Getting back to good credit once your bankruptcy is final.
Bankruptcy is not the end of your financial life. In fact, it can be a fresh start so you can move forward and build a better financial outlook than you’ve ever had before.
Taking the right steps now will help you avoid facing another round of problems later. It helps ensure that this time things won’t go south – you’ll have the right strategy and tools to keep you out of bankruptcy courts and on the right financial path.
Step 1: Repair your credit
Financial distress (particularly bankruptcy) is almost always going to create a lot of negative remarks on your credit report. Every missed payment, overdrawn credit limit, and collections account is going to appear on your credit file.
Once your bankruptcy is complete, at least some of these negative remarks should be removed. Overdrawn credit limits should be zeroed out, collections accounts should be closed, and your account status should all says things like “Settled.”
Of course, creditors can be a little slow to update this info, and that slowdown will also hurt any efforts you make to rebuild your credit. So the first thing you need to do after bankruptcy is clean up your credit report through credit correction.
Step 2: Get a secured credit card
Right after you complete a bankruptcy, creditors aren’t exactly going to be breaking down the door to send you their best credit card offers. But you need to start building better credit.
To do that, you need an open credit account that you can use strategically to slowly build your score. Creditors offer secured credit cards as an easy way for high-risk borrowers to build better credit.
- You apply for a secured credit card online.
- You will be required to put down a deposit in order to open the credit line. On most cards, the credit line equals the deposit, although some companies offer a small credit line bonus over and above the deposit you made.
- Make strategic purchases on the card, only with certainty that you can pay off each debt you incur quickly. In addition, never leave a balance on the card that’s over 30 percent of the available credit line.
- Pay your bill on time every month, paying off as much debt as you can every time. Ideally, if you can zero out the balance every time, this is ideal for your credit and your budget.
If you have a secured credit card with a $500 credit limit, what’s the maximum amount of debt you should carry if you want to maintain a balance of less than 30 percent of your available credit line?
Although ideally, you want to pay off as much debt as possible every pay period.
Step 3: Diversify with a loan
The types of debt that you have matter when it comes to your credit score. So you don’t want to just have credit cards, because this doesn’t show that you’re maintaining a good mix of debt. With that in mind, your next step on the road to better credit is to take out a smaller sized loan that you won’t have any trouble paying back.
In most cases, this is going to be a small personal loan. You can use the money you receive for anything – home repairs, making important purchases, or some people even take out loans and divert the money to an investment. That way, you get the credit benefit of paying off the debt while building a better financial outlook at the same time.
In some cases – particularly if you really need a new set of wheels to get to work – then you may want to take out a slightly larger auto loan. This doesn’t mean that you head out to a luxury car dealer and go crazy. Instead, you opt for a much more economical car and may have to use a lender who specifically works with high-risk borrowers.
Whichever loan you choose, always pay the bills on time every month. If there’s no early repayment penalty, make bigger payments on the loan when you have the money available. Once the loan is paid off, consider taking out a different loan so you can continue to diversify and build a positive payment history in your credit file.
Step 4: Monitor your credit to watch your progress
Monitoring your credit after bankruptcy is one of the best uses of a credit monitoring service aside from ID theft prevention. After all, if you’re not watching your credit score, how do you know if what you’re doing is having the effect you want?
By signing up for a credit monitoring service, you can see how each step that you take affects your credit score. You can also make strategic decisions – like following a few months of paying off your secured credit card, has your credit improved enough for an auto loan, or are you better off taking out a smaller loan first.
Fact: The negative credit impact of bankruptcy decreases over time, so you can recover even before the 7- or 10-year penalty expires.
You’ll also be able to see when you’ve recovered enough to do bigger things, like buy a new home. Once you have your credit score back to a level you’re happy with, you can cancel your service or keep it going to make sure you maintain the highest score possible 365 days a year.
A special note on niggling collection issues
This doesn’t have anything to do with rebuilding your credit after bankruptcy, but it is another important step that you may have to take. Once your bankruptcy filing is complete every single account that you had in collections should be settled.
But that doesn’t always mean that the collectors get the message and stop calling you. If you’re still getting collection calls after your debts have been discharged and settled in court, then you need to take action. You may even be able to seek compensation for collector harassment if they really won’t leave you alone.