Bankruptcy gives you the comfort of a pure financial slate and the worry that you will never achieve decent credit again. Although bankruptcy stays on your credit reports for up to 10 years, its impact on your score fades with time.
Do not worry! It seems your credit score after bankruptcy might be better than you think. Yes, you can have a higher credit score a year after bankruptcy than before filing, as you are in the phase of rebuilding your credit score.
There are several ways to improve your credit score. Let us check them one by one.
Make a New Budget
Usually, the culprit in financial disaster stories is the petitioner’s failure to adhere to a realistic budget. So, create a fresh, new budget. Organize your post-bankruptcy expenditures in three columns: fixed, variable, and irregular. Fixed expenses include those that do not change monthly—for example, your housing payment, car payment, etc. Variable expenses arise monthly but fluctuate—for example, food, clothes, entertainment, fuel, and utilities. This is an area to be taken care of. Assess 3-to-6 months of bank and credit card statements. List down even your small expenses and identify areas of overspending. Irregular expenses are not part of each month’s spending but can arise predictably or unpredictably. For example, hospital expenses, travel/celebration expenses, etc.
So, look at all your expenses and find the loopholes to start saving. Specify a set percentage of savings from every paycheck, and prioritize it. Dedicating 10% of each pay to your savings is a reasonable benchmark, and you can achieve this by shortening costs or adding income. Another method is to turn your spending income into currency, split it into envelopes or wallets for specified purposes, and spend only what you have allocated on each expense. For the digitally savvy, online budgets or smartphone apps help you achieve the same task. Make your savings automatic and inconvenient to get your hands on. Set up an account at a bank or establish a relationship with a credit union. Have a portion of each check direct-deposited into that account. Keeping your savings account in a different institution from your checking account makes transfers slightly more complex, and that’s a good thing.
Get a new line of credit.
Always try to apply for credit lines you know you can qualify for. Adding a new line of credit indicates you can make on-time payments responsibly. It also helps to build your credit score. When you’re trying to build your credit after bankruptcy, here are some types of credit for you to consider:
Credit builder loans.
Using a credit builder loan, you deposit money into an account. The lender maintains that money while you bear the principal and interest on the loan. You receive the money after paying back the loan. Regional and community banks typically offer credit builder loans, and the loan amounts are small.
Secured credit cards.
A secured credit card is a card secured by a cash deposit. This deposit is the same as your credit limit amount, starting at $200 and going up to $2,500. You will get your money back over time if you make timely payments. As secured credit cards are considered low risk, it’s an excellent option to rebuild credit.
As an authorized user of a credit card.
You have permission to use it when you are an authorized user on someone else’s credit card. As you are not the primary account holder, you are not liable for making payments on the card. Authorized users benefit from the primary account holder’s financial behaviour, such as making payments on the card, by building their credit. However, it could harm your credit file if they are not timely on charges.
Apply for a loan with a co-signer.
Getting a co-signer on loan can strengthen your approval possibilities. Lenders evaluate the co-signer’s credit score, which would add to your creditworthiness. When someone co-signs a loan, they cannot access the money. They are, however, responsible for repayment if you cannot pay.
Keep a close eye on your credit reports and credit scores.
Credit reports are only sometimes perfect. Inspecting your credit reports regularly can help you find errors or missing information. Throughout 2023, you can check your reports weekly for free on AnnualCreditReport.com. Every year, you are qualified for one free copy of your credit report from each of the three primary credit-reporting institutions – Equifax, Experian, and TransUnion. Inaccurate information results in lowering your credit score. So, if you find any inaccuracies, you can report them to the appropriate credit-reporting agency. It’s also a wise practice to track your credit score monthly, and it’s crucial to look at the same score each time. Your credit scores are calculated using the information on your credit reports, so any incorrect negative information can make it even harder for you to dig out of debt.
Can you get credit after bankruptcy?
Although encountering a lender ready to offer you a competitive product may be more challenging, there are ways to obtain credit after bankruptcy. The types of credit you could receive include:
- Car financing. Managing the double responsibility of vehicle and credit card payments can raise your credit score. Car loans after bankruptcy are a good starting point, especially short-term ones with affordable prices.
- Conventional mortgage. Most experts say it takes 18 to 24 months before a customer with re-established good credit can ensure a mortgage loan after discharge from personal bankruptcy. Credit-impaired borrowers should prepare to pay two to three percent interest rates over conventional rates.
- FHA-insured mortgage. Chapter 13 filers can obtain an FHA-insured mortgage if they have made timely payments for one year and the debtor has acquired the court’s permission. After discharge, Chapter 7 bankruptcy debtors must establish good credit within two years.
So, Bankruptcy does not erase a bad credit history but gives you a second chance. For more details, contact Dana MacRae LIT for further information on Bankruptcy.