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Credit card activity and debt are major contributors to your credit score. If you’re rebuilding your credit score after bankruptcy, it pays to know how your score is calculated and how your decisions about your credit cards can affect your score for the better or worse.
#1 Opening a Secured Credit Card After Bankruptcy
When you file bankruptcy and get a discharge, much of your unsecured debt should be eliminated. Because your credit card accounts were closed as a result of the bankruptcy, you’re at ground zero with a lower credit score. But bear in mind, if you were maxed out and making late payments, your score was already in trouble.
Opening a secured credit card account is often the first step toward rebuilding credit after bankruptcy. The initial inquiry will drop your score slightly as will opening a new account. However, if you use the card responsibly, keep your balance low or pay off in full each month, your score should increase over time, so it can be a good thing.
#2 Closing an Older Credit Card Account
When you first start rebuilding your credit after bankruptcy, a secured card is usually the starting point but these can come with annual fees and higher interest rates. Once you have an unsecured credit card, you might be tempted to close your other secured account, but you should think twice before you do so because it could lower your score.
First, closing it will lower your average age of credit, which can hurt. Second, closing it will reduce the total credit limits you have, which can also ding your score. Third, if you’re carrying any credit card debt, closing it can greatly increase your utilization (the amount you owe vs. credit lines), which can hammer your score. It may be better to keep it open and use it sparingly so it stays active.
#3 Missing Payments or Paying Less Than Minimums
Ideally, paying off your credit cards in full each month is the best way to keep your debt under control. However, if you must carry a balance due to an unexpected expense, vacation, home or car repair, etc., the next best thing is to pay it off as soon as possible and never miss a payment. Each time you miss a payment, your credit score will drop.
Also, if you pay less than the minimum, your credit score will take a hit. Make sure you pay on time and always pay more than the minimum, even if it’s only by a few dollars. A maxed out card will hurt your score as will late or missed payments or paying too little. If you’ve struggled with credit card debt in the past, avoidance may be your best plan for the future.
#4 Opening a New Unsecured Credit Card
If your credit score is heading in the right direction, you might wonder how opening a new unsecured credit card account will affect it. A hard inquiry from the card issuer will initially lower your credit score, as will opening a new account the first month or so it’s on your credit report. But, overall, if managed wisely, a new account could help your score.
An increase in available credit lines can boost your score and the impact of your hard inquiry on your credit report won’t last too long. A new account, used sparingly and paid off each month, should increase your credit score more and more each month if nothing else negative shows up on your credit report.
If you’re just coming out of bankruptcy, now is the time to work on improving your credit score. That’s where Credit Score Keys can help. Contact us today for a free consultation on rebuilding your credit score after bankruptcy. Call 919-495-2365 today to talk about your credit.