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You know how some recent college graduates complain that they can't get a job because they don't have experience, and they can't get experience because they can't get a job? Sometimes, obtaining new credit works the same way. You can't build a record of creditworthiness until you have credit, and some lenders won't give you credit until you've established a good record.
When your post bankruptcy credit reports show a clean slate, you're halfway home — but only halfway. Now, you must establish a good payment record and ensure that your efforts are reflected on the credit reports. Creditors want to know that you're now good for your debts, and if you continue making payments on a prepetition debt, such as a house or car loan, you're off to a good start. Check out the following sections for other things you can do to start building a solid credit record.
Applying for an unsecured credit card
At the moment, obtaining an unsecured credit card (one not secured by the items you purchase or anything else) with a modest limit is pretty easy. Many lenders target people who have recently obtained bankruptcy discharges.
If you obtain an unsecured credit card, keep the purpose for your card firmly in mind, remembering that the objective is to show that you can responsibly handle debt. Use the card only for small items and make sure that you keep up with all the payments (actually you'd be wiser using the card only when cash won't do, like when renting a car or making hotel reservations.) And if you find yourself only making minimum payments, watch out! You may be drifting into financial trouble all over again.
 | Beware of catalog cards that enable you to charge items from particular merchants. For one thing, the company probably doesn't sell anything that you should ever consider buying at this point. For another, you can't be sure that the company actually reports your payment history to credit bureaus. So, whenever you use one of these cards, you may end up buying stuff you don't need without doing diddly-squat to improve your credit rating. |
Settling for secured credit
If you can't get an unsecured credit card, you may be able to obtain some form of secured credit.
Local banks or credit unions may give you a small loan if you agree to maintain a specific balance in an account, which they of course promptly seize if you don't pay. If you go this route, however, make sure that the lender reports your good payment history to the credit bureaus.
You may also be able to get a secured credit card. Some credit-card issuers guarantee you a credit card as long as you keep enough money on deposit to pay off the account. If, for example, you have a $300 line of credit, you need to keep $300 on deposit.
Again, be certain that the issuing bank reports your diligence to the credit bureaus. Otherwise, what's the point?
 | Likewise, don't confuse secured credit cards with debit cards that allow only immediate deductions from your bank account. Because you don't borrow money with a debit card, nothing about your creditworthiness can be reported to credit bureaus. |
 | Shopping around for a lender who won't flag the card as secured when reporting to the credit bureaus is another good idea. Similarly, you may want to look for a lender who's willing to convert the secured card to an unsecured card after a record of timely payments is established. |
Several online outfits provide comparisons between secured cards and instructions for obtaining one. Keep in mind that because these companies are heavily dependent on cooperation from the credit-card industry, they provide a wealth of useful information about credit. Check out:
- CreditComm Services LLC. CreditComm, many agree, is the best. In addition to their Web site, CreditComm can be reached by calling 800-777-9700. Or, you can write to: CreditComm Services LLC, 10400, Eaton Place, Suite 400, Fairfax, VA 22030.
| You may also want to consider buying a used car from one of those we-don't-turn-anyone-down-for-financing outfits. But be really careful. Don't let them sell you a car that you can't afford, because you certainly won't accomplish your purpose that way. And, be prepared to pay sky-high interest rates on the loan. |
Informing credit bureaus of your good work when the creditor doesn't
If you're making payments to a creditor that doesn't report to the credit bureaus, you still can write the agencies yourself, asking them to include that information on your report. They're not obliged to comply and chances are good they won't but, nevertheless, asking is worthwhile. When you do, be sure to include the creditor's phone number and your account number so that the credit bureaus can verify the information. After you've established a good payment history, you also have the option of using the creditor as a credit reference. Just make sure beforehand that the creditor is willing to back you up.
Taking it easy when building new credit
Although building a credit history is important, begin slowly. If you go wild, applying for credit all over the place, your report probably is going to show that you tried to get credit and failed. That kind of report makes lenders nervous, and they begin thinking that you're headed toward trouble again or that they're missing some egregious problem.
| After you reestablish credit and (despite our warnings about the evils of plastic) want to start regularly using credit cards, shop around for the best deal. Many lenders entice you with ads for low interest rates but, after they've got your attention, come up with some cockamamie reason why you don't qualify and try to sell you on a higher one. Others offer low teaser rates, but then hike the interest after a short period of time or when you miss a payment. Some impose outrageous fees for late payments, sticking you with a $25 fine when you're a day late on a $5 payment. Late fees represent as much as one-third of the income of some credit-card issuers. |
The smartest move — other than avoiding credit cards altogether — is paying off the entire balance every month. That way, you never have to pay interest. Of course, credit-card companies aren't particularly fond of folks who pay their bills in full because they lose out on collecting a ton of interest; and some even have the nerve to cancel your account.
Watching out for credit-repair scams
Credit-repair companies can't do anything legitimate that you can't do for yourself. Some are shady, some are not, and you have to be on the lookout for scams. Run for cover whenever the company:
- Plans to sell your name to other lenders
- Boasts that it can remove truthful information from your credit reports
One common ploy that credit-repair hustlers use is repeatedly disputing negative but truthful information on your credit report, hoping that the credit bureau drops the ball, doesn't investigate the dispute and, as a result, has to delete the item. Credit bureaus are onto this game, and they don't like it. Even when your credit repairer succeeds in getting a legitimate item off your report, the chances are good that the credit bureau will look a little harder in the future and put it right back in.
| Creating a new credit identity by applying for and then using a new Social Security number to obtain a new credit file is another dumb trick. That obtaining a Social Security number for fraudulent purposes is illegal is a no-brainer. And yet, some credit-repair advisors advise you to go that route. If you do, you'll pay the consequences. The judge just isn't going to care that you took the advice of some bonehead credit-repair advisor. |
Sometimes, advisors suggest that you apply for credit using a Social Security number similar to but slightly different than your real number, hoping that the credit bureau won't match this fake number with an existing file but that it will create a new one. Taking this step is illegal and stupid.
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