Filing for bankruptcy can be stressful, especially if your financial problems arise from the death of a loved one, divorce, or medical bills. Fortunately, even after bankruptcy, you can still get back on track and heal financially. However, after filing for bankruptcy, you must adopt the right strategies to rebuild your credit and win the confidence of financial lenders.
When you discharge your debts via bankruptcy, it is advisable to create room in your monthly budget to contribute to a savings account. Your savings account should have an adequate amount to cover your three months' living expenses. You can use these savings to cover costs like utilities, rent/mortgage, transportation, and food if you lose your job. It could be challenging to access credit after filing for bankruptcy due to a poor credit score. You will also not be eligible to file for bankruptcy for several years. Your savings will serve as an emergency fund just in case things do not work out as expected.
THE STATUS OF YOUR CREDIT SCORE AFTER BANKRUPTCY
Your credit score can take a hit after bankruptcy. The blow could be even harder if you previously had a high credit score. Other factors will also determine the effects of bankruptcy on your credit score. However, it’s important to know that this reduction in credit score is temporary. All else being equal, a person who files bankruptcy can very likely be in a better financial situation in the long run than a person who does not file for bankruptcy.
You will lose an average of 150 to 180 points if your credit score is 680. If you have a credit score of 780, you will lose between 200 and 240 points. So even if you have a good FICO credit score of 850, bankruptcy will still leave a notable dent in your credit report in the subsequent years.
IMPROVING YOUR CREDIT AFTER BANKRUPTCY
Even after filing for bankruptcy, you will still have financial needs that require you to borrow money. However, after bankruptcy, the status of your credit report will make banks and other conventional lenders shy off. Therefore, if you need a loan after bankruptcy, you will have to rebuild your credit score. Many banks consider a FICO credit score of 680 fair; they will grant you reasonable interest rates.
The steps you take after bankruptcy matter; they will go a long way in improving your credit score. You should ensure that you feed positive data to your credit report in the subsequent years after bankruptcy. One of the best ways of rebuilding your credit score is by making payments on time. Often, credit bureaus track open loan account payments like credit cards or loans. Unfortunately, after bankruptcy, you will not have open loan accounts. This could put you in a considerable dilemma. To open a loan account, you need a good credit score, yet many institutions will not be willing to lend to you. You can follow the following strategies to improve your credit score:
- Rebuild your credit score with a secured credit card
- Secured loans or credit builders
- Monitor your credit report for accuracy
- Become an authorized account user on someone’s card that you trust and has good credit
- Make payments on time on moving forward
- Have someone cosign for a new credit card or loan
Build Credit With A Secured Credit Card Or Retail Card
After bankruptcy, many banks will be hesitant to deal with you. Most banks will be unwilling to give you a credit card or loan. Banks consider people who have filed for bankruptcy as high-risk. You can overcome this challenge by providing collateral. For example, you could obtain a secured credit card. Even if you cannot repay the debt, the bank can seize the collateral to recover its money.
Collateral is something the banks will hold on to. If you happen to file for bankruptcy again, the bank can dispose of the collateral. Secured credit cards must have a financial backup. For example, if you deposit $2,000, this same amount will be your credit card limit. The larger the amount you deposit as collateral, the higher your credit limit. When you have a large credit limit, you will only use a small percentage. You will improve your credit utilization ratio by not exhausting your credit card limit. It is wise to not exceed 30% for your credit utilization ratio.
After acquiring a secured credit card, ensure that you pay on time. Most lenders will release the collateral or the deposit amount to you when you make several on-time payments---generally 12. The credit card automatically becomes unsecured when the lender releases the collateral amount to you.
When you apply for a secured credit card, follow up with the card issuers to ensure that they share your account information with credit bureaus. It will be useless to acquire a secured credit card if the card issuers do not share your information with credit bureaus.
Another great way of rebuilding your credit is by paying back your retail credit card debts. Unlike traditional credit cards, retail credit cards tend to be easier to access. However, use these wisely---only charge what you already have the money to pay for.
Secured Loans Or Credit Builder
Lenders will be more willing to offer you this type of loan after bankruptcy. With secured loans or credit builders, lenders retain a form of collateral to reduce the risk of the transaction. For example, collateral like a savings account, homes, or vehicles is used to back a secured loan.
Secured loans also have setbacks and benefits similar to those of a secured credit card but on a slightly greater scale. The lender will be willing to lend you money on the condition that you cover the risk with your property. However, you risk forfeiting your collateral and your credit score could sink deeper if you fail to repay the loan. Also, sometimes these loans come with high interest so be very careful before accepting such loan---a high interest loan could put you two steps backward.
To access a credit builder loan, you have to deposit money into a savings account until it accumulates to the agreed-upon loan figure. You will receive the loan once your savings reach the agreed-upon loan amount. There is no significant difference between this method and, for example, saving money in your personal account. However, in a credit builder loan, every installment you pay helps to improve your credit score. Therefore, this is a better way of rebuilding your credit score since depositing money into a personal account will not affect your score.
Monitor Credit Reports For Accuracy
It is essential to review your credit report regularly, particularly after bankruptcy. You should ensure that your information is updated. Your credit score will suffer if your credit report shows discharged accounts as being overdue. Often, credit bureaus take time to update credit reports. According to the Federal Trade Commission (FTC), one out of five people have an error on their credit reports. Monitoring your credit report does not have to be complicated. You have a right to access a free annual credit report from the major credit bureaus. The major credit bureaus are Transunion, Experian, and Equifax. You should check several things to determine if your credit report is accurate:
- Discharged balances should be marked.
- Accurate personal information.
- Updated accounts section.
- Up-to-date employer information.
If there are errors on your credit report, you should reach out to the credit bureau and file an official dispute.
Become An Authorized Account User
You could look into having relatives or close friends add you to their credit card account to become an authorized account user. You will not be responsible for any of the amounts the bank charges on the account. The good thing is that you will receive positive marks on your credit report if the account is maintained responsibly. The disadvantage is that if their account shows unpaid bills, your credit score will show the pending bills. Therefore, you should be wise while choosing a person whose account you intend to use to rebuild your credit score. Go for people who make smart financial decisions.
Make Payments On Time
Some debts might not be discharged in the bankruptcy. For example, most student loans and tax debts are not discharged, as are alimony and child support debts. Tax liens and Alimony will be retained. If you do not want your credit score to deteriorate, you need to keep paying tax liens, Alimony, student loan, and any other debt that was not discharged in bankruptcy. You can add positive information to your credit reports without applying for a new loan or acquiring a credit card when you still have some outstanding debts. If you have a credit card, you should only spend what you can manage to repay at the end of the month----in full.
You can join a repayment program that suits your financial situation if you have outstanding federal student loans. An income-driven repayment plan can be appropriate to repay your federal student loans without straining you. They will generally require you to recertify your income on an annual basis in order to stay in the program.
You should repay all your loans on time, even those that do not appear on your credit report. You have to prove to lenders that you have overcome your financial mishaps.
Have Someone Cosign For A New Credit Card Or Loan
Another option for improving your credit score is to have a close person cosign your loan. You can rebuild your credit score by making timely payments on the loan. Your co-signer could be a very close friend or relative but they must have a substantial credit score to make up for yours. If you fail to pay, the co-signer's credit rating will suffer. You should not risk dragging a close person into your debt problems. Therefore, if you are not sure of your ability to repay the loan, you should avoid obtaining a loan through a co-signer. However, most co-signers will only enter a deal with people who have a steady income and who would have no problems securing and repaying debt on their own.
Also, having someone co-sign for you can possibly get you a better interest rate too. Let’s say you are looking to get a car loan and the best rate you get can get is 15.99%. If you have a close relative or friend co-sign for you and this person has great credit, your interest rate might decrease to a better rate, maybe 9.99%, maybe even lower!
OTHER OPTIONS THAT CAN ASSIST YOU IN REBUILDING YOUR CREDIT AFTER BANKRUPTCY
You can employ the following additional strategies to revive your credit score after bankruptcy:
Keep Account Balances Low
Maxed-out credit cards are a sign of strained finances from the credit bureaus' point of view. Therefore, ensure that you retain your credit card utilization at 30% or below. If you also maintain your credit balances low, your debt-to-income ratio will be lower, increasing your chances of landing a low-cost loan.
For example, if you have a credit card with a $1,000.00 spending limit, do not charge over $300.00 on that card. When the bill comes at the end of the billing cycle, pay the full $300.00. The credit card company wants you to only pay the minimum required payment, let’s say $50.00. The reason for that is because the remaining amount will now be charged interest. You do not want to get into that situation---pay it in full.
Avoid Credit Repair Scams
When improving your credit score, you should not fall prey to credit companies. You will receive multiple offers from companies promising to erase bankruptcy from your credit report. Do not fall prey to con artists who purport to be experts in removing a bankruptcy from your credit report. Nobody can erase bankruptcy from a credit report before the end of the allotted 7-10 years. After this period, the bankruptcy records will no longer reflect on your credit report.
Credit repair companies might not actually be able to help you. They will take your money and promise to help you but in a lot of situations, you will not reap any benefits. You must be patient. Instead of focusing on getting rid of the bankruptcy record from your report, you should focus on gradually rebuilding your score.
Avoid Applying For New Credit Often
Credit bureaus and banks take note when you rapidly apply for credit. You should not develop this habit. Applying for credit too often makes you appear desperate. Lenders will consider you a high-risk client and banks abhor risk.
Avoid Frequent Job Changes If Possible
Banks could put less faith in you if you move from job to job even if your state of employment has no direct effect on your credit score. Also, some lenders require minimum employment status before they will lend you money. If you have only been at a job for a small period of time, they might not be willing to lend you money.
LIFE AFTER BANKRUPTCY
After bankruptcy, your life should not be a nightmare. It is crucial that you talk to your bankruptcy lawyer about what to expect post-bankruptcy. He/she could assist you in overcoming the stigma that surrounds filing for bankruptcy. Your bankruptcy lawyer will give you advice and tips on getting around after bankruptcy and rebuilding your finances. Your lawyer might be able to provide you information on budgeting. There are many great apps for your smart phones that help you budget Also, most nonprofit credit counseling agencies also offer free basic consumer help on topics like budgeting.
You should be vigilant about paying on time once you manage to acquire credit. In addition, you should maintain your credit card balances lower than the card limit, typically below 30%.
Embrace a saving culture. Emergency expenses can start a new debt spiral. Therefore, it is wise to save because these funds can help you tackle emergency expenses.
FIND A BANKRUPTCY ATTORNEY NEAR ME
If you are contemplating filing for bankruptcy, you are probably concerned about the effect of bankruptcy on your credit score. It is advisable to consult an experienced bankruptcy attorney before filing for bankruptcy. An attorney will advise you whether bankruptcy is the right option for you. For the best legal representation, contact the Modesto Bankruptcy Attorneys. Our attorneys will walk with you throughout the bankruptcy process and advise you on how to rebuild your credit score after bankruptcy. Call us at 209-314-3010 and speak to one of our attorneys at your free consultation.
