Filing for bankruptcy is not an automatic “out” from your financial troubles, but it can be a good last resort if you have tried everything else and have no way out of debt. If you have filed for bankruptcy, then the stress of looming loan payments may be over, but your credit journey is just beginning.
After you declare bankruptcy, it is time to pick up the pieces and start strengthening your credit so you can regain long-term financial stability without suffering the same pitfalls you dealt with in the past. Read on to learn a few tips for how to rebuild your credit after a bankruptcy.
1. Look at the Silver Lining
Your credit score decreases after you declare bankruptcy, but it doesn’t have to stay low. Instead of focusing on the fallout of your bankruptcy, look at it as a chance to start over, this time by making the best financial choices you can.
Your credit score is directly influenced by the things that you do. This is good news, since you can immediately take steps to increase it over time. It may take dedication and consistency, but after just a couple of years you can be on track to enjoying a high credit score and all the perks that come with it.
2. Change Your Spending Habits
Illness, business failure and even divorce can set a sequence of events in motion that lead to bankruptcy. Adjusting your spending habits to ensure that you can save for emergencies can help to prevent the same thing from happening again in the future.
If you’re a part of a couple, this will take cooperation. However, you can also consider taking steps to ensure that if your spouse doesn’t stick to the spending plan, it won’t put you at risk.
Make a household budget, planning for every expense that you can foresee. Adjust overspending wherever you find it. For example, if you feel you are spending too much on food, then you can begin preparing low-cost meals at home rather than ordering lunch at work or eating out on the weekends.
Get used to troubleshooting problems yourself before outsourcing the work to a handyman. Find ways to save on electricity and water. Look for insurance discounts. Do anything you need to do to make sure you are able to put away about 20% to 30% of your income each month.
Finally, look at any future credit cards as a way to rebuild credit and not as a way to afford things you can’t pay for with cash. In the past, you may have habitually used almost all the credit available on your cards. However, keep in mind that credit bureaus increase your score when you stick to a credit utilization of 30% or less. In future, if you have a credit limit of $10,000, give yourself a limit of $3,000.
3. Check Your Credit Report
Don’t assume that all is as you expect after bankruptcy. Order a free credit report online and assess your credit history, making sure that all of the information on it is correct. If there are any issues, dispute them so that Experian, Equifax or TransUnion can correct them. This will keep your credit score accurate.
4. Consider a Secured Credit Card
As you know, your credit score is affected by several factors, including:
- Whether you make loan payments on time.
- Whether you’ve defaulted on a loan.
- What your credit utilization ratio is.
Unfortunately, you may have trouble getting approved for a line of credit after bankruptcy, and without a line of credit, you will not be able to show lenders that you are a trustworthy borrower.
This is where secured credit cards come in. Secured credit cards require you to put an initial deposit down when you open the card. This protects the lender in the event that you default on your credit card and makes them more likely to approve your application.
When you get a credit card and make payments punctually, you’ll increase your credit rating. It’s important to only make essential purchases that you’ll pay soon after and use as little of your available credit as possible. Build your track record of handling repayments well, so lenders will be willing to offer you other forms of credit.
Once your debts have been discharged in court, you can use a secured card to take on a minute sum of debt, with the primary goal of using it to re-establish your credit. Look for the best secured credit card that meets your needs. Some give you cashback on certain purchases, so you could earn money by using it just for gas or groceries and paying the sum off during the grace period.
5. Become an Authorized User on Someone Else’s Card
You may already be an authorized user on another person’s credit card. If not, you can become one. This doesn’t require that they actually let you use the card. It is just a way to increase your score with no risk for the other person.
This will help you build credit because that person’s card will be added to your credit report. As long as the primary cardholder makes their payments promptly, it improves your credit score.
6. Use Small Credit Union Loans to Boost Your Credit Score
If you’ve made a decision to avoid all credit cards, you can demonstrate your creditworthiness by taking out a small loan instead of using an unsecured credit card. A credit union is usually a better option than a bank for several reasons. Some offer a free financial advisor, the rates are lower and the payments are more manageable.
If you want to stick with a bank that you’re already doing business with, ask them about a credit-builder loan. As with a secured credit card, you’ll need to make an initial deposit to cover the sum you would like to borrow.
When using this tactic, your aim is not to borrow a large sum of money. You’ll want to borrow a very small sum that you can easily manage to pay off. Choose a term of around three months, or even less if possible. That way, you do not accrue much interest.
Pay the principal off on time for that loan and make all payments in full. This builds your reputation as a trustworthy borrower. Your credit rating will go up and you can boost it even further with a new short-term, secured loan.