5 ways to rebuild credit after bankruptcy
If you're one of the 1.5 million people who filed for bankruptcy in 2010, the dark financial cloud may seem unending. But take heart: As time crawls on, if you don't suffer additional money missteps, your financial picture will improve.
Rest assured that you are not alone. The recession ushered in a tidal wave of bankruptcies, with the number of new filers nearly doubling from 850,912 in 2007 to 1.5 million in 2010, according to the American Bankruptcy Institute. While a bankruptcy will cause credit score damage, there are steps you can take to turn things around.
"Becoming creditworthy after bankruptcy is a major concern to millions of Americans right now," says Karen Carlson, director of education for InCharge Debt Solutions, a credit counseling organization in Orlando, Fla. After all, a bankruptcy can hurt your chances of getting a mortgage and make credit, in general, more expensive, with car loans sometimes costing consumers as much as 29 percent in interest after a bankruptcy, Carlson says.
The damage to your credit score can be substantial. In fact, a FICO score in the mid-to-upper 700s could fall by 200 points or more as a result of a bankruptcy filing, says Barry Paperno, consumer operations manager for MyFICO.com. Though bankruptcy remains on your credit report for seven to 10 years, you can start to turn your credit around in 12 to 18 months, experts say, by considering the following options.
Option No. 1: Correct reporting errors. While the last thing you may want to do is pull a copy of your credit report to see the bankruptcy's damage firsthand, it's important to make sure inaccuracies don't drag your score down even more. "Get a copy of your credit report free from AnnualCreditReport.com and make sure everything that should have been discharged in your bankruptcy shows a zero balance," says Carlson. If it doesn't, contact those creditors and the credit bureau to make sure the information gets updated.
Option No. 2: Take advantage of current obligations. Many people mistakenly believe that a bankruptcy will wipe out all debts, but some, such as student loans, child support and, in many cases, mortgages will not be discharged, says Barry J. Roy, a bankruptcy attorney with Rabinowitz, Lubetkin & Tully in Livingston, N.J. By keeping on top of payments on those remaining loans, you'll receive a credit boost for paying your bills over time.
Option No. 3: Rent your way to better credit. Earlier this year,, credit reporting agency Experian announced it would include rental histories in its credit profiles to get a more accurate reflection of consumers' financial pictures. "We included consumers' mortgages, auto loans, credit loans and student loans before, but we were missing the largest monthly expenditure for a third of the country -- namely their rent payments," says Brannan Johnston, vice president and managing director of Experian RentBureau.
Since the collection of rental data requires leasing companies to be part of a national network of property management companies and use special software, most individual landlords and small rental companies aren't equipped to report rent payments at this time. But if you plan to lease an apartment from a midsized to large rental company, check with the leasing office to see if they're reporting their data to Experian RentBureau, Johnston says. Though Fair Isaac's FICO score (which can range from 300 to 850) doesn't include the rental data in its credit scoring system, VantageScore (whose scores range from 501 to 990) does, and a record of paying your rent on time can make a difference. In fact, for those consumers who have rental data reported, 45 percent of them with VantageScores in the 500s and lower found their scores increased to 600 or above, RentBureau's Johnston says.
Option No. 4: Take a slow and 'secure' approach. Secured credit cards let you take baby steps back into the credit game. To offset the card issuer's risk, secured cards require a deposit that serves as your credit line, so if you put down $1,000, you'll have $1,000 in credit available. Apply for a secured credit card through a local bank or credit union, suggests Katie Ross, education and development manager for Auburndale, Mass.-based American Consumer Credit Counseling. Avoid secured cards with high fees, and make sure the card issuer reports your payments to the credit bureaus, Ross adds.
Option No. 5: Explore unsecured offers with caution. While some people who find themselves in financial straits may swear off credit entirely, doing so won't help your cause. Jacqueline Gikow of New York found this out the hard way after she filed for bankruptcy and then decided to operate solely with cash. "For about 10 years, I just used debit cards," the 64-year-old says. Since she hadn't built up her credit, she still had trouble getting credit cards after the bankruptcy had fallen off of her credit report. Though department store and gasoline credit cards tend to have high interest rates, they're typically among the easiest types of credit cards to qualify for. A high interest card with no annual fee, in general, can be advantageous if you use it regularly and pay it off immediately so you rack up no interest charges, Ross says. "By doing this, it will be reported to the credit reporting agencies and will show that you are making payments in a timely manner," Ross adds. Once you've shown your ability to pay on time and your credit score has risen accordingly, ask the card issuer to lower your rate, or apply for a card with better terms.
There's no one-size-fits-all approach to rebuilding credit after bankruptcy, but with consistent financial discipline and a little patience, you will get easier access to credit again, says Roy. "You'll be able to get a car loan, you'll be able to get a lease and eventually you'll be able to get a mortgage."
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