Your post-bankruptcy game plan

Making the first steps back up the credit ladder

By Marianne Curphey

After years of struggling with overwhelming debt and creditors, bankruptcy can be a relief -- and a fresh start.

That fresh start, however, is rife with obstacles. Your troubled past will make it difficult to obtain credit cards and loans with good terms -- and rebuilding your credit without access to new credit can be a frustratingly slow process.

"There is no quick fix to rebuilding your credit rating," says Andrew Hagger, director of MoneyComms, the independent financial information site. "Rather it will be a long, steady process as you demonstrate that you can handle credit."

Here's how to make the first steps towards rebuilding your credit from scratch -- and towards making you worthy of new credit.

Try not to look desperate: If a credit card application is rejected, don't apply again -- at least not right away. credit-after-bankruptcy

"If you are not successful in making your first application, you should wait six to 12 months before trying again," Hagger says.

Each application you make leaves a footprint on the credit information held by credit reference agencies, which is used by banks and card companies and other lenders.

"If you make multiple applications you will look desperate," Hagger says.

Start small: Even if credit card providers say "No" when you apply for a credit card, there are other credit sources that will say "Yes." A number of catalogues (such as Grattan or Littlewoods) will allow you to open up a shopping account and make payments by cheque or debit on items over several weeks or months. Because the activity on your account will get reported to the credit rating agencies, you can use these catalogues to build a better credit rating.

"One way is to find something that you need to buy now and can afford to pay cash for, a pair of shoes, for example, or a replacement kettle, and to buy it from a catalogue which allows you to spread payments over 20 weeks," says Linda Isted, spokeswoman for the national debt charity Debt Advice Foundation.

Although spreading out payments will probably make the item slightly more expensive, making payments on time will prevent interest charges from piling up.

"You already have the cash, so the repayments will be affordable, and the credit arrangement will give you a first step back on the credit rating ladder," Isted says.

Another possible solution: If you already have a bank account, ask your bank for an overdraft agreement. An overdraft agreement allows you to go over your account balance in exchange for fees and interest charges. In other words, it's a type of credit agreement. If you leave that overdraft "headroom" untouched, your credit reports will show that you have available credit, which could boost your credit ratings.

While you'll often need good credit to qualify for an overdraft agreement, some banks will take into account the balance in your bank account, how regularly you deposit money and how close you are to a zero balance. If you keep a high balance and deposit your paycheques automatically into the account, it could make an overdraft agreement easier to obtain than a credit card.

Be sure to calculate the fees your bank charges for such an agreement. Some charge fees simply for setting one up. If the fees would drain your account, steer clear.

Be realistic: Having your credit card applications rejected will do nothing to help you. So, immediately after bankruptcy, you might need to re-set your expectations. A low-interest card or a rewards card may be out of your reach, some credit card companies will approve cards for discharged bankrupts, although the interest rates can be high.

For example, Vanquis Bank has a card designed for those with poor credit with an APR of 39.9% (and a credit limit between £150 and £1,000). Meanwhile, Aqua offers a line of cards designed for people who are trying to improve their credit. APRs range from 32.9% to 34.9%, depending on your personal circumstances.

While these terms may not be ideal, getting one of these cards is a great opportunity to demonstrate that you can handle credit.

"Use your card little and often and pay off the balance at the end of the month, if you can," Hagger says. That way you should not incur any high-interest charges.

Want something with a few extra perks? Isted recommends starting with the supermarket where you do most of your grocery shopping. Because of their high interest rates and limitations (you can use them only in certain stores or chains), store cards can be easier to get than regular bank credit cards. Yet they'll let you earn points and receive discount offers.
Set the record straight:  There's no way to keep a bankruptcy off your credit records. But if you got into financial difficulties due to divorce, bereavement, redundancy or another life crisis, you can write to the credit reference agencies (Experian, Equifax and CallCredit) detailing what happened and asking for  a note to be put on your file to explain the mitigating circumstances, says Hagger.

If there were mitigating circumstances behind your financial difficulties, this may improve your chances of being approved for a loan

Pay attention to small details: If you have moved recently, make sure that all your registered addresses are the same (check your driving licence, for example, and any bank accounts). Make sure you put your name and current address on the electoral roll -- it's how lenders verify your identity. If you're not on the roll (or if the address on your application differs from the one on the roll), you could get denied credit.

Avoid past mistakes: In the first months, or even years, after a bankruptcy, you'll need to adjust your attitude about credit cards. They are no longer a way to fund the lifestyle you can't afford, but a credit-building tool.

 "Don't think of a card as a source of credit," Isted says. "Pay it off in full, every month, by direct debit."

Work on managing your family's expectations as well.

"It is always stressful , and will be even more so after bankruptcy, but at least if everyone understands just how much, or how little, spare cash there is, it will make it easier to find ways to cut costs and allocate spending," Isted says.

See related: A guide to the bankruptcy process, Debt crash diet: Do you have the discipline for an IVA?

Published: 31 January 2013