Friday, November 30, 2012, AM | 5 Comments
One of the primary concerns many people have when considering bankruptcy is how they will rebuild their credit once they file. Many are concerned that it will be years before they can apply for credit again or before they can buy a new car or a house.
However, many people find that their credit actually improves soon after filing for bankruptcy as a result of clearing out high levels of unsecured debts like credit cards and lowering their debt-to-income ratio.
Even if your credit takes a hit after bankruptcy, there are a number of ways you can rebuild your credit and get back on the road to financial recovery.
Here are 7 ways you can rebuild your credit after bankruptcy:
Create a Realistic Budget
Learning to live within your means is an important part of restoring financial health and building up credit. Start by creating a realistic monthly budget with all of your expected expenses and all of your expected income.
Don’t just estimate in creating your expenses. Go back and look at what you have done in the past so you can see all of the different types of expenses you have. Figure out how much income you have left over each month and don’t spend more than that.
If you can manage to stick with your budget, you’ll be able to pay all your bills, maybe save a little money for an emergency, and avoid running up debts through credit cards and loans.
Pay All Bills on Time
Payment history has a significant impact on your credit score. If you miss payments or make late payments, that will bring down your score. In fact, many people who file for bankruptcy were struggling with these negative marks before they filed because their debt became unmanageable and they were unable to pay their bills.
Paying all of your bills on time each month will have a significant impact on your credit score, helping you to raise it steadily over time.
Open a Savings Account
Putting aside whatever savings you can will benefit you in two ways. First, it will ensure that you have an emergency fund established so that you do not have to rely on credit if you lose your job or have to make a major repair on your car. Second, any savings you have will show creditors that you are taking responsible steps with your finances and will serve as security for a line of credit.
Even if you only save a little each week or each month, putting aside what you can into your savings will help your finances and your credit.
Apply for a Gas or Store Credit Card
After you file bankruptcy, the chances of getting approved for a major credit card are usually not good. However, smaller retail cards like those for gas stations or department stores are usually more accessible as they have lower limits.
If you are able to be approved for one of these cards, you can use it to make small charges then pay back your balance each month to establish a new credit history. Just be sure to keep your balance low and to stay in your budget to ensure that your debts remain manageable.
It is not a good idea, however, to try and get a gas card for each gas station or a store card for every store to which you go. Pick one store and/or one gas station to start with and work on managing those accounts. If you apply for too many individual store cards, this will ultimately hurt your credit.
Apply for a Secured Credit Card
Many credit cards are unsecured, meaning that there is no collateral to seize if you default. In other words, if you don’t pay your bills, your creditors usually have no recourse to claim property or other assets to pay what you owe. This is why you need a good credit score to show your trustworthiness to pay your debts on these cards.
After bankruptcy, it may be difficult to obtain a traditional unsecured card from a major bank. However, you may be able to get a secured card. A secured credit card is issued for an amount that matches the amount of a deposit you have made with the bank. For example, if you have $500 in savings, you may be eligible for a $500 credit limit on a secured card. Then, if you default, your savings can be taken to pay the debt.
A secured credit card is often seen as a low-risk option for banks, and they can help you to rebuild your credit by establishing a new payment history.
Avoid Running Up Debts
Using some credit is a good way to re-establish payment history and credit. However, you should be careful to avoid running up a lot of debt. You may find yourself on a slippery slope that leads to more and more reliance on credit to pay bills or buy the things you need, which can lead to unmanageable debt.
Also, running up high debts will increase your debt-to-income ratio, which will hurt your credit score and make it difficult for you to get approved for new credit such as a car or home loan.
Monitor Credit Reports
Mistakes happen. However, when they happen on your credit report, they can damage your score and make it hard for you to get the credit you need. Make sure that mistakes aren’t hurting you by monitoring your credit reports regularly. If you spot mistakes, report them immediately to the credit bureaus to have them corrected or removed.
You can get a free copy of your credit report each year. However, there are also many low-cost credit-monitoring services that can allow you to access your report at any time and even notify you when any changes are made to your report.
Rebuilding your credit after bankruptcy may seem like a daunting task, but following these steps will help you get back on the road to recovery. Be sure to meet with a qualified financial advisor for tailored feedback for your personal circumstances.
Have you filed for bankruptcy? How did you rebuild your credit after you filed? Tell us your thoughts in the comments!
Eileen Bornstein is a North Carolina Board Certified Specialist in Business and Consumer Bankruptcy Law at the Law Offices of James Scott Farrin. She works with clients to help them find debt relief (http://www.farrin.com/bankruptcy-lawyer-north-carolina/bankruptcy-for-debt-relief) through bankruptcy protection. Information offered here is for general use. It is not legal advice and should not be construed as establishment of an attorney-client relationship. Ms. Bornstein is not a financial advisor.
The Law Offices of James Scott Farrin is a debt-relief agency. We help people file for bankruptcy relief under the Bankruptcy Code. Filing subject to qualification.
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