I have heard a lot of people talk about "re-establishing" their credit after getting themselves into a mound of trouble through debt. I just read an article saying the best way to re-establish your credit after a bankruptcy is to get a low-limit credit card, make small purchases, then pay it off early each month.I am sure it does help your FICO score, however, I have a problem with this advice for two reasons.
#1) Why should you care about increasing your FICO score anyway? All a FICO score is for is to allow you to borrow MORE money (even though that is the thing that got you in financial ruin in the first place.)
#2) This advice takes the "human" element out of the equation. If personal finance was 100% finance and 0% personal then my advice would be different, but it is inaccurate to say this.
When a person files for bankruptcy it is because they were so far in debt the could not get out of it. At this point isn't this something that that person should avoid rather than jump back into it?
I advise people to not be concerned with "re-establishing" their credit. There are steps that you can take that we talk about on this website that will enable you to eliminate debt completely from your life. The only thing that I consider "acceptable" debt is a home mortgage and getting a home mortgage is a different kind of beast when applying for it.
The lender is 100% concerned with probability of paying it back (not with FICO score). If they see your savings increase and you don't have any new entries on your credit report they will notice this (not just the FICO score). In fact, I don't know of any lenders out there who would even turn down somebody that drops a 20% down payment on their house.
Dave Ramsey says, "The definition of insanity is doing the same thing over and over and expecting different results." Getting back into what got you into a mess in the first place could be considered insane.
