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Ask Dave

How Do I Rebuild My Credit After Bankruptcy?

Rick filed bankruptcy in 2004 and cleared it five years later. He'd like to rebuild his credit. What's the best way to do that?

QUESTION: Rick in New York City filed bankruptcy in 2004 and cleared it five years later. He’d like to rebuild his credit. What’s the best way to do that?

ANSWER: I’m going to give you a different answer than you are probably used to hearing because I determined many years ago that the shortest path to building wealth is not debt. It’s the opposite of debt. Not getting into debt causes more people to become wealthy more often than getting into debt.

Once I discovered that and really settled that in with all my formal financial training, I still decided that it’s a really good idea to not worry about going into debt. As a matter of fact, worry enough about it to not do it. On that basis, I’d tell you that when you got turned down for the credit card, I’d call that a blessing.

I’ve met thousands of millionaires, and I never met one that said they made it all with their Discover points. We’ve been taught by the financial community, primarily the banking community, to worship at the altar of the great FICO. My goal would be for you to close as many debt accounts as you can close after paying them off.

You’ve been out of the Chapter 13 bankruptcy close to five years. It will stay on your credit bureau report for only seven years, but it’s seven years from the closing of the bankruptcy, not the filing. Seven years from that date, which is probably only about two years for you, it will completely go off of your credit bureau report, which is good news.

I would have a weird goal for you, and that is to have nothing on your credit bureau report in seven years to not give you a score. That’s because 100% of the calculation of the FICO score is based on your interaction with debt. The only way you can have a FICO score is to go in debt and pay debt. The score is not an indication of winning with money, it’s only an indication that you borrowed money and are paying it back. I could give you $10 million, and it wouldn’t change your FICO score one point.

That’s a weird answer for you, but the only thing I want you to concentrate on the FICO score for is to get rid of it. You can buy a house, by the way, without a FICO score. Go to a mortgage company that does manual underwriting, where they do it the old-fashioned way and make sure you have a job. They are not counting on one number to make a determination on whether to get a mortgage or not.

Past that, save up and pay cash for your cars like your grandmother did. If you are going to buy something at the store, they take a debit card. I haven’t had any credit cards in decades. I have just a couple of pieces of plastic in my pocket—a debit card on my business and one on my personal account, my driver’s license and my handgun permit.

Cash and debit cards take me anywhere I want to go. I have traveled the world and travel about every other week. I stay in hotels and take my wife to nice restaurants and we have a nice life, but we pay for it. Just like you, Rick, I went bankrupt many years ago, and I had to stop and think about what caused this mess. What I figured out was debt caused this mess. I just decided I wasn’t going to be slave to anyone anymore.

I know people think I’m a wacko and I’m just fine with that. But I’m a very rich wacko because this stuff works.