The Debt Doctor’s Guide to Rebuilding your Credit

By Victoria Wright, J.D.


Don’t use outside help to rebuild & improve your credit. You can do it yourself and you’ll do a better job for yourself than a stranger would do for you. Both as a bankruptcy lawyer who’s helped thousands of clients and also as an accredited credit counselor, I know that it’s not difficult to rebuild credit. Avoid any company or person who claims expertise and wants to “fix” your credit for you! Anyone can improve their own credit for free– all it takes is a little knowledge, effort and patience. This article offers the 8 knowledge points you’ll need.

Don’t Use Credit if you Can Avoid It

If you’ve been through financial problems and are trying to rebuild, this article will provide 7 keys to success and help you avoid the pitfalls. Before you get going, consider why credit is important to you and what you really need credit to accomplish.  Avoid using credit for any purchase that you can either postpone or for which you can save and pay cash.

“Save Your Credit, You Won’t Regret It” is an easy rhyme to remind us that we should save credit for things we really need and that will help us achieve our financial or personal goals. So using credit for a vacation or clothes is a bad idea when we may need it to purchase a vehicle.

Here are 8 simple must-dos for rebuilding your credit.

 1. Don’t Assume Bankruptcy Fixed Your Credit Reports

Bankruptcy lawyers are not responsible for fixing your credit reports, you are! In a perfect world, your bankruptcy filing would show up under all of your debts (called “trade lines” in credit report lingo), but in reality, most credit reports contain some errors. Any debts that you discharged in bankruptcy should show a zero balance. If they don’t, see step 2 below, and take action!

 2. Fix Your Credit Reports

Your credit score is based on your credit reports, so fixing your reports is the first step to improving your score. The big 3 Credit Reporting Agencies (CRAs), also known as “credit bureaus” are Equifax, Experian and TransUnion. The first step in rebuilding your credit is to obtain all 3 of your reports from and correct any errors in your reports. BEWARE: the AnnualCreditReport site is the only site that offers free credit reports—all those sites with “free” in their names are not free, they make you buy totally unnecessary monthly services in order to get anything “free”—they offer nothing that is truly free!

When you get your 3 reports, you must correct errors in writing. The best way is to do it by certified mail, return receipt requested. Send copies, never your originals. Most negative items are supposed to drop off your credit report after 7 years but sometimes outdated items have to be brought to the CRA’s attention to be removed.

 3. Don’t Revive Old “Zombie Debts”—Knowingly or Unknowingly!

Every debt has a statute of limitations that’s like an expiration date. After the statute of limitations runs out, the debt can no longer be legally enforced. This doesn’t mean that the debt no longer exists, it just means that you have a complete defense to any law suit to collect the debt. But every day, debt collectors use guilt (and often illegal threats) to collect old, expired debts. BEWARE! One small payment on an expired debt will re-set the clock on the statute of limitations back to the beginning and make the old debt legally enforceable again! Statutes of limitations differ by state and by the type of debt but typically range from 3 to 10 years.

If you can afford it and you want to pay an old debt, don’t do so by making payments to a debt collector. Instead, save up a lump sum equal to 25-50% of the debt and offer to settle the entire debt for that amount. Before you send money, be sure to get everything in writing, including that the debt will be reported with a zero balance and that it will not be resold to another debt buyer. The terms of debt settlements are very strictly enforced so be sure your payment arrives at least one day before the date it is due under the settlement. You may owe taxes on the amount of debt that is forgiven in the settlement unless IRS Form 982 applies. NEVER use any “debt settlement” business; they will do you more harm than good. Debt settlement companies simply charge high fees to hold you money until they accumulate enough to make a settlement offer. In the meantime, you creditors continue to make negative reports about you and may sue you to get judgments against you.

 4. Make a Budget, Balance it and Track Spending.

In order to build credit you must have some credit, which is addressed next. But if you don’t trust yourself with credit, that’s an issue that needs to be solved first.

Remember that a spending plan must:

  • Be written and accurate. There are 4.33 weeks per month, not 4!
  • Include savings. You should have line items for your goal savings, periodic expenses and emergency savings (unless you already have a large emergency fund).
  • Be worked. Track your actual spending and compare it to your spending plan each month! If you don’t take this step to “work your plan” you may as well forget it.

 5. Do Have Some Credit.

Without some credit accounts, you will not have the “trade lines” necessary to build a traditional credit report with the big 3 CRAs. But having credit does not mean you have to carry a balance. As a form of payment, credit cards have protections that debit cards do not. If you pay your credit card balances in full and on time each month, you will be building good credit. You may also use credit cards to track spending in certain areas such as groceries and fuel. But beware of carrying a balance—the interest is costly and credit card balances can lead you back into debt trouble quickly.

 6. Avoid New Debt Unless It’s Truly Necessary

A replacement vehicle or more education may be necessary but seek to borrow the least amount you can to serve your true need as opposed to your “wants.” Credit is different from debt. If you pay in full each month, you have credit without debt. With credit cards, never fall victim to the minimum payment trap; paying only the minimum, you’ll usually pay back more than the amount you charged in the first place! And paying the minimum can keep you in debt for years, sometimes decades.

 7. Don’t assume you have to settle

One of the worst mistakes my former bankruptcy clients tended to make is to assume that they won’t be able to get “good credit” because they have bankruptcy on their credit reports. It’s true that a bankruptcy notation will require you to shop harder and longer in order to get decent terms, but if you have balanced your budget after bankruptcy (see # 4 above), you can get decent credit.

Some of the things that will help you get decent credit terms are:

  • Apply to smaller, more local lenders. If you are not a credit union member, try to join one. Then make an effort to get acquainted with the employees of your local branch. You’re less likely to be a number and your unique situation is more likely to be considered.
  • Be able to tell your story. Why you had financial trouble can be important. If circumstances largely beyond your control (job loss, illness, etc.) led to your bankruptcy or other financial issues, tell that story honestly and forthrightly.
  • Be able to show how your circumstances have changed. After bankruptcy, many people are far more able to afford a loan payment than when they were overburdened with debt. If your current income is stable, be able to show your current spending plan (budget) and how the loan you’re asking for would fit comfortably into that budget.
  • Save as much of a down payment as possible.

8. Don’t look back.

Don’t beat yourself up or waste energy with regret— keep a positive outlook and actively learn more—always checking your sources for bias and knowledge.