Repairing Your Credit After Bankruptcy


Almost anyone can get credit soon
after a bankruptcy; it’s just a matter of knowing how.  Long before the bankruptcy drops off of your credit
report, you could be qualifying for loans with good rates and terms; however, before
plunging back into the credit world, consider the extent to which easy credit
lead to a bankruptcy filing in the first place in order to avoid making those
same mistakes.

A bankruptcy can legally remain on
your credit report for up to 10 years, but its effect on your credit score can start
to diminish the day your case is discharged if you adopt responsible credit
habits such as paying your bills on time, using only a small portion of your
available credit and not applying for too much credit at once.  Below are some additional suggestions on how
you can begin to rebuild your credit.

CLEAN UP YOUR CREDIT REPORT 

One problem that people emerging
from bankruptcy face is that credit reports frequently show accounts as open
and overdue — when in fact they were closed and the obligations discharged as
part of the bankruptcy.  If you encounter
this, you need to contact the credit bureaus and insist that those accounts be
properly reported as "included in bankruptcy."  Remember that a bankruptcy is not going to
erase the record of your debts listed in your bankruptcy.  Credit reporting agencies are within their
rights in showing an accurate history of your financial affairs.  You want to make sure that the bankruptcy
discharge also shows on the credit report so that potential new creditors understand
that those old creditors have no legal claim remaining.  It’s the only way your credit can begin to
recover.

If you have other serious mistakes
on your credit report, those need to be corrected as well. Your credit score is
based on information in your credit report, so errors on your report can
seriously hurt your score.

OBTAIN AND USE CREDIT (WITHIN YOUR
MEANS)

You need two types of credit to
quickly rebuild your credit score:

         
Revolving: credit cards

         
Installment: auto loans, student
loans or mortgages

 

REVOLVING ACCOUNTS

Most recent bankrupts have trouble qualifying for a regular, unsecured
credit card.  The best solution is to
obtain a secured credit card, which generally gives you a credit limit that’s
equal to an amount you deposit at the issuing bank.  Typically, that’s $200 to $500, but don’t
make the mistake of using all of your available credit because maxing out your
credit cards will hurt your score.  You
don’t want to charge more than 30% of your available credit limit, and you want
to pay the balance off in full each month. 
Light, regular use of a credit card is what helps to build your credit.

Be smart when picking a secured card. 
Shop around at different banks to find the best rate you can.  Do NOT fill out a dozen credit card applications
because every time you fill one out, your credit score goes down.  When selecting a secured card, look for the
following:

         
No application fee and reasonable annual fee:  Some secured cards tack huge upfront and
annual charges onto their accounts.  You
don’t need to pay these to build your credit. 
Always read the fine print in the application.  As required by law, the companies must
disclose their fees and rates to you.

         
Reports to the major credit bureaus:  You’re not doing your credit score any good unless
your payment history is being reported to the three major credit bureaus:
Equifax, Experian and TransUnion.  Before
you apply for a card, call and ask if the issuer regularly reports to all
three.

         
Converts to an unsecured card after 12-18 months of on-time
payments:  Good behavior should get you
upgraded to a regular credit card within a year or two.

As a general rule, avoid using payday loans. The fees and interest are too
high, and it is very easy to get back into trouble.

INSTALLMENT ACCOUNTS

If you still have student
loans, which typically aren’t dischargeable in bankruptcy, you can use them to
rebuild your score. Make your payments on time and try to pay more than you owe
whenever possible. Next to making on-time payments, paying down your existing
debt is one of the best ways to improve your credit score.

Auto loans can also help you rebuild your credit but
be prepared to pay a very high interest rate at first.  If you go this route, try to make a big down
payment and choose a loan that doesn’t have a prepayment penalty. That way, you
can refinance the car to a lower interest rate as your credit improves.  Your best bet is to look for car dealers that
attest to be "bankruptcy friendly."  Also, you may want to buy a used car so you do
not get hit with the depreciation that occurs during the first two years after
a new car purchase.

Finally, it is
possible to obtain a mortgage and purchase a home after bankruptcy.  Two years after a bankruptcy discharge,
debtors are eligible for mortgage loans on terms as good as those of others, with
the same financial profile, who have not filed for bankruptcy.  At that point, the lender will be much more
interested in your down payment, the stability of your income, and the
relationship between the loan payments and your monthly income than your prior
bankruptcy filing.  As long as you stay
on top of all of your payments and do not over extend yourself, you will
eventually be able to get a mortgage approved.  It can take some time, but if you utilize the
above strategies to accelerate your credit repair, you will be able to get a
mortgage approved sooner.  Just make sure
you really can afford a home before you buy one.  Often times, people end up filing for
bankruptcy because they stretched too far to buy a house and can’t keep up with
all of the costs that accompany homeownership.

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