Before we get into the method itself, let’s talk a little about why it works.
This "credit after bankruptcy" strategy works because of a special aspect of the credit scoring system known as "scorecards".
In credit scoring, a "score card" categorizes and scores consumers based on their credit performance compared to others in their same category. It’s kind of like the credit world’s equivalent of "grading on a curve", but this "grading curve" can hurt you just as much as it can help you.
Both FICO and the newer Vantage score use scorecards, so the general discussion here should apply to both.
A scorecard might, for example, look at patterns for consumers who have filed bankruptcy. Statistics might show that if a consumer has late payments within a few months of bankruptcy, they are highly likely to have even worse credit problems in the future. Statistics might also show that consumers who keep their credit clean after bankruptcy for at least a year or two are much less likely to default on loans.
This means that consumers on the bankruptcy scorecard who have late payments popping up within a year or two of their bankruptcy will likely see their score drop even more and will have an extremely difficult time bringing it up from there.
Why? Because it looks like they haven’t learned their lesson, and they’re continuing with their old ways.
On the other hand, a consumer who takes good care of their credit and starts building a positive payment history after their BK could see a seemingly disproportionate jump in their credit score.
What does this mean for your efforts to rebuild credit after bankruptcy?
We’ll cover that now.
The #1 most important rule that you absolutely must follow after your bankruptcy is to keep your credit SQUEAKY CLEAN.
Seriously, you cannot allow yourself a single slip up.
If you do, the scorecard effect is going to work against you and your score will suffer more and for a longer period of time than it would otherwise.
The next thing that you have to do is to make sure any negative items on your credit report that were included in the bankruptcy are being reported as such.
Again, because of the scorecard effect, these incorrectly reported negative items can wreak havoc on your credit score.
The third and final thing to do is to start the process of rebuilding credit after bankruptcy by opening up new positive primary credit accounts and building a positive payment history.
The best place to start is probably with secured credit cards, sub-prime credit cards or merchandise cards (or all three), and then slowly build your credit score by building up balances and paying them off over time. This will build new payment history which is very important after a bankruptcy.
Again, the scorecard effect will come into play here and as long as you’ve kept your credit clean, it’s highly possible you’ll see a good jump in your credit score in a relatively short amount of time.
Also remember that while these credit building tools might not seem too great in and of themselves, they are a stepping stone to better forms of credit that you will soon get offers for and qualify for if you stick to this plan.
It might sound like it would take a lot of time but if you are proactive and start immediately after discharge, you can actually see your credit score reach the "good" range in as little as a year or two after your bankruptcy.