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Life after Bankruptcy: How to Repair Your Credit
Perhaps the biggest misconception of filing for bankruptcy is how long it takes to rebuild your credit. The amount of time a bankruptcy stays on your credit report varies depending on the type of bankruptcy. Beyond that, the credit repair process depends largely on whether a borrower takes intentional steps to actively improve his score. It is a well-known fact that bankruptcy negatively impacts a debtor’s credit score. However, the impact is not nearly as detrimental as many people believe - especially considering what could have negatively impacted your credit before filing for bankruptcy. If approached correctly, your credit repair journey, after your bankruptcy has been completed, can result in a successful second chance for any individual. In fact, there are several financial practices that a debtor (or anyone) can implement to improve and rebuild credit. This blog will explore these practices.
The Effects of Bankruptcy on your Credit Score
It is important to have realistic expectations and be aware of the impact bankruptcy will have on your credit. First and foremost, if you have a high credit score but need to file for bankruptcy, the bankruptcy will likely decrease your credit score by 100+ points. If your credit score is already on the lower spectrum (below 669) and/or have judgments, repossessions and foreclosures on your credit report – the bankruptcy may not have much impact on your credit score. Although the initial decrease in credit scores varies based on a debtor’s individual circumstances, the effects of the bankruptcy and your credit score improve over time after the bankruptcy case closes. Thus, it is imperative that you monitor your credit score on a monthly basis after bankruptcy.
One of the first steps you should take after bankruptcy is creating an account with a free online service that allows you to monitor your credit. You may check with your bank or credit card company to see if it offers customers free credit score monitoring resources and score updates. Once you have a way to check your credit score, confirm that your accounts were in fact discharged by the bankruptcy and that it is accurately reflected on your credit report. Further monitor your credit for issues such as identity theft, fraudulent loan applications in your name, inaccurate reporting of an account status, judgments, and lawsuits. All of these issues can cause your credit score to drop even lower, especially if you are not aware of it.
Your credit score will improve as your bankruptcy fades into the past, but good financial habits are an essential part to rebuilding your credit after bankruptcy.
Be Strategic with your Credit Post-Bankruptcy
Reducing your dependence on credit cards can be an important step toward rebuilding credit after bankruptcy. However, the strategic use of secured credit cards can also help you begin to repair your credit score and allow creditors to extend lines of credit. Taking out a secured credit card requires making a refundable security deposit and then borrowing against it. While these cards tend to come with high interest rates, if they report to all three credit bureaus, they’re a great option to show responsible credit behavior until you’re better qualified for a traditional card with more competitive terms. Some secured cards even allow you to “graduate” to an unsecured card after consistent on-time payments. This is a benefit since you won’t have to apply for a new, unsecured card, when your credit improves. If possible, choose a bank or provider that offers prequalification so you can see whether you’re likely to qualify before agreeing to a hard credit check that can further damage your score.
Build Credit by Co-Signing a Loan
Another option would be getting someone to co-sign on a loan. Building your credit as an authorized user on someone else’s credit card is often more feasible (especially if you don’t have the means for a secured credit card). Being an authorized user involves having a card in your name that’s attached to another borrower’s account. You’ll be able to use the card for purchases without having to qualify for the account on your own merits—but you won’t be able to modify the account. Credit card payments will show up on your credit report, so if these payments are made on time and the credit utilization rate stays low, your score will improve over time. Just make sure the credit card company reports authorized user payments to the three main credit bureaus so you have the greatest chance of increasing your score. While this isn’t as impactful as other methods of increasing a credit score, it can still be helpful as part of a larger strategy.
Tips to Maintain or Increase your Credit Score
Once you establish credit and begin using your own credit card be mindful to begin taking the following steps to increase your credit score and protect you from pitfalls that you may encounter in the future. For instance, make consistent on-time payments. Payment history accounts for 35% of your FICO Score calculation, so it is important that you make on-time payments when rebuilding credit after bankruptcy. In addition to making consistent, on-time payments, stay on top of other bills, like utilities, because these can also improve your score.
Depending on how you arrived in bankruptcy, one of the biggest risks can be falling into the same habits that led you into financial trouble before. Reducing your credit card use—or avoiding them altogether—can temper the temptation to spend and reduce the likelihood of this happening. Finally, credit card balances are very important. The balance you owe makes up 30% of your FICO Score calculation. For this reason, keeping your credit balances low is integral to rebuilding credit after bankruptcy. To do so, try to reduce card usage and aim to pay off balances each month. If you can not pay off the entire balance by the end of the month at least reduce it to 50% of the total credit line amount.
Following these simple steps will have you on the road to repairing your credit in no time. If this sounds like your situation, your best bet is to contact one of our bankruptcy attorneys to see how we can help. Call one of bankruptcy attorneys for a free consultation and learn about your options are during this difficult time.
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