Rebuilding Your Credit After Filing Bankruptcy
Rebuilding your credit is important, especially if you have recently filed for bankruptcy. You may have gone down a long and difficult road where your money was confusing; however, now is your second chance. The great news is that after bankruptcy, you can rebuild your credit but you have to pay careful attention to your finances.
If you have questions about bankruptcy or rebuilding credit, contact The Law Office of Denvil F. Crowe today. We have worked with many clients who are trying to rebuild their credit after bankruptcy. Call us today to learn more about how we can help you.
How Filing Bankruptcy Will Affect Your Credit Score
If you are considering bankruptcy, you probably have a low credit score already. However, your concern may be whether your credit score will go lower by filing bankruptcy. In actuality, the effect that bankruptcy will have on your credit score depends on several things.
If you have a lot of accounts with late payments and your debt-to-asset ratio is high prior to filing bankruptcy, then your credit score is likely already very low. Once you file bankruptcy, you eliminate the late payments and substantially decrease your debt-to-asset ratio. This will dramatically increase your credit score over time. Sometimes it increases your credit score immediately! (We have a report that we can give you right before filing your case that will estimate how much your credit score will increase.)
However, if you always make your payments on time but simply feel like you can’t keep making those payments, then your credit score could take a bigger hit. Even if this is the case, over time, your credit score can still be dramatically increased by filing bankruptcy and decreasing your total debt. As always, you need to consult with a bankruptcy attorney before filing bankruptcy so that you can understand your options and how bankruptcy will impact you specifically.
Bankruptcy Can Improve Your Credit Score Over Time
Bankruptcy can give you relief now and it can help you rebuild your credit over time. This can often times be accomplished in less than a year. Although the bankruptcy may appear on your credit report for 7 to 10 years, it does not mean you can’t borrow money for that entire time. For Example, in a Chapter 7 Bankruptcy, many are able to purchase a car within a few days of filing their case or get pre-approved credit card offers in the mail before they are even discharged.
Bankruptcy immediately reduces or eliminates the debts that you can’t afford to pay, and it eliminates the negative impact of late payments as well as other credit killers. So, while a bankruptcy could negatively impact your credit score, the overall impact of all the other negative items that bankruptcy fixes may be much greater.
Even though you can’t do much about the amount of time a bankruptcy stays on your credit report, you can take actions that will speed up the rate at which your credit score increases. A good bankruptcy attorney can help you understand exactly what impact a bankruptcy can have on your credit score.
Is My Credit Score Negatively Impacted by Filing Bankruptcy?
You have probably heard that filing bankruptcy, either Chapter 7 or Chapter 13, could negatively impact your credit score. Even though this can be true in some cases, remember that any negative effects that filing bankruptcy may have on your credit score do not have to last forever. If you take specific action with rebuilding your credit score in mind after you file a bankruptcy, your credit score can shoot up rather quickly.
Here are some ways to rebuild your credit score after filing bankruptcy:
- Annually check your credit report and dispute any errors
- Apply for a pre-paid credit card.
- Always pay ALL of your bills on time and create a budget.
- Only use a small portion of your available credit
#1: Annual Review of Your Credit Report
After you have completed your bankruptcy and received a discharge, you need to know precisely where you stand financially. The best way to determine this is by getting a copy of your credit report from all of the major credit reporting agencies, like Equifax, Experian and TransUnion. Most people don’t know, but you are entitled to a free copy of your credit report once a year. If there are inaccurate or inconsistent items in the reports regarding your debts or payments, you can and should dispute them. (Continue disputing those inaccurate items until they are removed from your credit reports)
#2: Start Using a Pre-Paid Credit Card
An extremely effective way to rebuild your credit score after filing for bankruptcy is obtain and start using a pre-paid card. With a pre-paid credit card, you would deposit cash that will cover the credit limit. If you want a credit card with a $500 spending limit, then you will deposit $500 to the card issuer as a “pre-paid” deposit. This offers the convenience of being able to pay with a plastic card and, if you make your payments on time, it can improve your credit score. It is vital that you choose a pre-paid card that reports to all three credit reporting agencies.
#3: Always Make All of Your Payments On Time
It is critical that you start making all your bill payments on-time after you have filed for bankruptcy. At least 35% of your credit score is your payment history (making on-time payments), so one of the easiest ways to rebuild your credit is to make all of your payments on-time. If you tend to pay your bills late, then create a monthly budget and stick to it. This is the time for bad financial habits to end. Sticking to a budget can even help you increase your savings. Request a free consultation with The Law Office of Denvil F. Crowe to find out more.
#4: Pay Off Your Balance Every Month
Some think that it is a good idea to keep a balance to improve your credit score, but that may not be true. The credit reporting agencies want to make sure that you have the ability to repay your debts. Therefore, get in the habit of only spending what you can repay at the end of the month. A really good method of breaking out of the cycle of debt is to pay your entire balances off each and every month.
What Can Improve Your Credit Score After Bankruptcy
There are many aspects to your credit history that can be used to help you rebuild your credit score after filing bankruptcy. Your credit score takes into account many parts of your credit history. Even if you have filed bankruptcy recently, these things can help improve your credit score:
- Credit history over the long term;
- Payment history, never miss, never late;
- Low debt-to-asset ratio; and
- Low number of credit application you’ve applied for.
Keep the above listed things in mind when trying to rebuild credit. If possible, avoid closing your oldest credit cards. Instead, pay them off and don’t use the cards. Doing this will improve your long term credit history. Also, as stated above, always make your payments and never pay late. Keep a low debt-to-asset ratio, this can be helped by filing bankruptcy. Also, don’t keep applying for new credit accounts. Too many of those will show up as credit checks on the credit report which can have a negative impact on your credit score.
Getting Loans After Bankruptcy
You will be given the opportunity to get credit cards, car loans, home mortgages and more while you are in the process of rebuilding your credit after bankruptcy. However, you need to really think about your situation before adding a bunch of new debt again. You are going to have lots of opportunities to get personal loans. Before you take any major financial steps, you should talk with a financial advisor.
Once your bankruptcy is over, more likely than not, you will be eligible to get a car loan. In some cases, this can actually happen immediately after filing the bankruptcy. However, you must be careful to make sure that the terms of the loan are not overly cumbersome. Things to watch out for are extremely high interest rates or a high down payment. The Law Office of Denvil F. Crowe has auto dealers that we can recommend who will not take advantage of you with outrageous interest rates and some may even allow you to purchase a car with a zero or a low down payment.
Most mortgage companies will make you to wait a period of time after bankruptcy before they will consider you for a new mortgage. However, we have actually had clients obtain a new mortgage after only one year of finishing their bankruptcy. Other loans may require more or less of a wait time to consider loaning you money after your bankruptcy concludes.
Rebuilding credit after bankruptcy is not as difficult as you may think. Home mortgages, car loans, credit cards, personal loans and more may be available to you quicker than you may realize.
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