How to Rebuild Credit After Bankruptcy
Many People try to avoid filing a bankruptcy because they hear stories about it staying on your credit report up to 10 years. They think bankruptcy will ruin their chances of having a good credit score. That information is false. Actually when you file a bankruptcy and get relieved from your debt it allows you to be able to rebuild your credit. Other factors are involved in your credit score and FICO than repossession and bankruptcy. How much debt you have accumulated does play an important role in the scores. Filing a bankruptcy will discharge all of that debt and allow you to be able to start fresh towards rebuilding your credit immediately afterwards.
When you use reliable credit practices you can rebuild your credit in about a year or two. Paying vehicle loans and mortgage payments on time along with making on time payments toward a secured credit card will improve your credit score. There is no need to avoid debt relief options such as bankruptcy in fear of how it may affect your credit score. In fact, your credit score is probably already low due to missed payments and your debt to income ratio. Filing a bankruptcy allows the debt to be discharged and give you a fresh payment history to start over with that you can make on time, confirming that you will be a worthy future credit risk.
Bankruptcy doesn’t leave the bad taste that it used to – specifically in the economy. Bankruptcy is a right promised to you by the founding fathers. Something that may surprise you is that most of the first presidents of the United States owed a lot of debt at the end of their life. Good people go through hard times. It happens to the best of us.
Don’t you feel the relief from bankruptcy lifting that 70,000 pound gorilla off your back? Your bankruptcy has been filed successfully and now you have made the first step toward rebuilding your credit score. It feels so good to not have your creditors harassing you day and night with hostile demands insisting you give them a payment you cannot afford at the time. Now, instead of receiving letters demanding payment you are getting applications for credit. That’s an incredible difference!
You do need to be careful, though. Once you come out of your bankruptcy it will be tempting to get right back where you started with high credit limits and alleged credit repairing organizations. It is a better idea to start off slow and rebuild your credit on your own after bankruptcy, slowly.
You will probably be receiving credit card opportunities like you were back when you were 18. Your best bet is to choose a card with low interest and use it only when a credit card is required. For instance, use it when renting a car or hotel room. It is not a good idea to use it for impractical spending or necessities. If you start using credit for unnecessary spending you will fall right into the habit of living above your means and regain the habits that drove you to bankruptcy. Additionally, make sure you pay more than your minimum payment or you will be in trouble again.
You may run into trouble trying to figure out how to build your credit back up. Be careful working with companies that repair credit. Everything they tell you they can do, you can actually do on your own. It would also be good experience for you to do it on your own. Credit rebuilders often try to offer you loans or say they can remove correct entries on your credit report. Some companies even tell you to enter a wrong social security number on applications. That kind of advice has no benefit for you and can put you in a terrible position if you choose to follow it.
The main thing to do to help yourself is get your reports from Equifax, Experian, and TransUnion. Review the reports to make sure the debt you listed in your bankruptcy are now listed with zero balances. If there is something on your credit report that appears to be wrong you will need to contact that creditor to ensure that they either fix or remove it.
Now, you will want to review your credit report often to ensure that your new, positive practices are being recorded. Dispute the mistakes using proper methods. This is the prime time to develop good habits of limiting your spending and analyzing your credit.
If you are going to rebuild your credit after you file bankruptcy you will need a plan. You will have to make better decisions than the ones that got you into bankruptcy in the first place. Of course you will feel so relieved to get that 70,000 pound gorilla off your back but you need to keep in mind that the bankruptcy will still be on your record for the next ten years or so.
On the contrary, the longer the bankruptcy is on your credit, the less impact it will have on your offers from credit companies. That means creditor prospects consider the recent activity on your report the most important. You will have to regain creditors trust to rebuild your credit after bankruptcy.
If you need a fresh start from spiraling out of control with your finances we can help! Call our bankruptcy attorneys right now at The Law Office of Denvil F. Crowe, PLLC at 662-844-7949 to discuss your situation.
How Does Bankruptcy Affect my Credit Score?
The reason for a credit score is to show moneylenders how much of a liability you would be if they were to loan you money. High scores let the lender know that you are responsible and pay your bills in a timely manner. On the other hand, a low score lets the lender know you do not pay your bills regularly on time. Clearly a bankruptcy will negatively affect your credit score, but only temporarily. You can consider these next steps to rebuild your credit score after the bankruptcy.
You Can Begin Restoring Your Credit Right Away
You may start immediately on building your credit back up once you are discharged from your bankruptcy. Many people are afraid to get a credit card or any debt after they file. While that is an understandable thought, it is important in order to correct the negative effect of the bankruptcy to improve your credit and build a positive credit history.
As opposed to popular belief, the bankruptcy does not “ruin” your credit. Although, your credit isn’t in a good place – bankruptcy gives you the opportunity to start from scratch and rebuild it.
Before we go any deeper, let us look at what might make you a good possibility to moneylenders.
First, if you have filed a Chapter 7, you will have to wait 8 years before you are able to file another. Next, potential lenders like to be assured that you are able to pay for necessities, manage the debt you are inquiring about, and still have some extra cash left. After your bankruptcy was filed, you had most or all of your debt wiped away. Essentially, you are not the high risk that you were before to a creditor.
It is not as difficult as you may think it would be after you file to rebuild your credit.
The first step to take is getting a copy of your credit from one of the major agencies: TransUnion, Experian, or Equifax. Carefully look over it checking for errors of any sort. When, or if you find an error, for example something that should have been discharged from your chapter 7 bankruptcy, you will need to contact that credit agency and work directly with them to correct the issue.
Once your credit report is corrected you will need to rely on getting back to the foundations. Don’t spend more money than you can afford. Pay your bills in full, in a timely manner, and that includes debts that were not able to be discharged in the bankruptcy (for reference, student loans.)
Avoiding credit altogether is a very common mistake that is made. It is understandable and may seem like your best option is to stay away from incurring debt, however it will not help you build your credit back up. Instead of dodging credit, try to find ways to use it responsibly and in small amounts. Assuming and making regular payments on a secured credit card that reports to the credit bureaus is a good way to use credit wisely after a bankruptcy. You will need to pay off the full balance each month to keep from paying interest and showing lenders you are not a liability. This step alone, if practiced for a few years, could dramatically improve your credit score.
Another way to work on your credit score is applying for a gas card or opening a new bank account. Gas is a necessity if you have a car, so using credit for this regular purchase will be rewarding for you. Automatic bill pay is another great option for credit rebuilding because it will ensure that bills are paid on time.
During this process it is vital to stay patient and continue positive financial habits. You need to make a routine out of staying aware of your credit score at all times. With your best efforts you should see an incline in the number slowly.
Bankruptcy is not a financial death. For millions of Americans it is the best option to restart their economic situation. By taking suitable steps to repair your credit, you can enjoy financial independence.
Developing a Sound Credit Score
Transforming your credit is not difficult, but it is not as simple as building your credit either. You are not a threat to lenders because they are not aware of anything regarding your past when building credit for the first time. Because you didn’t pay back the money you owed you’re a risk to creditors. You need a practical strategy that you are able to manage.
You will be responsible for checking your credit score. If you think you have listings on there that are wrong, they can be disputed. However, just because you filed a Chapter 7 bankruptcy does not mean that those creditors are to be cleared off the report. More than likely, those claims are still to be there.
Secured Loans and Secured Credit Cards
At this time you will start to rebuild your credit. You will need to find a creditor or bank that will work with you in spite of the fact that you just completed a bankruptcy. You need to re-establish a loan repayment history to rebuild your credit after bankruptcy.
Applying for a secured loan is one way to do this.
There are two kinds of secured loans. One loan option releases money into a savings account that cannot be accessed until a certain amount of payments have been made.
The second type of loan is generally offered by credit unions or banks. The way it works is the entity agrees to loan you money against the money you already have deposited into an account there.
Basically, you are borrowing money from yourself. In return, the entity sends the info to the credit reporting agencies.
Secured credit cards work basically the same way. You borrow money against money you have already deposited.
Co-signed Credit or Loan
After Bankruptcy, applying for all types of credit will improve your credit score. For example: car loans, credit cards, mortgages, and personal loans are all different types that you could apply for.
If you have someone in your life that is willing to co-sign for you on a loan or credit card that is a possible way to build your credit back up. You need to understand that this is a big request to someone. They are taking a huge risk if you are unable to pay back the money you borrow.
It will be your responsibility to pay on time payments after you file your bankruptcy. A late payment can seriously damage your credit score and abolish the hard work that you have put into rebuilding your credit after bankruptcy. It is important that you choose to work with companies that report to the three major credit bureaus. Once you have obtained your first secured credit card and have made regular on-time payments for a few months, apply for a second line of credit in the form of a secured line of credit. Some good options for this type of credit can be obtained from stores that sell electronics, home goods, or appliances. Using these types of credit is good because they will report your on-time payments to the bureaus. Do not take advantage of the credit lines you are granted after filing a bankruptcy. A commonly made mistake that debtors make is go overboard again on debt. Be very careful not to overuse your credit cards or overload yourself with new debt after getting out of bankruptcy.
Start and keep a budget after filing bankruptcy and make your payments for EVERY bill on time.
It is very wise to prepare ahead of time for emergencies. The largest reason debtors find their selves engulfed in debt that they cannot recover from is they are not prepared for emergencies. They don’t have enough money on the ready when emergencies arise. After you receive your discharge begin to build an emergency savings that is the equivalent to around three months of regular expenses. This will help when expenses arise that you were not expecting. Another smart idea is to have insurance. Lawsuits and medical bills resulting from vehicle accidents can deplete even a prepared individual’s healthy reserve. Having insurance can definitely help with medical bills and lawsuits as regards to accidents.
Rebuild Credit After Bankruptcy: Final Steps
In due course, someone will offer credit to you. A credit card, for example, with a low limit will be presented to you. Accept this offer and use the card wisely by making monthly payments toward the balance. It is important that you keep the balance under or around thirty percent of the limit. This will put you well on your path to good credit after filing for bankruptcy.
Why Having A Co-Signer Is Not The Best Way To Rebuild Credit
Many Americans suffer from bad credit and job loss and try the “easy” route to rebuilding credit. One of the most suggested options for helping your credit score is to be added to someone else’s credit card that has good credit history. This method is often recommended by credit “specialists” because when you add someone with bad credit to the card of a person who has good credit, the bad credit will be improved. That may work in a picture-perfect world, but there are flaws in that plan and risks that are assumed by both parties.
- Both parties are now accountable for all transactions on the card regardless of who is really responsible. This means even if the good credit person charges up thousands worth of transactions on the card both of you carry the responsibility of paying for them. The credit company won’t make a distinction between who made what purchase.
- If the good credit person or primary cardholder fails to pay for any reason, the credit company will hold the secondary cardholder accountable. This means if you friend who added you to their card loses their job and is now unable to pay back the thousands they incurred, you will now be responsible for paying back that debt. The credit card company will have all rights to come after you as the secondary cardholder.
Before making the decision to join forces with someone on their credit card you need to be prepared to pay the card balance yourself in the off-chance that something happens to your friend/family member and that person is unable to pay it on their own.
