Rebuilding Credit After Bankruptcy
Rebuilding Credit After Bankruptcy
Whether you are only considering bankruptcy, or currently in the middle of one, you are probably already looking ahead to the future. Life after bankruptcy may seem scary, but it is actually pretty great! The feelings of stress and anxiety you felt while drowning in debt will have melted away, and you can begin to focus on planning and preparing for your new life. The primary concern for many people coming out of a bankruptcy is rebuilding and repairing credit. If you are wondering how to begin improving your credit score, this post may provide some insight on establishing a solid credit history post bankruptcy.
Credit is Your Friend
If you have had bad experiences with loans and credit in the past, you might understandably be wary to jump back into debt. This cautious and disciplined approach to your finances will help you as you build up your credit. However, it is important to remember that debt is not the same thing as credit: Debt is something you owe to someone else, while credit is something given to you.
Do not swear off credit completely. Remember that having NO credit is no better than having POOR credit. You will need credit to rent or buy a car or a place to live. Instead, focus on building credit without taking on the debt that typically goes along with it. While good credit is your friend, debt is a clingy, needy thing that follows you all over the world.
The best way to boost your credit score is to demonstrate that you can responsibly accept and maintain lines of credit without overburdening yourself with debt.
Start Rebuilding Your Credit Score Right Away
A bankruptcy will appear on your credit report for 10 years, but its impact on your credit score will diminish over time. Once your bankruptcy is finalized, you can immediately begin establishing new, good credit. If you file for Chapter 7 bankruptcy, you can begin rebuilding your credit history the next day. Chapter 13 bankruptcy is a process that lasts three to five years. You will not be able to secure any new lines of credit until the Chapter 13 bankruptcy has been finalized. However, you can still spend this time mindfully preparing for the future.
If you are proactive, taking steps to demonstrate to creditors that you can use credit responsibly, you can repair your credit in one to two years after bankruptcy. So, how do you establish good credit? Getting started on the recovery process is the hardest part. Below are some great first steps you can take to turn your credit score around.
Do Your Research
Before seeking out any new lines of credit, you should make sure you understand the post-bankruptcy credit recovery process. You may be unintentionally dinging your credit score by excessively “shopping” for credit. There is a wealth of information available online, but we have listed a few ways to grasp a general understanding of the post-bankruptcy credit repair process:
- Start here: Watch our video “How do I rebuild my credit after declaring bankruptcy?” on Youtube. In this two-minute video, we address some misconceptions about credit scores, and tell you the easiest, fastest way to get a “B” credit score.
- See also: This video provides an introductory explanation of how bankruptcy affects your credit. It is the first video in a 21-video series by Patrick Ritchie, author of The Credit Road Map. Watch the entire video series to gain an in-depth understanding of the post-bankruptcy credit repair process.
- Research the institution or credit card company before applying for any new credit cards or loans. Reading consumer reviews can provide insight on the reputability of the company and give you an idea whether you stand a good chance to be accepted. com can review your credit profile and show you the offers for which you are most likely to qualify. Make sure you understand all fees, charges, and interest rates of the offer before submitting your application.
Consider Signing up for a Credit Recovery Program
We recommend utilizing 720creditscore.com’s credit program. They have a good reputation, and many of our clients are pleased with their results. Their “7 steps to a 720 credit score” program can transform your credit score within two years.
Professional and nonprofit credit counseling agencies may also be able to assist you with budgeting, saving, building good credit, and avoiding future debt spirals. You will receive some credit counseling during the bankruptcy process, but there are plenty of other resources out there.
Create a Strategy
It is easier to rebuild your credit score if you are standing on solid financial footing. The good news is that after bankruptcy, all your unsecured debts (except certain taxes and student loans) will be wiped away, making it the perfect chance for a new start. Set off on the right foot by creating and implementing a credit recovery battle plan.
- Check your credit report: The government will provide you with a free annual copy of your credit report from all three major credit-reporting agencies (Experian, Transunion, and Equifax), if you request them. com is an official, government-run website that makes it easy to request and obtain your credit reports. These reports include information such as payment history, delinquent accounts, how much credit you have obtained and how much of it you are using. However, it will not include your credit score.
- Check your credit score: Your credit score is a number ranging from 300-850. Any credit score above 690 is considered “good,” or a “B” rating. Most Americans have a “B” credit score, but do not be discouraged if your credit score falls below that threshold. Your credit score can change monthly, and there are ways to boost your score quickly. Many finance websites offer a free credit score, but some charge a fee or require a paid subscription. One trusted website that offers a free credit score is com.
- Create a budget and emergency fund: If you have not already, make a budget and stick to it the best you can. Modify it frequently as your income and living expenses change. Building up your emergency savings is a top priority. This will prevent you from seeking out “last resort” lines of credit when unexpected expenses pop up. Also, improving your credit score will be easier if you are already applying the best practices in the other areas of your finances.
- Make purposeful credit decisions: Armed with your knowledge, credit report, credit score, and realistic expectations, you are ready to put your credit recovery battle plan into writing. Decide your goals, what steps you are going to take, and the timeframe in which you would like to accomplish them.
Obtain a Secured Credit Card
A secured card is not really a “credit card” in the traditional sense of the word. You cannot charge something to a secured credit card without paying money in advance. You must first put up a cash collateral deposit to “secure” the credit line. For example, a $300 deposit would allow you to charge up to $300 on the credit card. Then you make monthly payments on the balance, leaving the collateral in place. Think of a secured credit card like the security deposit you put down when you rent an apartment. You give your landlord (or, in this case, a creditor) money up front to guarantee that he or she will not be harmed if you are unable to make the payments.
A secured credit card is an excellent first step to rebuilding your credit after bankruptcy. You can use it to book a hotel or rent a car, just like you would use a regular credit card. It is specifically designed to help those with poor or no credit establish a positive credit history. Most credit card companies will report your on-time, monthly payments to the credit agencies (building your good credit), and the collateral ensures you cannot spend more than you can afford.
The downside to secured credit cards is that they often charge higher fees and interest rates than unsecured cards. It is best to use a secured credit card only long enough to obtain an unsecured one.
Once you are accepted for a secured credit card, use it carefully. Make a few small charges on it (up to 50% of the credit limit) and pay the balance off completely every month. No matter what, do not max it out and do not make any late payments. Use the card for at least 12 months, but do not close the account until your credit score has bounced back considerably. Closing an account could do more harm to your credit score than good.
Continue Building with Unsecured Lines of Credit
After you have made regular payments on your secured credit card for a year or more, you may find it easier to obtain unsecured lines of credit. Unsecured credit cards tend to charge lower interest rates and fees than secured ones. This makes them a powerful credit building tool for qualified applicants.
Continue paying off 75-100% of the balance on time every month. Avoid maxing out the credit limit. Your credit utilization ratio (also known as balance-to-limit ratio) refers to how much of your available credit you are using. A credit utilization ratio of up to 50% is ideal. A high credit utilization ratio will drag down your credit score.
Do Not Make These Three Common Mistakes
Most credit users have good intentions, but the whole credit repair process can be confusing. Sometimes what you think is a positive step can actually hurt your credit score! Avoid these all-too-common credit mistakes:
- Swearing off credit cards: When used correctly, a credit card is the most effective tool for rebuilding your credit score. Making regular, on-time payments on your house or car, while essential, will only improve your credit score incrementally over a long period of time. Since making payments on these kinds of loans is considered a necessity, this part of your credit history is not as impressive to creditors. Excellent credit card use can repair your credit in as little as 12 months.
- Too many hard inquiries: Every time you apply for a loan or credit card, your score will dip a few points. Apply for a bunch of credit cards, and those points can add up. This mistake is difficult to avoid when trying to rebuild your credit after bankruptcy, since it can be hard to find a creditor that will approve your application. Research and read reviews for every offer before you apply, and only select credit lines that seem like a safe bet.
- Biting off more than you can chew: After bankruptcy, you want to rebuild your credit quickly, but sometimes, slow and steady is the way to go. Having too many open lines of credit, especially those opened in a short period of time, can negatively impact your credit score. There is no magic number for the amount of credit accounts an individual should have, so try to stay in your own personal comfort zone.
Bankruptcy Attorney in Tucson, Arizona
For better or worse, life never goes the way we expect. If you are considering bankruptcy, chances are you have experienced:
- Long periods of unemployment
- Large medical bills
- A failed business venture
- A judgement or settlement stemming from a lawsuit
- Some combination of the above.
These unfortunate life events are difficult to plan for, and the resulting debts can quickly snowball out of control. The good news is that there are legal protections in place to give you a new chance at life. Bankruptcy allows you to become debt free in less than five years, without losing your home, car, or retirement. Those that qualify for Chapter 7 bankruptcy will be debt free in less than six months.
Many people are afraid to file for bankruptcy because they believe it will ruin their credit for life. However, if you are having trouble paying off your current debts, filing for bankruptcy may be the BEST decision you can make for your credit. Although the bankruptcy will stay on your credit report for several years, you will be given a clean slate and can typically repair your credit within 24 months.
If you are wondering if bankruptcy is the right choice for you, the experienced attorneys at Arizona Law Group of Trezza & Associates, LLC can help. To take control of your finances, contact us today to schedule a free consultation.