If you have accumulated more debt than you can reasonably afford to pay, filing for bankruptcy is often the best option. When you file for bankruptcy, you are able to get out from under the debt and ensure a better financial future for yourself and your family. However, the bankruptcy will have a negative effect on your credit score. Fortunately, you can take steps to rebuild your credit after bankruptcy.
If you’ve gone through a bankruptcy or are likely to go through one in the near future, it’s important for you to know how to rebuild your credit score. A poor or bad score is a score of below 619. An average credit rating is between 620 and 679, while a good score is 680 to 739, and an excellent score is 740 or higher. Let’s go over a few concrete steps you can take to get your credit score back on track and return your life to normal as soon as possible.
1 Check Your Current Credit Score.
Checking your current credit score can give you an idea of where you’re falling short and how you can improve. Maybe you’re missing payments, or maybe you’re struggling to get your payments in on time. It could be that you’re simply carrying more debt than you can sustain. Sometimes, there can even be errors in the report that you can dispute to increase your score.
Whatever the problem, a credit report can allow you to diagnose the problem and put together a plan to improve those parts of your credit report that need improving. You can pick up reports from Equifax, Experian, and TransUnion, along with AnnualCreditReport.com (which is the official site run by all three bureaus together).
2. Create a budget.
Before you start seeking to increase your credit score, spend time creating a budget that will ensure that you are able to pay all of your obligations comfortably. It’s also a good idea to put away some extra money for emergencies before you start applying for new credit.
One major part of preparing your budget is to create a plan for getting out of debt. This can require you to cut back your expenses significantly in the short term, but it’s worth it for the long-term increase in your credit score.
3. Apply for secured loans and credit cards.
When your credit score is low and you have a recent bankruptcy on your record, you may not qualify for unsecured credit. However, if you are able to give lenders some extra assurance that you will be able to pay, they are more likely to approve your application. The best way to do this is to apply for secured credit cards and loans, which are credit cards and loans secured by some form of collateral, such as a deposit or asset you own. Keep in mind that these credit options often come with modest limits and high interest rates. However, you won’t be using them on a long-term basis. The goal is to establish a record of making your payments on time.
4. Avoid closing existing credit card accounts.
If you close your credit card accounts, or if you have them closed on you, you shorten your credit history. That’s a bad thing, because a shorter history means less of a record of you, which means a lower credit score. So even if your current accounts don’t give you a great credit score, you should do what you can to hold on to them.
If you’re far enough behind on your payments, you may not be able to hold on to your accounts. That’s okay. But if it’s at all possible for you to keep your credit card accounts open, do it
5. Make all payments on time.
As you are trying to establish credit, making all of your monthly payments on time is essential. Late payments will appear on your credit report, dropping your score and causing you to appear riskier to new creditors. If you are worried that you will forget to make a payment on one or more of your accounts, consider setting up an automatic draft.
6. Apply for better credit options when available.
After your credit has started to recover, companies that offer unsecured credit with lower interest rates will be more likely to approve your application. After your score has begun to increase, consider applying for better credit.
7. Don’t take on more than you can handle.
Although applying for new credit cards and loans is an important part of rebuilding your credit and improving your score, taking on too much can put you at risk of falling behind in your payments. In addition, each credit application you submit results in a hard inquiry on your credit report, which lowers your score slightly. Thus, it is important to take it slow as you rebuild your credit.
8. Keep your balances low.
One of the most important factors in the calculation of your credit score is your credit utilization ratio, which is the ratio of your outstanding balances to your available credit. In general, it is best to keep this ratio below 30 percent. However, the lower this ratio, the better your credit score will be.
Filing for bankruptcy affects your credit but following these steps will allow you to rebuild it as quickly as possible. If you are considering filing for bankruptcy, please call Bunch & Brock today at 859-254-5522 to learn more.
