How To Rebuild Credit After Bankruptcy
Bankruptcy is a challenging circumstance to face. For some, bankruptcy represents financial doom, but fortunately this doesn’t have to be the case for you.
Today, there are many avenues to take for rebuilding credit. Here, we’ll advise you on the best ways to do so in a few easy steps.
What Does It Mean To Rebuild Your Credit?
Before we begin, let’s make sure you are aware of what it really means to rebuild your credit. This process entails more than just obtaining a credit card or paying a car loan on time. The fact is that different agencies will judge you based on a variety of elements, and they are all different.
Before we begin, we will show you an example or two of how your credit is looked at. Even credit card rules have changed in the past ten years, and most people are unaware. This next section is the most important because you don’t want to start a new credit rebuilding scheme and then find out you have been doing it all wrong.
Debt To Spending Ratio
In years past the most important thing you needed to remember about credit was paying it in full. The second most important thing to remember was to never pay the minimum. Minimum payments still cause interest payments. And if you get a new credit card that is a credit rebuilder, the interest could be 20%. We will talk about interest a little later.
Today, credit card companies review and judge the lifestyle rather than simply on-time bill payments. The way they do this is they look at whether or not you are living on the credit cards. You may be thinking, “So what if I am?” This sounds much like a value statement on their part but it still stands true as the way they will judge how you use the privilege of credit with their company.
Creditor’s Point of View
Here’s why this happens from the creditor’s point of view. The creditor feels that if you are living off of the credit they granted to you, then if one thing happens, you will not be able to pay it back.
To the creditor, your credit should not be for bills, and only 30% of what they lend you should be used in one month. Why then do they lend you such lofty amounts? The amounts they lend you are for emergencies, vacations and unusual occurrences. This is why you can no longer use a credit card to pay off other credit card accounts.
The only way to do that is to get a credit account made for consolidation. This is when you allow a credit card company that buys the balances of all your credit cards. The consolidation company will negotiate an interest rate and repayment plan. You will not be allowed to use the credit cards while consolidation is happening.
Did you know that a car loan score is a separate credit score from your regular FICO score? In fact, the car dealership may never look at the traditional FICO score. They use an FICO auto score. In short, the car dealer is looking for bankruptcy, whether you are likely to file bankruptcy soon and any signs that you will default.
Why? Because unlike student loans, you can sometimes claim the car payments in the bankruptcy and be able to keep the car at least for a period of time. This puts the car dealership and the salesman’s commission at risk, so they will avoid you like the plague.
The chance to purchase a home need not be negated by credit rebuilding. If it is done correctly, you could get a decent mortgage rate. If you have not already been foreclosed then your chances of home ownership is greater. Here, we will show you how your credit is looked at by this last credit type before we move on to how to rebuild it.
The credit score a mortgage lender uses to determine your creditworthiness is the FICO. But again, it is viewed differently than other agencies. To date, if you want an interest rate below 4% then the FICO score from all 3 bureaus needs to be 800 plus. This is hard to get but having it hover in the area of 700 is the next best thing. Check your Experian, Trans Union and Equifax reports for outstanding debt and errors, and make sure you correct any errors you find.
Now that you have a better understanding of how your credit scores are viewed, we can confidently move on to the rebuilding process. We will focus mostly on rebuilding your credit after bankruptcy. The advice we give here can be used in most other credit rebuilding circumstance with bankruptcy being the most challenging.
The steps outlined in the next part of this article will provide actionable steps and knowledge nuggets that you may be unaware of. If you notice a trend throughout this post it would be that we look to expose the issues that may trip you up.
Why? Because those situations can cost time, money and discouragement when you thought you were doing so well. Success is our main objective when it comes to credit rebuilding.
How To Actively Rebuild Your Credit
Rebuilding your credit after bankruptcy is not as challenging as it seems, especially if you paid attention during your bankruptcy courses. The two courses that you need to take and receive a certificate for are mandatory which are the Credit Counseling and Debtor Education courses.
They will give you an idea about your personal finances and the debt you came to the bankruptcy with. At least you aren’t left totally to your own devices but there needs to be more knowledge gained for any real long-term success.
We suggest printing this half of the guide in order to reference the steps easier in the future. Grab a journal or digital document so notes can be taken about your personal situation regarding this information. We will split this section into two parts.
The first part covers what you need to do before you apply for more credit. The second part will cover how to apply for more credit and what types of credit you should have to rebuild credit again. And lastly, how to rebuild safely and not on a house of cards.
What To Do First To Start Rebuilding After Bankruptcy:
Organize all of your bankruptcy discharge information: After the bankruptcy, you will need all the paperwork you were provided for your discharge. If you lose them you can pay to get them online. It is important to keep all the paperwork, notes and debt information along with all the certificates you earned. The three most important papers are: the petition, notice of filing, and discharge.
There are several reasons to have these papers on hand. Your new lenders will want to see exactly what kinds of debt you filed for. The second reason is an old collector may come calling and you can then prove the debt is discharged.
That information can be seen on the credit report, but you do not want to risk errors or any creditor seeing more than they need to see to satisfy another loan.
Develop Good Credit Monitoring Habits: You are able to obtain your credit reports free annually. Do this religiously and make it a habit to monitor every piece of information on it to ensure it is correct. Any little detail can cost you going forward and post discharge is not the time to have that happen.
One important note about this is making sure you wait three to six months after your discharge to begin monitoring. You do not want to bring extra stress on yourself by seeing old debt that is still there. Give the agencies time to wipe the slate clean. You should not be obtaining new credit or loans that fast anyway. Then, make sure you stay on the agencies to correct their records. A bankruptcy discharge does not mean you stop being proactive.
Make sure you know what collection agencies were on your credit report prior to discharge. In checking your post discharge credit report, you should not see a new company there. Sometimes old debt gets sold, so they can dupe you into paying. Make sure you stop this as early as you see it.
Develop Good Budgeting Habits: This must be done in order to rebuild credit. The old ways of handling money are gone and the new way should be ushered in. Remember the aforementioned courses that were required for discharge? That was a start in correcting your future habits. Look at the means test they gave you and use it as a template for budgeting around your means and income.
Start some kind of emergency fund. It can be small for now, and it will impact rebuilding credit. Remember that emergencies are one of the main causes of overstretching a credit limit and thus causing a tailspin into credit hell. Put a little away each month to carry you until you have 6 months or more of emergency expense funds.
What To Do Next
Start thinking about new credit: After six months to one year, you will probably be safe to think about new credit. Just like any other financial portfolio, diversification is the key. It is not enough to have only credit cards.
The most important thing to remember is whether it is a small personal loan that you take out or a car to get to work, make sure it is the smallest loan possible. This ensures that you can pay it back on time and avoid interest charges or a late payment on your shiny new credit report.
Get a Secured Credit Card: A secured credit card is a revolving credit type and is used to pay for emergencies, vacations, special needs when you do not have cash. Make sure you only spend 30% of the limit given and pay it off on time. A secured credit line can be obtained from your bank or from a third party creditor that have cards made specifically for rebuilding purposes.
The steps for obtaining secured credit is easy. Research and choose the card that is best for you or simply walk into your local bank branch. Pay an amount that the card company keeps as collateral in case of a default. One important note is, you should be certain that you never, ever use that money.
You will be billed for anything you have spent just as you would for a traditional line of credit. You will pay that as usual and the deposit amount will remain untouched. Make sure that you check with the card issuer to ensure that the card company reports all on time and default payments to the credit bureaus.
Get a Credit Builder Bank Loan: Ask if your bank lends money that is put into a secured account that you may not have access to. Once the loan is paid off you may then access the funds. This is a little known way of rebuilding credit without a credit card or to help diversify your credit history.
Peer to Peer Loans: This is a way to borrow money from a certain type of investor that allows you to borrow and pay on time to the lender just as you would a friend or family member. You may find them online with specialized P2P companies.
There are many traditional and unusual ways to rebuild credit. Bankruptcy never has to be looked at as the end of the world. View bankruptcy as the end of an era. The era of struggle and the beginning of success. Just remember that you never need to go it alone.
Research the professionals that can help thoroughly. Credit repair is a commitment and should be approached as such. With a little effort, organization, and a new relationship to money, a bright future is ahead for you.
- Ultimate Guide to Debtor Education, The Second Bankruptcy Course
- Debtor Education Requirement
- Debtor Education and Life After Bankruptcy
- What Happens If I Don’t Complete The Debtor Education Course?
- Avoid Falling Into Debt With Smart Financial Management
- How To Rebuild Credit After Bankruptcy