The goal of Chapter 7 bankruptcy is to provide financial relief, but it can also create worry about your future finances. Most people know that a bankruptcy stays on your credit report for 10 years. It is possible to rebuild your credit, and you don't have to wait a decade to do it. There are several ways to show creditors you are trustworthy.
By following the four steps below, you will learn how to manage your money and your credit standing. You can come back from bankruptcy stronger than ever.
Monitor Your Credit
If you are ready to take control and improve your financial health, the first step is to understand your financial situation. Get a copy of your credit report from all three reporting agencies and examine your credit history. Creditors look at this to determine the level of risk they face if they lend you money.
You should review your credit report for errors. Potential lenders can see every late payment and charge off you have. Bankruptcy zeros your debt, but it does not erase black marks from your report.
If you find inaccuracies in your credit report, you can dispute them yourself. Another option is to have a reputable credit repair agency do that for you; however, many credit repair companies promise things they can't deliver.
If you do enlist the help of a credit repair service, look for one with a proven record and a high Better Business Bureau rating. When comparing credit repair services, evaluate their prices as well as package offerings, cancellation policies and guarantees. Also, check their customer support options, including how and when you can contact them.
It's important to know what the information contained on your credit report means. There are many resources that are available that explain what the entries in your file mean. Each reporting agency (Experian, Transunion and Equifax) devotes help sections to this subject on its website.
The next step is to set a goal to raise your credit score. Creating a strategy will enable you to successfully rebuild your post-bankruptcy credit. Check your goal progress by monitoring your credit reports for changes in your credit score. A credit score under 660 is a problem because it shows creditors you are a high risk.
Paying all of your bills on time and having a low debt-to-credit ratio raises your score. People with bad credit are easy targets for predatory lenders. These loans typically have extremely high interest rates and poor terms.
Be wary of offers that promise to extend credit regardless of your credit score. Falling prey to a questionable lender can sabotage your plan to rebuild your credit. The good news is that when you reach the next credit score tier, you qualify for better interest rates. And once you get there, you can aim even higher. Having a high credit score will get you the best rates on loans and credit cards. Review your report regularly to check your progress toward your goal so you can verify that your strategy is working.
Prove You Are Credit Worthy
To demonstrate to creditors that you are a good risk, you need to re-establish a record of paying your debts on time and managing credit wisely. Potential lenders look for a good payment history, how much money you make, the total amount of credit you have available and how much of it has been used. They also consider your debt-to-income ratio and the age of your debt.
Avoid opening a new credit account if you know you will be applying for a loan soon. And once you have a clean slate, creditors want to see that you are not going to run up a high amount debt again. One thing in your favor is that you can't declare bankruptcy again for eight more years.
There are few types of loans available to help you rebuild your credit. Each has its own pros and cons, and choosing the right one depends on your situation.
Secured loans do not require good credit and are specifically designed to improve your credit. These loans are typically available through small financial institutions such as community banks and credit unions. You can borrow funds with a secured loan in a couple of ways. In one scenario, a bank will approve your loan but will not release the funds until the loan is paid. Another way to get a secured loan is to borrow against the money in your savings account. For instance, if you have $500 in savings, you can borrow $500, and that amount will be frozen until you have repaid the loan. In both cases, your on-time payments will elevate your credit score.
Secured credit cards are another tool to improve your credit. The company will require a deposit, then it will set a credit limit in relation to your deposit. The credit limit may be 50 to 100 percent of your deposit and some will let you exceed that amount. Secured cards are usually more expensive than unsecured cards since the company is taking on more risk. There are many secured credit cards available, so weigh your options carefully. Check the cardholder agreements for hidden service charges and fees.
Co-signed loans can also be used to boost your score and may also garner lower interest rates. Keep in mind that the co-signer will be liable for this debt. If you are late or you can't pay the loan, your co-signer will also be held responsible, and it will affect their credit. When looking for a co-signer, choose carefully. If you have any problems making a future payment, communicate with your co-signer to give them the opportunity to avoid the negative hit on their credit and the resulting strain on your relationship.
Stay on Track: Budgeting Tips
- Be realistic when creating a budget. This way, you're more likely to stick to it.
- Add 10 percent to your budget for miscellaneous expenses.
- Evaluate your purchases. Decide whether each purchase is absolutely necessary. When it isn't, put that money into your savings account instead.
- Include savings as an expense in your budget.
- Don't let missteps keep you from your goal. Learn from your mistakes and keep going.
Declaring bankruptcy gives you a chance to start over. You can make the most of it by learning from your experience and committing to better financial management.