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Rebuild Your Credit

Reestablishing Credit

If you work at it, you can rebuild your credit quickly after filing bankruptcy. Usually, you can qualify for credit again, soon after filing, and rebuild your credit score. It is just a matter of knowing how.

For most people, your credit score will be higher 18 months after filing than it would be at that point if you had not filed.

While filing bankruptcy can severely impact your credit score, the effects don’t have to be lasting. Although bankruptcy is on your credit report for 10 years, you can qualify for new credit loans at good rates and terms long before the public record entry goes off. Most people can get secured credit cards almost immediately after filing, normal credit cards in a year, and at least within five years you can usually qualify for a mortgage. While you can normally get a car loan immediately after filing, the interest rate would be high and as time passes, you can qualify for lower rates.

If you keep your mortgage, a car loan or other debt in the bankruptcy, paying that debt on time will help you to rebuild your credit. Paying your bills on time, using only a small part of your available credit, and not applying for too much credit, all help to rebuild your credit.

People who have been unemployed and have large credit card, or unsecured debt, have been able to obtain credit cards, car loans, and mortgages within three to four years after their bankruptcy case is closed. Credit scores improve if you just watch your spending and use your new credit wisely. Lenders look at how you are handling your new found credit and then they may lower your interest rate, even though the rate may start out high.

Paying with cash is great if you are able to, but it does not help to rebuild your credit. While you may not want to have a credit card again, you would need one, for example, to rent a car, which might be necessary if you car is wrecked or needs a major repair, or if you travel. Having a credit card and paying the balance at the end of the month will not put you back in debt. Just use your new credit wisely.

A chapter 7 bankruptcy will stay on your credit report for 10 years, while a chapter 13 bankruptcy remains on your credit report for 7 years after your discharge. Once you start to rebuild your credit, do not use more than about one-third of your credit limit, and use your credit cards sparingly. One of the worst things you can do is to apply for too much credit at one time.

Some people seem to make a practice of declaring bankruptcy every eight years, or more often when the law allows. These people are known as “serial bankruptcy filers”. This is something you want to avoid. Learn from the experience, use credit wisely and avoid paying a substantial amount of your income for interest, finance charges, and bounced check charges or other bank fees.

Having a budget and keeping track of where you are spending, and on what, is always a good idea. After bankruptcy, you want to be particularly careful, and know just where your money is going every month. You should try to eliminate unnecessary expenses and try to put money into savings. You should always have some money in savings in case you need a major home repair, are sick or unemployed for a while, or in the event of any other expense that is not in your budget. The generally accepted goal is to have at least 6 months income in savings.

You should monitor your credit report and if there are any inaccuracies, you should contact the credit reporting agencies and try to correct the error promptly. Accounts that were discharged should be reported as “included in” or “discharged in” bankruptcy and your credit report should show a zero ($0.00) balance for the debts that were discharged. If there are any other negative entries on your credit report, you should take care of them at the same time. All of the credit reporting agencies can give you information about how to dispute erroneous entries on your credit report.

If you have trouble obtaining a regular credit card, you may get offers for secured credit cards, or you can contact your bank. Some banks will give you a credit card if you have an amount on deposit (such as $300 to $500), which is equal to the credit limit on the card it issues. Make sure there is no application fee or annual fee, and that the issuer will report your payment history to the three major credit reporting agencies. You should be able to convert a secured card to an unsecured card in a year, or a year and a half.

You should not have a balance on a credit card of more than 30% of the credit limit. Using all of the available credit damages your credit score. Pay the balance off in full each month. This will show that you are handling your newfound credit wisely. You do not have to carry a balance from month to month. Light use of a credit card will help rebuild your credit. Don’t charge more than you can pay off at the end of the month.

If you have student loans, a car loan that you reaffirmed, or a mortgage that you are still paying, make sure that you always pay on time. Getting an installment loan will also help rebuild your credit, even a loan that you don’t need. You can put the money in a savings account and even have automatic payments from the account. The additional interest that you pay should be worth the benefit it produces for your credit rating. Better yet, when you have a substantial down payment, get an auto loan with no prepayment penalty, and refinance at a lower rate each time you qualify for a rate that is about 25% lower.

Don’t rush into a high interest mortgage when you qualify. The best thing may be to wait until you qualify for a FHA mortgage, which normally only has an interest rate that is a half percent above regular rates. You may qualify within two years after bankruptcy. Make sure that you can afford the mortgage payment and the other costs of home ownership before you take this step. Defaulting on your mortgage will seriously damage your credit. Buy something smaller, and cheaper, that you know you can afford and where you can build equity more quickly. Some credit advisors recommend only having a 15-year mortgage.

Loaning money to friends or relatives, or co-signing loans for them can be dangerous. You should only do it when you can afford to give them the full amount, because that may very well be what happens. If they can’t qualify for a loan through normal lenders, presumably it is because they have bad credit. If those lenders are concerned about their ability to repay, you should be too, and should be aware that you are putting your credit at risk, and that there may be a substantial risk that you will not be repaid.

Being thrifty with your spending and using credit wisely are the smart things to do, and will help you recover faster.