November 3, 2016

Rebuilding Your Credit After Bankruptcy

bankruptcy counselingJust after you file for bankruptcy, it may seem impossible to start rebuilding your credit. While the process certainly isn’t easy, you can get through it with some due diligence.

Yes, you will initially have to pay higher interest rates when borrowing money. However, you will soon be much better equipped to handle your finances.

There are several strategies you can put into place to help raise your credit, and if you tread carefully, you may not be in as bad of shape as you think.

Chapter 7 Can Raise Your Credit Score

Filing for bankruptcy can greatly reduce your debt-to-income ratio, often making you appear a better risk to lenders. In the case of Chapter 7 liquidation bankruptcy, this could happen immediately. According to an article in the Los Angeles Times, the average credit score before filing chapter 7 bankruptcy was 538.2 on Equifax’s 280-850 scoring. By the time the cases were discharged, that average rose to 620.3.Another factor that can boost your credit scores is that lenders will know that you aren’t eligible to file Chapter 7 again for another eight years.

Unfortunately, the credit raising process takes a little longer for Chapter 13 petitioners, who must live within a strict budget for three to five years.

If possible, avoid borrowing money until you’re able to boost your credit score a bit. To avoid outrageous interest rates, it’s a good idea until that score is roughly 650. Keep in mind that filing for bankruptcy could affect your credit score by as much as 240 points.

Credit Cards

If you don’t already have a credit card, try applying for a secure credit card. This card requires the lender to make a deposit between $200-$2000. Then, the bank issues a credit line in the corresponding amount. To maximize the results, try not to exceed 30 percent of the card’s limit and pay off the full balance every month.

Keep in mind, though, that many secured credit cards require an annual fee that is higher than most unsecured cards. You should also be prepared to pay application and processing fees, though you may be offered a refund if you are denied.

Buying a Home or Vehicle

Most experts would agree that it will be 18 to 24 months after personal bankruptcy discharge before a bankrupt consumer who has reestablished good credit is typically able to obtain a mortgage. It’s a bit easier to finance a car, especially if you can prove that the vehicle is necessary to get to work to repay your debt. Again, be prepared for interest rates that are two to three points higher than the average rate. Be wary of any companies offering interest rates above that.

Credit Builder Loans

You may consider taking out a credit-builder loan. These loans are typically between $500 and $1000, but before they are deposited into your bank account, you must make 12 monthly payments. Since these payments will be reported to the credit bureaus, this will allow you to raise your credit while building savings.

For more information on this process, see this article written by the staff at Bank Rate.

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