This post originally appeared October 15, 2015 on CreditCards.com as “Getting a credit card after bankruptcy can help credit score“
By Barry Paperno
Dear Speaking of Credit,
My husband and I recently had to file for bankruptcy due to loss of income. If that’s not painful enough, we have this looming bad credit over our heads. We filed in January of 2015 and have been making monthly payments. I recently was approved for credit card with a low balance. Will getting credit during my bankruptcy help in establishing good credit once again? Thanks! — Lisa
Actually, yes, adding positive credit to a less-than-stellar credit report happens to be a very good way to start raising your FICO score beyond what simply the passage of time will heal.
Though not considered an absolute must for rebuilding credit, opening new accounts shortly after filing for bankruptcy can help speed up the credit rebuilding timeline. When in rebuilding mode, new accounts can help add points to your score.
The scoring forces at work when a new account appears on your credit report mostly lie within three big scoring categories that together make up about 80 percent of your score — payment history (35 percent), credit utilization (30 percent) and length of credit history (15 percent). Essentially, a post-bankruptcy new account opening can:
- Increase your proportion of good (never late) to bad (included in bankruptcy) accounts, something the score likes to see.
- Reduce or minimize your combined credit utilization (card balance/limit) percentage as long as the new card balance is kept low.
- Establish some long-term credit that will continue to contribute positively to your score long after your “baddies” have automatically fallen off your credit report upon reaching the seven-year retention mark for negative information.
While your new low limit card is one good way of reaping some scoring benefits, you and your husband may be able to add some additional points by including each other as authorized users on any good cards — paid on time, low utilization — that either of you hold as the only user.
A third option for proactively adding some positives to the negatives in your credit report is the credit-builder loan. These loans tend to be of the secured and unsecured variety, and are typically issued by credit unions and some banks for relatively small amounts — $500 to $1,500. Not only could opening a credit-builder loan provide most, if not all, of the same scoring benefits as a credit card, but, if cards now make up all of your good open accounts, a new loan could add some additional points through the “credit mix” scoring category (10 percent) that rewards you for having multiple types of open credit — not just cards or loans exclusively.
You don’t have to stop at just one new account. Feel free to open more than one card or loan, as the number of scoring points can rise with an increase in the number of good accounts. However, only add new accounts in moderation, as lenders evaluating credit applications frown on too many recent inquiries that indicate you’ve been applying for credit. Plan on opening a new card or loan every six to 12 months if you’re looking for a strategy to follow.
But what about any scoring downsides from opening new accounts? After all, won’t opening a bunch of new accounts hurt your score?
As in all scoring scenarios, the effects of new account openings vary from one credit report to another. Generally, the slight scoring drops that can make new account openings something to avoid are more likely to be felt by higher scoring consumers, given the absence of other negative information to knock their scores down. When it comes to low-scorers, though, the scoring benefits listed above can far outweigh any potential negatives — particularly over the long run.
So, congratulations on what appears to be your first post-bankruptcy move toward faster credit rebuilding. You’re off to a good start!