How To Rebuild Your Credit Following Bankruptcy
A Chapter 7 bankruptcy provides you with the relief of having a clean financial slate. However, it also brings the worry that you won’t have decent credit ever again.
There is a good chance that your credit was completely tarnished if you were eligible for filing Chapter 7. However, that is different from that common misconception that filing for bankruptcy will forever ruin your finances.
Truthfully, you can start rebuilding your credit immediately.
Although it is true that a bankruptcy stays on your credit reports for a period of 10 years, over time its impact does fade. You can help this process through offsetting that negative information with something more positive for your credit report.
Begin with the basics
Lenders at this point want to see if you have enough income for paying your current obligations, with a small amount left over. You will be a much more attractive buyer if you have a lighter debt burden.
In addition, lenders won’t need to worry about you filing for bankruptcy in order to eliminate new debt. That is because you aren’t allowed to have debts discharged for another eight years.
The first thing that you need to do is develop a budget that will help you keep your finances under control. Before you finished your bankruptcy the pre-discharge credit counseling that you were required to go through should have given you information on budgeting. You can also go to a credit counseling agency to get help. Nonprofit credit counseling agencies all provide free basic consumer assistance on budgeting and other topics.
The next thing you should do is start to build an emergency fund. The Urban Institute has conducted research that shows that even having only $250 in savings set aside for unexpected expense can provide families with protection from having to running up their credit cards or having to resort to a payday loan, since this can get a new spiral of debt started.
Plan out your post-bankruptcy credit strategy
It is possible you may be thinking that credit card issuers and lenders think of you as a pariah now. However, that isn’t actually quite true. Of course you will need to prove yourself. However, it is possible to do.
Your goal to build up a good credit score might be the same as somebody who is starting completely from scratch, however you are in a little different situation. You don’t have the problem of creditors not knowing enough about you, but instead that they know quite a lot.
The first thing you should is assess your situation. This can be done through getting free copies of your annual credit reports and checking them. It might appear to be daunting, however there are guides available that can help you better understand what the various entries refer to. Your credit scores get calculated using information that is contained in your credit reports. Therefore, if there is any inaccurate negative information that can make things even more difficult for you as you attempt to recover from your debt. If you happen to discover any errors, make sure you dispute them and have them corrected.
There will of course also be accurate negative information. Your bankruptcy will appear on your credit reports for 10 years. Debts that go into collection and late payments also stay on your credit reports for seven years following the delinquencies. When you file for Chapter 7, it wipes out your debit, but doesn’t wipe clean your credit reports.
Next, check out your credit score. Free VantageScores are offered by several sources, and free FICO scores are offered by Discover even when you aren’t one of their cardholders. Tracking your credit score on a monthly basis is a smart idea, and it is critical looking at the same score every time. Otherwise it won’t be a useful comparison. Choose one kind of score that you will be tracking and that stick to it.
If you know which credit score lenders will see and clean your credit reports up it will help you know what credit products are the best ones for you to apply for.
Find a product that fits your situation the best
Unfortunately, your payment history from the time before your bankruptcy will make you appear to be a very risky borrower for lenders. This problem can be fixed by providing the lender will extra assurance that lending to you won’t result in them losing money. The following are four things you can do to improve your finances and obtain the credit you need to help you rebuilt your credit score:
Secured loan: There are two different types, and are offered most often by community banks or credit unions. One type of secure loan allow you borrow against money that you have on deposit already. You can’t access the money as you are paying your loan off. You can make the other type without having to pay any cash upfront. However, the money that is loaned to you gets put into a savings account and you only get it released to you after making the necessary payments. The financial institution in exchange agree to send the credit bureaus a report regarding your payment history.
Secured credit card: With this type of card, there is a deposit that you pay that backs the card. Typically your credit limit is the amount of money you have deposited. Frequently a secured card will come with a high interest rate and annual fees. However, you shouldn’t need to have it over the long term. You can use it for improving your credit until you are eligible for an unsecured, better card.
Just be aware that you potentially be turned down for a secured card. Carefully read over the requirements before applying. You want to be confident that you will be approved before applying for a card, since every credit inquiry causes a small, temporary decrease in your score. If you obtain the card, the reduction will be offset and more Just make sure to not use the card too much, and pay your bills on time.
Sean McQuay, a credit card expert with NerdWallet, recommends that you apply for a secured credit card with a local bank or credit union. He said they have a tendency of being a lot more lenient when it comes to credit history, and many of them are happy to work with you so that you can build up your credit profile. However, there is one large caveat to this: before you apply be sure the credit union or bank reports your credit activities to all three of the major credit bureaus. You need to ensure that all of your good credit behavior is going to count.
Co-signed loan or credit card: This another way of helping your score, but you’ll need to have a family member or friend who has good credit history and is willing to be a co-signer for you. That’s a lot to ask of someone. A co-signer has to risk her or his credit reputation to do this for you, and is responsible for the entire amount if you end up not paying, and could face limits on their own personal borrowing due to the extra debt obligation they are taking on. If you don’t end up paying as agreed, a co-signed loan or card can seriously damage your relationship.
Authorized user status: If it’s too much to ask somebody to co-sign for you, you could instead ask if you can be an authorized user on someone else’s credit card. You need to ensure that the credit card reports payment activities to the credit bureaus that are made by authorized users. Otherwise, it won’t help with building your score.
This technique wont help to boost your score anywhere near as much as other methods we have mentioned, since authorized users aren’t ultimately responsible for repaying debt. This method is more likely to help somebody with very little credit information as opposed to somebody with a file full of negative information. However, you might want to go ahead and pursue it since it can’t hurt.
Once you find a lender who is willing to extend credit to you, make sure to pay on time. Also be sure that your balances on your credit card are kept low in relation to your card limits – typically it is advised to keep them under 30%, however it is even better for them to be less than 10%.
Since you are trying to redeem yourself, don’t get yourself into a position where you are struggling to stay caught up with increasing credit balances or have to beg a late payment to be forgiven.
Once your recent history shows you are finally a good credit risk, all of your hard work in getting your credit reputation restored will pay off for you.