Reader Question: How Can I Rebuild My Credit After Bankruptcy?

Bouncing back after bankruptcy is tough. And seems especially tough if your bankruptcy is the result of medical bills that were out of your control. One such reader has this question about improving his credit after bankruptcy:

I went through Cancer, and had to declare bankruptcy because of over 500,000 in debt. Now 2 years have gone by and my credit is still crap.

This is a frustrating situation, especially since most of the debt was acquired through no fault of your own. Unfortunately, it can take 3 or 4 years or more to get the best rates on loans. But there is some good news. You can start improving your credit now, overcoming your bankruptcy (which will remain on your credit report for 7-10 years), and get some reasonably good rates in the relatively near future. Sadly, you may have to wait another 12 to 18 months before you can buy a home. Rarely -- especially in this climate -- is it possible to buy a home 2 years after a bankruptcy. But you might talk to a mortgage lender just to see what your options are.

Here are some things you can do to help improve your credit score after bankruptcy:

1. Check your credit report. In many cases, your credit accounts may still show up "open" or even "overdue" when they are not. Check your credit report from all three credit bureaus (try www.annualcreditreport.com for one free copy of each credit report per year), and make sure that the accounts wiped out as part of your bankruptcy are listed as "included in bankruptcy." Otherwise they will continue to drag down your score. Also look for other mistakes on your credit report and have them corrected.
2. Get some credit. You need to use credit to build your credit score. This doesn't mean you go crazy and max out a couple of credit cards. It means you create a plan to get some sort of credit -- installment loan or credit card -- in a low amount so that you can make regular, on time payments. Chances are that you will only be able to get a low credit line of around $200 to $800. Charge no more than 30% of your credit limit, and make consistent payments. Carrying a balance is not necessary (and I discourage it). If you choose to get a secured credit card, make sure that the issuer reports to the credit bureaus and that you can upgrade to an unsecured card after a year or year and a half.
3. Get professional financial help. You can get help from a fee-based certified financial planner. A financial planner costs some money, but he or she can help you map out a plan that will not only help you improve your credit score, but can also help you create a long-term financial plan that will help you reach your goals.

Another thing to consider if you are trying to buy a home is that some mortgage lenders will take into account your situation. You can usually write a letter of explanation to supplement your application, explaining that you filed bankruptcy due to cancer-related medical bills. However, in this climate, you will need a fairly substantial down payment, low current debt, and an adequate and verifiable income in order to be approved for a home mortgage loan.