After bankruptcy, how to rebuild credit is usually the most important concern you may have. It’s not easy, especially in today’s economic environment. In past years, banks were more willing, even eager, to lend to what we all now call “sub prime” borrowers. These clients will low or poor credit could get bad credit loans, bad credit credit cards, and even home mortgages. Those days are now past. So what are your options if you want to know how to rebuild credit after bankruptcy?
First you need to remember that a bankruptcy stays on your credit report for ten years. This means that even if you successfully raise your credit score through other methods, a lender will always see that public record notice of your bankruptcy on your credit report. Also, having this on your credit report will always depress your score somewhat (although no credit reporting agencies will ever tell you by how much.)
Many people think the best bankruptcy rebuild credit steps include getting back into debt, and getting a new credit card for rebuilding credit, or a loan for the same purpose. Yet it’s important to note that these cards and loans, even secured loans, come with extremely high fees and interest rates – rates that allow the lender to make money while expecting you to default again. A better option than getting immediately back into debt with a bad credit product is to take a breath, and wait for a bit to do other things to slowly recover your financial footing.
For example, one excellent thing to do is to subscribe to a credit watch service, where you can review your credit reports, see your score, and get notified when your score improves. One such service is FICO Quarterly Monitoring
which costs less than ten dollars a month. You should review your credit report for errors, to clean up whatever you can other than your bankruptcy, and these services help you to do that.
Next, start using a budget. Rebuilding credit is not just about using credit cards, but managing your debt wisely. People who are financially organized use budgets, and these people are less likely to go into bankruptcy. Make yourself a promise not to use debt as a replacement for income. Start using cash and debit cards, and avoid credit for the time being. That’s not to say that eventually you’ll want to apply for a rebuilding credit cards product, but right now, figure out your financial capacity to do so first.
Plan to put together a budget and stick to it for six months. Within that budget, determine what credit you still have. In bankruptcy, not all debt is discharged. You may have been on a payment plan, and kept some assets. Start paying those on time every single month. Even in a Chapter 7 bankruptcy, you may have some student loans after bankruptcy that you can pay on time, every month. You may even be able to consolidate loans or get a slightly better rate after a few months of on time payments.
One avenue to use to rebuild bad credit after bankruptcy is a small secured personal loan with your bank. Some banks are willing to work with you a year or two after your bankruptcy is discharged. You deposit a small amount of money in a savings account or CD, and the bank gives you a loan in that amount secured by your deposit. The loan payments appear on your credit report, which helps with rebuilding your credit, and once it’s paid off, you get your deposit back with interest. Talk to your banker, since loans of this type through other lenders can have high fees attached.
Finally, consider using less credit or no credit in the future. Banks are now much more wary of any borrower who has even moderate credit let alone bad credit. With a bankruptcy in your past, banks will be less likely to approve you for credit for two to five years. But banks are also treating even good customers badly these days – raising credit card interest rates to ridiculous heights, cutting back lines of credit or closing accounts. Do you want to be a slave to this attitude by banks?
Take this as a challenge. Start living without credit, and rebuild your credit after bankruptcy by keeping debt to a minimum. Don’t be a slave to FICO scores and borrowing. Instead, add money to savings each month instead, since after bankruptcy, as many of your old debts may now be gone, and you have some breathing room.
