Bankruptcy may cause a significant decrease in your credit score. In many cases, however, credit scores will be as low as they will ever be before filing, due to missed mortgage payments and non-payment of credit card debts. Filing bankruptcy may actually improve those credit scores because all or most of the unsecured debt will be eliminated and discharging debts again in bankruptcy will not be possible for many years. Either way, it is a very good idea to start rebuilding your credit score immediately after filing bankruptcy.
Rebuilding your credit score demonstrates that you can handle credit responsibly, that you can repay your debts on time, and that the events that led to your bankruptcy are unlikely to repeat.
Here the steps you should take to rebuild your credit following bankruptcy.
Check Your Credit Reports and Dispute Incorrect Information
Following your bankruptcy discharge, get a copy of your credit report from each of the three major credit reporting agencies: Trans Union, Equifax, and Experian. Because creditors do not always report to all 3 agencies, credit reports may vary. You can obtain one free credit report per year from each agency through websites such as AnnualCreditReport.com, FreeCreditReport.com and Creditkarma.com. You should review the three credit reports for incorrect information, such as discharged debts that have not been removed or accounts that are listed on the credit reports that are not yours. Generally the agencies are good about removing inaccurate information. Instructions for removing credit report errors, along with sample letters, can be found at the Federal Trade Commission website.
Pay Your Bills On Time Every Month.
The single most important step you can take in rebuilding your credit after bankruptcy is to pay your bills on time every month. Payment history is one of the most important factors in determining your FICO score, so never make a late payment. Late payments following a bankruptcy tell the lender that financial problems remain that the bankruptcy did not solve.
Pay recurring bills, such as rent, telephone and utility bills, in full and on time. To be on the safe side, if a payment is due on the first of the month, pay it by the 25th of the previous month. Consider setting up automatic payment deductions from your bank account for these payments to make sure you do not miss any of them.
Get New Lines of Credit –
Apply for a secured credit card as soon as possible following bankruptcy. These cards require you to fund a bank account up to a matching credit limit, which typically ranges from $200 to $5,000. If you fail to pay your secured credit card balance, the bank will take payment from your bank account. By depositing funds equal to your credit limit, a secured credit card will be issued despite your poor credit history. A regular credit card application might be rejected and a rejection on your credit report would hurt your credit score.
A secured credit card is used like any other credit card. Choose a card that reports your payment history, on-time or delinquent, to the credit reporting agencies. Make small purchases regularly and pay down the entire balance every month. Never max out your secured credit card limit. Ideally, use less than 40% of the available credit limit. Generally, you can increase your credit limit by depositing more money into the bank account. After approximately a year of timely payments on your secured credit card, the deposit will be returned, and you will have an unsecured credit card.
The more different types of credit accounts, also known as trade lines, you have, the higher your credit score will be. So, while opening multiple secured credit cards will boost your credit score, opening one secured credit card, and then opening an unsecured credit card, such as a department store or gasoline company credit card, will boost your credit score further.
As with the secured credit card, pay all unsecured credit card balances off in full every month. Never use more than 40% of your credit limit. Be selective and careful when applying for unsecured credit cards, because each time you submit a credit application, a “hard inquiry” is generated. Too many hard inquiries will decrease a credit score, because you appear to be a greater credit risk. Also note that hard inquiries may be generated when you apply for automobile or renter’s insurance or new utility service.
Another way to diversify your trade lines, and increase your credit score, is to buy a used car with a loan from your local bank or credit union, which will report your payment history to the credit reporting agencies. Do not buy from a used car dealership that does not report payment history. Make sure you can easily afford the monthly payments. If a car loan is too big, buy a single piece of furniture on an installment loan that is reported to the credit reporting agencies, and pay off the loan after six to nine months.
One common mistake is closing credit accounts. Your credit score is, in part, based on your total available credit. Getting new trade lines increases your available credit. As you charge purchases, your available credit decreases, but paying off the monthly balances restores the available credit. However, by closing trade lines, you decrease your available credit and your credit score. It is better to make small purchases on credit accounts than to close them down.
Making timely, or faster than required, payments on three or four different types of trade lines that have been open for 12 to 24 months following your bankruptcy discharge demonstrates to potential lenders that you can responsibly handle debt and that your bankruptcy was attributable to circumstances beyond your control.