Ah, now you’re on your way to paying off your debt. You may actually have finished paying it all off or close to paying it all off now. But, now you have to move on to the next step: to rebuild credit after bankruptcy. It can be quite difficult to build up a credit history, and even harder to rebuild following a bankruptcy. Really, though, there are a few things you can do to help yourself rebuild your credit and get yourself to a great place once you have paid off all your debt.
What Is A Credit History And What Happens To It At Bankruptcy?
A credit report is the one major tool that banks and financial institutions use to decide whether or not to give you a loan or credit card. It is generally first created when you apply for your first credit- most likely a credit card. On applying and getting approved, there is a record maintained of your expenditures, bill paying habits and any outstanding balance (if any). This report is added on to with each credit card or loan you obtain. Most credit scores are recorded on a scale of 300-900 and you want to aim to be at the higher end of the scale in order to improve your ability to get credit. Over time, good or bad credit habits are recorded on your credit report and can help lenders decide whether or not to give you money. So, remembering to pay your bills on time, spending within your means and being discretionary with your spending can take you a long way. In short, good credit habits can help you with a good credit score while bad credit habits can get you rejected in many places.
Filing for bankruptcy can pull you credit score down dramatically. You are looking at a fall of 150 to 200 points in your credit score depending on how much you owed and who you owed it to. For those with great credit scores before bankruptcy, this fall may not be that bad, but with bad credit scores to begin with, those points you lost can be a huge dent in your credit score. How much bankruptcy will affect your credit will also depend on if you filed a Chapter 7 or Chapter 13 bankruptcy. Remember that no matter what you choose, bankruptcy will affect your credit score the most- over other credit consolidation tools like debt management or credit settlement. So, consider bankruptcy only if you have very limited resources to pay off your debt and have very little income.
How to Rebuild Credit after Bankruptcy?
Declaring bankruptcy is a huge step- conscious decision when no other path remains. This is generally a last resort just because of the long term effects of bankruptcy on your future credit. But, here are some things you can do to rebuild credit after bankruptcy:
Start paying your bills on time:
One third of your credit history is evaluated by how diligent you are with paying your bills. Start paying your bills when they are due so that at least one third of your credit score is improving slowly.
Try applying for a secure credit card. A secure credit card only allows you to spend what you put in to the card and usually has very low limits, starting around $200. Start with the lowest limit possible and gradually ask for increases to your limit as your credit improves. But, if you do not yet have control over your spending, consider sticking to low limits.
Know where you stand:
Consider getting your detailed credit reports. Know exactly where you stand after your bankruptcy so you know exactly what you need to do. Also, this gives you an opportunity to clear up anything that is incorrect on your report and get it corrected.
Budget your Life:
There is no better time than after a bankruptcy to start living on a budget. This doesn’t just mean tightening your spending belt, it means documenting your every income and every expense to determine how much you have to live on and how much you can spend or save.
Build a Cushion:
Save! Even if you are left only with $50 a month after life expenses, learn to save it. Let these savings be automatic deductions so you are not allowed to skip saving money. Getting even a 2% savings account will build your equity and help rebuild credit after bankruptcy. It also allows you to save for large expenses and for emergency bills.
To rebuild credit after bankruptcy is no small task, but your effort once can help you in the long run. Good credit habits and consistent rebuilding can work very well for you after bankruptcy. You can be then established as a stable borrower and can get you on the path to financial freedom.