Card tips for rebuilding credit after bankruptcy


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I filed bankruptcy Chapter 7 almost two years ago. I'm 29 years old. I got all my debt wiped clean and started over. I got a bank account with a checking, savings and a secured card. After that I saved money, used my card for everything and paid 100 percent on time. Flawless.

About a year ago, I got two more credit cards, both equaling around $8,000 in credit. Both have crazy high interest rates of 25 percent and high penalties. My credit scores are TransUnion 691 and Equifax 701 because of my outstanding on-time payments and credit card utilization. Payments are 100 percent on time and I used only 10 percent credit utilization. So I'm looking extremely good on my credit report.

My question is: Should I cancel both cards with high limits and rates and apply for ones with better interest like 0 percent for one year with one high credit line like $10,000 instead of two cards equaling $8,000? Or do I just keep doing what I have been doing? I want better interest rates and higher credit lines. What's your advice? I want to buy a home soon. -- Jon


Dear Jon,
So your goal is to qualify for a great mortgage deal, but have had some credit problems in the relatively recent past. Since the bankruptcy, you've cleaned up your act and today are pretty darned awesome. What can you do now -- especially with your credit cards -- to beguile a bank for a home loan?

It really isn't as complicated as you're making it out to be. FICO scores beginning in the mid-700s to the top of 850 will put you in the lead for a mortgage with favorable terms. You're shy of those numbers at this point, but you'll get there by sticking with the accounts you have and by maintaining your new and improved money management habits.

Your perfect payment pattern is really working for you, as it's the weightiest FICO scoring factor. Second to that is credit utilization, and you're doing a bang-up job with that. too. The less you owe in relation to the amount you can contractually borrow is important. A revolving a balance less than 10 percent of the credit limit will help your scores rise. Still, owing nothing from month to month is preferable, as you'll pay nothing in finance fees. This is especially pertinent for you, because the APRs are indeed high. Never pay more when avoidable.

As for the "high penalties," I presume you're referring to late and over-limit fees. All cardholders can prevent them by sending payments before the due date and not charging more than the creditor allows. Simply put, it doesn't matter what the punitive fees are when you won't be hit with them anyway.

An interesting question is whether you should swap the two cards you have now and exchange them for a single card with a better interest rate and equivalent credit limit. I say no, because at this stage there is no good reason. You'll have the same borrowing power, so that's a horizontal move. Lower APRs are nice, but only when you'll be carrying over debt and repaying a balance in installments, which is not recommended.

If you really want to reduce the APR, ask if it will lower the rate for you. Though the bankruptcy is still on your record, it's losing negative steam because it's nearing the two-year mark. I don't see a reason why you would  be denied at least a small rate concession, unless of course these are retail cards, which typically carry higher-than-normal APRs. You can always add new cards to the mix later, but keep your current cards active. It will help with length of credit history, the third most important scoring factor.

Finally, know that decent credit scores aren't the only criteria a mortgage lender will require. You'll also need cash. Putting 20 percent down is standard, so if you haven't started to save aggressively, power it up. Your income and assets will be assessed, too, and the more you earn and own, the more wonderful you will appear. Which of course you already are, but this way you can prove it.

See related: Tips to boost credit score enough to qualify for a mortgage, Poll: Asking for a better credit card rate pays off 

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Published: September 30, 2015

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Updated: 10-23-2016

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