Simple Steps to Start Rebuilding Credit After Bankruptcy

Going through bankruptcy doesn’t mean that you’re stuck with bad credit for the rest of your life. Done correctly, you can emerge out of financial rut with a good credit score in just a few years. This isn’t to say that it’s easy or that it’s going to be cheap, but with the right strategies you can make bankruptcy a distant memory with little impact on your financial future. Bankruptcy laws are designed to give people who made some fiscal missteps a second chance at reestablishing firm financial footing. Here are 3 tips to improving credit:

Understand Your Credit Score

Your credit score is a simple three-digit number between 300 and 850. Mortgage companies and lenders that you may want to deal with in the future are going to get your scores from each of the three major credit bureaus: Experian, Equifax, and Transunion. Some lenders look at all three scores, some get an average, and a few drop the lowest score when evaluating you as a risk. The better your number, the better the chance a lender will let you borrow money at a reasonable interest rate.

A recent CBS.com report provided the following breakdown:

  • 60 percent of consumers have a credit score of 700 and above
  • You want to have a 720 score or higher
  • A score of 720 and above will place you in the same category as consumers with a score of 800 or higher.
  • At 720, you’re looked upon as a safe risk or investment and usually receive a loan hassle free
  • Word of advice: If you’re below a 700 scoring, it’s worth your investment to boost it up.

A lot of people are aware that payment history is a major factor in your credit rating, but the second most influential factor has to do with balances in proportion to your credit limits, which mainly affects open lines of credit like credit cards and HELOCs. If you’re looking to maximize your score, it’s generally best to keep your limits at or below 30 percent of your credit limit. So if you have a credit card with a $500 spending limit, you’ll want the balance to be below $150 when you apply for mortgage.

Now after a bankruptcy most, if not all, of your credit cards and other trade lines are closed. So what do you do?

Get a Loan

Repairing your credit history takes time and the willingness to take on more opportunities to improve your payment history. If you eventually want to qualify for a mortgage, it’s important that you have a few trade lines established so that you can prove that you are now able to make monthly payments on your obligations.

When you’re just beginning the recovery process, the easiest loan to get is an auto loan. There is less risk to the lender with an auto loan because the loan is secured by the vehicle itself. If you default, they take the vehicle. Even if your bankruptcy was just discharged a few days ago, chances are you’ll find a lender that’s willing to take you on as a risk.

Most lenders will require that you provide proof of income and the interest rate you get may not be the prettiest thing in the world, but it is still possible and a step worth if you’re serious about rebuilding your credit. You can get bad credit auto loans from DriveTime and a myriad of other lenders, but it’s important to look at not only the interest rate, but the total amount you’ll be paying back over the life of the loan. Generally, it’s best to get a low monthly payment that you’re comfortable with and pay more when you’re able. Don’t let your eyes get bigger than your wallet. Choose a loan that you’re confident you’ll be able to repay.

Get a Credit Card

Yes, some credit card companies will reject you. Yes, you’ll get a subprime interest rate on new credit cards you open. Yes, you’ll likely have to pay application fees and have strict terms on your credit card. However, you can do a lot to improve your credit score by getting a credit card, using it responsibly (on essentials you were going to buy anyway) and then paying off your balance every month.

Good people make honest mistakes with their credit. Your credit score can recover from bankruptcy if you make the right choices going forward. This includes careful budgeting and then making payments. Bankruptcy isn’t the end of world, but it does mean that you must learn from mistakes and have a sustainable financial plan going forward.

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