Seven Steps to Rebuilding Credit After Bankruptcy
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Sometimes events happen in life that leave you with no choice but to declare bankruptcy. It might leave you worried that you will never have good credit again, but that is simply not the case.
Chapter 7 Bankruptcy will eliminate your debt and give you a fresh start, but your credit score will fall to the mid to low 500s. This can be frightening, but you can begin to rebuild your credit right away.
The bankruptcy will stay on your credit report for 10 years, and any of the negative items that likely led to the bankruptcy will be there for seven. However, their impact will not be as significant after the first two years.
You will need to make sure that your credit report accurately reflects all of this information after the bankruptcy, and you can begin to add positive information to your credit report to show that you are re-establishing yourself as a credit-worthy individual. Read on to see seven steps you can take to rebuild your credit after bankruptcy.
Verify That Your Credit Report Is Updated
In spite of the negative hit that your credit report will take from the bankruptcy, it is better than showing unpaid debt and high balances on credit cards and loans. You should check your credit report after your bankruptcy is complete to make sure that your credit report is updated.
You can use a credit repair company to help you with this part of the process. They will pull your credit report from all three credit bureaus and go through every single item with you.
When you file for bankruptcy, the first thing that it does is stop all debt collection activities, including phone calls, wage garnishment, and most lawsuits. This can be a huge relief.
The bankruptcy will eliminate a lot of different debts, including credit card debt, personal bills, medical debts, and more. However, it will not eliminate your child support, alimony, or tax debt.
There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 will eliminate most of your debt and give you a fresh start, and Chapter 13 offers you the ability to restructure your debt.
You will likely choose Chapter 7 if you have a lower income and Chapter 13 will work for you if you can restructure your debt and pay it off over a period of time. Chapter 7 can take three or four months, whereas Chapter 13 will take the time of your repayment plan.
No matter which you file, the court will issue an order called an automatic stay. This will put a stop to creditor and collection phone calls, wage garnishment, and lawsuits. It will also stop a foreclosure, even if the stay might be temporary.
Bankruptcy will eliminate most of your unsecured debt, especially credit card debt, medical bills, personal loans, and even overdue utility bills. Keep in mind that if you have used your credit to make purchases such as furniture, electronics, or jewelry, you will have to return those items. It is important to make sure that you list all of your debts because only those you list will be included in the bankruptcy.
Once your bankruptcy goes through, these debts are discharged. Creditors should report them all to the credit bureaus with a $0 balance as discharged through bankruptcy. You need to verify that this has occurred. You can work with a credit repair agency to go through your credit report and dispute any accounts where the creditor is still reporting negative information.
You should send each of the credit bureaus a copy of your discharge as soon as the bankruptcy is over, and let them know that they should no longer report any information on these accounts.
Pay Other Accounts on Time
Once your credit report shows that you have $0 balances on all of your discharged debts, you should focus on making sure that you pay your other accounts on time. You may have some accounts that cannot be discharged, such as student loans, and you may have accounts that are not on your credit report. You should continue to pay these accounts on time to keep your credit from taking any further hits.
One of the things creditors are looking for after bankruptcy is evidence that the bankruptcy brought an end to your financial problems. If you continue to make late payments, this will show the creditors a continuing problem with paying your bills on time, and your score could go down even further.
Most of the credit bureaus are providing people with the option to include utility bills on their credit report as a way to show on-time payments. You can consider adding these bills to your credit report. The key is to make sure that you pay them on time every month.
Apply for New Credit
One of the hardest obstacles to overcome after bankruptcy is finding new credit, but this is a very important part of rebuilding your credit. After you declare bankruptcy, you will not be able to declare it again for at least seven years, which works in your favor. Credit card companies do not need to worry that you will file for bankruptcy and discharge your debt again.
As far as unsecured credit cards are concerned, your best options are gas cards or retail stores. They have lower standards for qualification, and you might have better luck. If you find that you are having trouble getting approved for these cards, you can try a secured credit card.
When you get a secured credit card, you will put down a security deposit, and the amount of your deposit will normally be your credit limit. However, you will make payments just as you do with an unsecured credit card, and the payments will be reported to the credit bureau each month.
In fact, many businesses that issue secured credit cards will allow you to transition to an unsecured credit card once you build up a history of making your payments on time for a year.
You can also find secured loans that will allow you to rebuild your credit. Similarly, you will deposit a certain amount of money and have access to the loan.
You will find that secured loans and credit cards have more restrictions and higher interest rates, but they will give you the opportunity to work on rebuilding your credit.
The best way to avoid paying the high interest rates is to use the new credit card for small purchases and pay the balance in full each month. You might just buy a tank of gas or some other essential expense, put the money aside, and pay it off as soon as you get the bill.
Try to Get a Loan with a Cosigner or Become an Authorized User
If you have a family member or a close friend who has good credit and they are willing to cosign for you, you may be able to rebuild your credit more quickly. You can use this method for auto loans or personal loans. Most credit cards don’t work this way, but you can be added to another person’s credit card as an authorized user. You won’t have responsibility for paying the credit card, but it will report to your credit report.
The important thing to remember is that if you have a cosigner, you must be on time with your payments. Not only will it hurt your score if you fall behind, but now you have someone else’s credit depending on your on-time payments. If you are late and miss payments, it will harm your cosigner’s credit as well.
You need to remember that cosigning a loan is a huge commitment from your friend or loved one, and you must be upfront and honest with anyone who does this for you. This new account will be reported on their credit report as well, and it can have other impacts such as reducing their access to other credit.
If you default on this loan, your cosigner could be sued and required to pay it. A cosigner is guaranteeing your credit and making a commitment to the company that he or she will be responsible for the debt if you should default.
If you have any problems with this loan, you need to communicate because your cosigner will find out. This could damage your relationship beyond repair because you are putting him or her in a position where the only choice is to pay your debt or have his or her credit damaged.
Make Your New Payments on Time Every Month
Once you are able to get a new card or loan to rebuild your credit, the most important thing is that you pay on time every month. It doesn’t matter what kind of credit card it is. If it is secured, it works just the same as an unsecured credit card works.
You should never spend more than you can afford to pay each month on the credit card. There is a strong likelihood that spending more money than you make is what led to bankruptcy in the first place, and you do not want to repeat that cycle.
Even if you are granted access to credit, you will want to limit yourself to using the credit you can afford to pay. Think of your credit card as a convenient way to pay without carrying cash around with you, and be sure to use your credit for expenses that are within your budget.
In addition, it is important to remember that any time you are 30 days or more late with a payment, it can be noted on your credit report, and it will stay there for up to seven years. This can suggest to lenders that the bankruptcy didn’t change your spending habits, and it can impact your ability to qualify for other loans.
It also defeats the purpose of getting the new card for the purpose of rebuilding your credit. Rather than helping you improve your credit score, it will take it down further if you have payments that are missing or late.
Keep Your Credit Balances Under 30%
The two factors that have the largest impact on your credit score are your on-time payment history and your credit usage. Each of these counts for about 35% of your overall score. Creditors like to see you using 30% or less of your available credit.
When you look at your credit report, the front page will show you how much credit you have and how much you use. If you have $1,000 in credit, you will want to use $300 or less. However, it is even better if you use a lower percentage.
When you are using a high percentage of your available credit, it creates the impression that you are living beyond your means. The reality is that if you have to use all of your credit, you are. It can be tempting to buy things you don’t need or to use your credit card more than you should, but it is very important to try to look at the credit card as a credit rebuilding tool.
No matter how much you charge, come as close as you can to paying it off every month. If your balances show that you are utilizing more than 30% of your available credit, it will lower your score, which defeats the purpose of using the new cards to rebuild your credit.
Only Apply for a Few Credit Cards
When you are uncertain as to whether banks will approve you for a credit card, it can be tempting to apply for any cards that come your way. This will actually have an adverse impact on our credit score. Another factor that goes into your credit score is the number of credit inquiries.
Creditors look at your credit inquiries because they are trying to get a full picture of your credit profile. If you have a lot of applications for credit, it appears to some lenders that you are in a desperate situation, which makes you appear to be a higher risk.
If you apply for an unsecured card and are turned down, do not continue to apply for other unsecured cards. This is a sign that your credit report is not where you need it to be yet. Move over to a secured credit card, which is more likely to be approved. Make your payments on time for six months before you apply for an unsecured card again.
You should stick with the approval odds and rebuild your credit using products that you qualify for. This shows lenders that you are serious about rebuilding your credit. Once you have a bankruptcy on your credit file, everything you do needs to have the purpose of showing creditors that you went through a tough time, but you are now back in control of your financial situation.
Creditors don’t get a chance to know you or discuss your credit history with you when they see your application. In fact, most credit card applications are never reviewed by a human being. Decisions are made quickly online based on your credit score.
People declare bankruptcy for a number of different reasons, but all bankruptcies have one thing in common, the individual filing needs financial relief. This may be the result of an emergency situation, a divorce, or some other hardship, or it may happen because your spending grew out of control.
Creditors don’t really care why the bankruptcy happened, and in most cases you won’t have the opportunity to discuss it. They care about your current credit status and how you are managing your finances at the present time.
Filing for bankruptcy gives you an opportunity to start over again financially, and it is up to you to make the most of it. If you take your time and make a plan, you can take steps to rebuild your credit. The new credit that you secure is a stepping stone to rebuilding your credit.
The way to make the most of this process is to keep your balances low and make your payments on time. You can establish a pattern of responsible payments, which will show lenders that the bankruptcy and whatever led to it is behind you.
We help people restore and repair their credit, and we can help you make sure that your credit report accurately reflects the post-bankruptcy balances. Your creditors are supposed to report $0 balances, and when they do not, you need to dispute it.
If you follow these steps to rebuild your credit, you will not have to wait 10 years to have a decent credit score. As long as you make your new payments on time and keep your credit usage below 30%, you can start improving your credit score right away.
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