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How to Rebuild Credit After Being Released From Prison

Dec. 8, 2015
Credit Card Basics, Credit Cards
How to Rebuild Credit After Being Released From Prison
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Perhaps you’re among the estimated 650,000 people who are released from prison each year in the United States, according to the Department of Justice. Or you might soon be granted early release after prison reforms changed the sentencing guidelines for drug-related crimes. Maybe one of your family members will be released soon, and you’re looking for ways to help him or her adjust.

Re-entering society after incarceration can be challenging for the individuals themselves, their families and their communities. One of the biggest difficulties is the financial burden on former prisoners and their families after months or years of confinement. Debts carried over from life before prison, legal fees during incarceration, and the need to find a new job after release can all make it hard to get back on track.

Your credit history, in particular, might have suffered while you were in confinement. But you can strengthen your finances, manage debt and rebuild your credit by following these steps.

1. Make a budget

The first thing Tony Leahy recommends when he speaks to former prisoners about finances is to approach specific problems as part of a money management plan. He’s the director of the nonprofit Consumer Education and Training Services (CENTS) in Seattle, an organization that offers classes in money management for people re-entering society.

“If you follow the principles of money management, your credit’s going to automatically improve,” Leahy says.

That means making a budget and sticking to it, so you’re not spending more money than you have coming in every month. Being able to meet your financial obligations will improve your credit score, since on-time payment of all your bills is a good way to strengthen your score.

2. Assess your debt

Anyone can accumulate debt, whether it’s credit card debt, overdue child support, student loans or mortgages. But people leaving prison sometimes face another debt burden: their share of the legal fees they incurred before, during and after incarceration.

Whatever your debts may be, Leahy recommends making a complete list of what you owe and approaching creditors to make a payment plan if necessary.

For example, Leahy says, some child support payments might be based on a higher-paying job you had before incarceration. If you don’t take the time to get it adjusted to fit your new circumstances, you could find yourself chased by a collection agency, and your credit score could suffer as a result.

“Try to make a payment plan with the court rather than avoiding the issue,” Leahy says.

The budget and spending plan will also help you make your case for lowering your payments, he says. He recommends you pull your credit report to see if there are any surprises. You can get your report for free from each of the three reporting bureaus once a year.

3. Find help

If you were confined for many years, some of your debts might have gone stale. That means the lender is no longer legally allowed to collect the debt from you. Leahy recommends finding a local legal aid clinic with an experienced creditor attorney who can help you figure out which debts you still owe.

It could be hard to contemplate simply not paying a debt, but Leahy says many former prisoners can’t afford to pay those that have gone stale.

“If they have limited financial resources, they should use those to get by, pay for food and shelter rather than paying off stale debt,” Leahy says.

Leahy cautions that this approach can damage your credit, but a good attorney can advise you.

In extreme cases, declaring bankruptcy might even be an option.

“Sometimes someone’s financial situation is in such a vulnerable position that filing for bankruptcy can actually help their financial situation,” Leahy says. He recommends talking to a bankruptcy attorney before taking this step. He or she can advise you about which of your debts can be wiped out by filing for bankruptcy (not all debts can be eliminated) and whether you can keep any assets during the process.

4. Rebuild your credit

Once you’ve inventoried your debt and created a budget, you can start to rebuild your credit. Paying at least the minimum on time for each creditor is crucial, but you can also improve your credit by reducing your overall debt. Time will also help — the longer your positive credit history is, the better your credit score will be.

If you haven’t had a credit card for some time, it can be hard to qualify for a new one. A couple of strategies will help you get back to being able to qualify for a card:

Become an authorized user

If you have a spouse, a parent or another trusted relative with good credit, consider being added to one of their credit card accounts as an authorized user. You’ll get your own card with your name on it, but the primary account holder will still ultimately be responsible for paying the bills. This won’t have a huge impact on your credit score, but it could help a little.

But be careful: If you’re added as an authorized user and the primary account holder doesn’t pay the bills on time, your score could be damaged.

Not all credit card issuers report authorized users to the credit bureaus. See a full list of those that do report here.

Start with a secured credit card

A secured credit card requires that you put down a deposit, which the credit card issuer holds as collateral. Usually, your credit limit will be equal to the deposit, so if you put down $300 your credit limit is also $300.

Not all secured cards are created equal. Some come with very high fees, and a few don’t report to the credit bureaus, which means your credit score won’t improve as a result of your good behavior with the secured card. For recommendations, see NerdWallet’s list of the best secured credit cards.

Another word of caution: Prepaid debit cards can also be useful if your credit score is too low to qualify for a credit card. But unlike secured credit cards, prepaid debit cards do not report to the credit bureaus, so they won’t help you improve your credit history.

The bottom line

You’ll still face many challenges as you rebuild your life after leaving prison. By facing your debts and other financial challenges, you can begin to rebuild your credit and bank accounts, and enjoy the good things life after incarceration has to offer.

Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @vcmcguire.

Image via iStock.