Whether you are overwhelmed by medical bills, or a lifetime of poor spending habits – bankruptcy can be your solution to starting over. Unfortunately, it is like an atomic bomb for your credit history. Bankruptcy can prevent you from getting a credit card, a mortgage, maybe even a job. In some cases a bankruptcy will remain on your credit report for 10 years!
Your report will list every creditor involved in the bankruptcy and your FICO credit score will likely drop into the 500‘s. However, if you have gone through bankruptcy do not give up hope. You can start to rebuild your credit score immediately. All you need to do is follow these 7 steps, stay on top of your bills and be patient.
Step 1: Pay Off All Debts
After you emerge from bankruptcy, it is more important than ever to stay current on all your bills. That includes timely payments to utility companies, cell phone services and creditors that were not paid in full in the bankruptcy.
Set up payment plans with everyone you owe and vow to never miss a single payment. Cut your spending or find ways to earn more money; do whatever it takes to ensure you have enough money to pay the minimum on your bills every month.
To make the biggest impact on your credit score, pay down credit cards that are closest to their limits. Put everything you can at them until you owe less than 30% of your maximum credit line. Then focus on paying off each card as quickly as possible.
Step 2: Set Up An Emergency Fund
Most likely, you no longer have the use of your credit cards so you will need to create an emergency savings account. This will be essential to keeping afloat in case your car breaks or you have a medical issue that keeps you from working.
Set up an automatic deposit with your bank that will transfer a pre-determined amount into a savings account every payday. If you don’t see it, you won’t be likely to use it. Once you get savings built up, you can use it to start a new line of credit.
Step 3: Review Your Credit Report Regularly
If you have been through bankruptcy, you should be familiar with checking your credit report. You can get three free reports every year through annualcreditreport.com by rotating between the major reporting agencies every four months.
You can also sign up for a credit monitoring service to review your report and credit score monthly. There are many different plans at many different prices, so do your homework to find the best company for your needs.
Step 4: Check Your Report For Errors
When you get your credit report, print it out and study it. Make sure your monthly payments are showing up and all the creditors involved in the bankruptcy have updated their information.
It is not uncommon for lenders involved in bankruptcy to move slowly to change your status from delinquent to bankruptcy. That can hurt your credit score every month. Here are some other common mistakes:
- False listings for late payments
- Discrepancy in reported credit limits
- Incorrect listings from collection agencies that were paid
- Negative items older than 10 years that should automatically fall off your reports
Computer and human errors happen all the time. It’s up to you to catch the mistakes and file a dispute.
Step 5: Report Mistakes
To report a mistake on your credit report, you can fill out a form on the reporting agency’s website or call your creditor directly. If you do not get a response in 30 days, credit counsellors advise you to mail in your complaint to the credit agency and the creditor. Be sure to include evidence of the mistake, like a canceled check.
Simply print out your credit report, circle each mistake and write up a simple explanation about the error. For example, if you paid your Visa bill in October, but it is still showing up as unpaid in December, circle the mistake on the report and write ‘Bill was paid October 17th’. Include a copy of the front and back of the check as proof.
Keep in mind, creditors have 30 days to contact the major reporting agencies. So if it looks like they forgot to record something, it may just be they haven’t sent in the most recent record. That is why it’s a good idea to check your report every month.
Step 6: Get a Secured Credit Card
It may be extremely difficult to get a credit card after you have declared bankruptcy because not many lenders are willing to take you on as a risk. However, you may get offers for a secured credit card.
A secured card is based on the amount of money you give to the bank to hold. If you give the bank $600 to open the account, that is your limit. If you want to increase your limit, you can simply deposit more money with the account. If you started an emergency fund, this would be a great place to use some of it to help you rebuild your credit. To have the greatest affect on your credit score, never use more than 20% of your limit and always pay the entire balance each month.
Lenders are quick to identify people who have been through bankruptcy, and you may get bombarded with offers for secured credit cards. Before you jump on the first offer, do your homework.
- Beware of high yearly fees
- Compare interest rates in the event you do have to carry a balance
- Make sure the bank reports your payments to all three credit reporting companies
A word of caution, a secured credit card is not the same as a prepaid card from your bank. A prepaid card, or a debit card, is generally not reported to any credit agencies and will not help you raise your credit score.
Step 7: Get an Installment Loan
An installment loan is different from a revolving credit line because you pay a fixed amount every month for a specified number of years. These include personal loans, car loans and mortgages. They usually require collateral.
An installment loan will show you are reliable and can make monthly payments on-time, which looks great on your credit report. In many cases, you only need to make 12 months of payments to start improving your credit score. If you get a low enough interest rate, you could use it to pay off higher credit card debt. However, there is the risk that once you borrow the money, you will spend it on stuff you don’t need and simply add another bill to your pile.
One option is to get a personal loan and put it in a CD or other interest bearing account. It will not be accessible, so you are less likely to spend it. Plus, you will be earning money off the CD that can go towards the cost of the interest payments on the loan.
Odds are, you won’t come out even. Just consider it the cost of raising your credit score. Once again, do your homework. Look for the best deals and make sure the company reports your payments to all three credit reporting bureaus. Some will not, and it will only waste your time and money.
You Can Do It
Rebuilding credit after bankruptcy takes patience and persistence. But it can be done. The more you can do to show you creditors you are responsible with money, the faster you can rebuild your credit history and your credit score.
Some banks will even issue you a non-secured credit card once you can show them a history of steady payments for one year. Use it to further build your credit and you will be well on your way to a 700 credit score in no time.
After 10 years, negative items associated in the bankruptcy will automatically come off your credit report. Using these 7 techniques will help you get ahead long before that timeline.