Which Bills Help you Rebuild Your Credit?

Dear Bankruptcy Adviser, Is taking out a cellphone contract a good way to rebuild your credit after bankruptcy? -- Chris

Dear Chris, Re-establishing credit after bankruptcy is essential. You want to show future creditors that although you filed bankruptcy, you learned from your mistakes and are now a trustworthy credit user.

In other columns, I have discussed many good ways to re-establish credit with reputable lenders -- lenders that would appear on your credit report and show future lenders that you are working with solid, well-established companies. For example, working with a bank is better than a finance company, even if the bank terms are less favorable.

That being said, there are many credit accounts that do not help but can only hurt your recovery from bankruptcy. Your cellphone account is one of them. It can only be a hindrance to re-establishing credit. Cellphone companies only report delinquent accounts to the credit bureaus.

There are quite a few bills, such as your cellphone, in which your credit is hurt for failing to pay but not helped for being a loyal customer. The initial account will not report to the credit bureaus, but the subsequent collection account will be reported.

Medical bills: Your monthly payment to a doctor or hospital will not be reported, but failing to pay will result in the bill being sent to a collection agency. That agency may report the account to your credit bureaus. Some, albeit only a few, hospitals will assign the bill to a collection agency but advise the agency not to report the bill to your credit report. The collection agency will attempt to collect the debt but not create a negative mark on your credit report.

Bills that don't help build your credit

Federal and state tax liens
Rent
Car insurance

Cellphone bills
Medical bills
Utility bills

Utility bills: These accounts are similar to medical bills. Your account will go to collections for not paying but receive no credit score boost for your monthly payments.

Federal and state tax liens: The government will report a tax lien to the credit bureaus but will not report a monthly payment plan. You will have to pay off the lien before it is reported as "satisfied."

Rent: You have to be very careful with rent because many landlords are individuals who will sue you immediately, usually in small claims court, for unpaid rent. And they will sell the account to a collection agency that will report the delinquent account. Even worse, the filing of an unlawful detainer can be reported to the credit bureaus. This would make renting another place difficult or impossible.

Car insurance: I am not exactly sure why a car insurance company would report a delinquent balance, since I always thought that if you failed to pay your premium, you merely don't have coverage. But I have included this bill in many bankruptcy schedules.

There are a few other miscellaneous creditors that report bad but not positive credit behavior: delinquent gym memberships, magazine subscriptions and CD/DVD clubs.

There are more and more companies willing to give people a second chance after bankruptcy. While the terms might not be very good, you have to start somewhere. After a few years with a good post-bankruptcy credit history, you will once again be a highly valued credit user.

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