit score. While your score may decrease after any financial hardship, there many practical and real life ways to improve your score, your personal financial plan and in general get back on a better financial path for yourself.

Of course, as anyone will tell you, before you start taking steps to fix your credit score, you need to understand what the score is and why it's so important to your financial future. 

Here is a brief explanation of how your credit works and the type of credit (credit cards, car loans, mortgage or rental agreements, student loans) the financial agency first looks at when evaluating your credit history.  This helps them to determine if it should lend to you. 

Many lenders use FICO scores as part of those decisions. If your FICO scores are in the mid-700s or above, that generally means you have good credit and it shouldn't be difficult for you to get approved.  Just know that every lender is different and you must also meet lender's other requirements.

How do I improve my credit score?

It is important that you understand what happens when you file a bankruptcy. It is best to ask your lawyer, tax preparer or even a financial advisor for specifics that might apply to your case. 

Know that a bankruptcy can remain on your credit report for up to 10 years, and there is a good chance your FICO score will be low until you have started rebuilding your credit. That's why you need to be smart with your second chance! You can take the following seven steps to start raising your scores and making good monkey choices

1. Review your credit report

The first step is knowing where you are starting from and where you need to go. You should  obtain a copy of your credit reports and make sure there are no errors or inconsistencies. It is common for debt to be miss categorized or not be completely cleared/marked as part of your bankruptcy.

You can try Credit.com's Free Credit Report Card for an overview of your credit standing and an explanation of how it's broken down, and you can request one free copy of your credit report per year from Equifax, Experian and TransUnion at AnnualCreditReport.c​om.

2. Pay bills on time

Your payment history makes up 35% of your credit score. One of the easiest ways to improve your score is to make sure you pay bills on time.

Tip: Set up reminders on your calendar to pay bills every month by the due date. Many banks and creditors offer services that allow you to set up your payments electronically so you don't forget. (Post continues below.)

3. Apply for credit . . . cautiously

If you didn't keep a major credit card account open during your bankruptcy, it's usually a  good idea to get one after your bankruptcy has been discharged. 

This is how you begin to rebuild your credit.  You might have to start with a secured card, which requires that you place a security deposit with the issuer. That's okay, the important thing to know is that it is a starting point for future recovery.

Once you get the card, it's perfectly fine to pay the bill off in full each month. You don't have to carry balances on your credit cards to build good credit.  You may also want to ask for a low limit so you can confidently know you can pay it off in full every single month.

4. Add a loan down the road

Once you have gone a year or two post-bankruptcy, consider getting a car loan or line of credit. This is your next step in showing you are making good money choices.

If it's a car loan, buy a vehicle that is affordable and that you can pay off successfully.  You do not want to go out an get the most expensive car on the lot.  Think like this:  Reasonable, Reliable and Realistic.  Those are the three R's you want when you get your vehicle.

You may receive a higher interest rate to start but that is okay.  Just shop around for the best rate, and keep in mind that once you have raised your credit scores, your next interest rate on a loan will likely be lower.  You can even contact your lender a year or so into your loan and ask for the rate to be lowered because you have successfully made 12 on time payments.

5. Beware of credit repair services

You may receive offers from credit repair services promising to help repair your credit. Not all of them are bad but you really need to make sure you investigate these services before you use them.

Their fees can be high and since you may already be in financial distress, you might want to look into taking control of this on your own. There are many ways you can rebuild your own financial future at no cost.

In this case, DIY is often best. You have control, you can learn and you can ask questions.

6. Know your limits

Again, once you begin re-establishing credit, it is crucial to know the limits on your credit cards and to keep your balances well below them. You may have a very low limit due to your credit history. That's OK. Use your cards sparingly and continue paying the bill on time.

7. Do not close accounts

You may think you're doing the right thing by closing lines of credit and swearing off all credit cards. That's not true.

This will do far more damage to your credit than you might think. Closing accounts reduces the amount of credit you have available to you. This leads to lower credit scores. It's best to keep the credit lines open and payment.  If you're tempted to spend, cut up the cards. 

The most important lesson to learn is to be patient. Getting to the point where bankruptcy occurred did not happen overnight. So don't expect that the road to improving your credit is going to do that.   Think smart, ask for advice from a professional and always think before you spend!