Life After Bankruptcy

How to Rebuild Good Credit

For those of you who have been through a bankruptcy and are wondering if a lender will ever give you a second chance, consider these steps to rebuilding a good credit history.

After Bankruptcy – Review Your Credit Report

The first step towards rebuilding good credit is to review your credit report thoroughly and check it for inaccuracies or omissions at least once a year. Viewing your report will allow you to see what the creditor sees and will help you determine if something on your report might be viewed as negative to a lender. Also, you will want to check your report to make sure you have not been victimized by identity theft.

Under the Federal Fair and Accurate Credit Transactions Act (FACTA), a lender has to tell you if it reports any negative information about you to the credit bureau or if it grants you credit at less favorable terms than those received by most other consumers. Creditors cannot report credit information to a credit bureau that is known or believed to stem from fraud. If you have been a victim of identity theft, you can block fraudulent information from appearing on your credit report but you will have to file a police report to exercise this right.

Under FACTA, you are entitled to one free credit report from each of the three major credit bureaus per year. To obtain a free copy of your credit report visit www.annualcreditreport.com.

After Bankruptcy – Rebuild Your Credit

One of the biggest concerns of most people considering bankruptcy is how to rebuild credit after filing a bankruptcy. This is certainly a valid concern as credit has become such an important part of the American economy. Here are some tips to responsibly and successfully rebuild credit:

1. Create a spending plan or budget and stick to it, making sure you account for every expense. As a rule of thumb, your debt should not exceed 20 percent of your take-home pay. The 20 percent includes car payments, installment loans, credit card payments and personal loans. It does not include your mortgage, rent payments or utility bills.
2. Live within your means. Do not unnecessarily increase your debt by taking on credit to purchase luxury items that you do not need.
3. Consistently pay your bills and rent on time each month. This is the best way to improve your credit score, but it will take some time.
4. Use a savings account as collateral for an installment loan. You may be able to borrow as much as you have in the account, but your prompt repayment will indicate responsibility.
5. Make a larger down payment than required to indicate an interest in the purchase. A creditor will be more likely to approve a loan if you have something invested.
6. Ask a cosigner who has good credit to apply with you for a charge account or loan.
7. Consider applying for store and gas credit cards. These cards usually have small limits and can help you restore your credit if you have the discipline to set aside the money to pay the bill in full each month.
8. Consider applying for a secured credit card, where you make an initial security deposit with the creditor. If you use it responsibly and pay your balance on time each month, this will reflect positively on your credit report.
9. Avoid rent-to-own companies. It is not uncommon for the required weekly payments to increase the cost of the merchandise 2 or 3 times its normal value. Not only that, but most rent-to-own companies do not report your credit status to credit bureaus because they are not subscribing members.
10. Buy a used car so you do not get hit with the depreciation that occurs during the first two years of a new car purchase. Look for car dealers and mortgage brokers that attest to be "bankruptcy friendly.”
11. Stay away from payday loans. Payday lenders charge extremely high interest rates and are a "bad credit" trap. 

After Bankruptcy – The Consequences

There is life after bankruptcy, although it’s not without consequences. When it comes to access to credit, there is nothing quite as damaging as a bankruptcy. Filing for bankruptcy is public record and it will be recorded on your credit report. A Chapter 7 bankruptcy will be reported to potential creditors for 10 years and a Chapter 13 bankruptcy will be reported for 7 years. The more recent the bankruptcy, the tougher it will be to gain access to credit. The longer the time since you filed for bankruptcy protection, the better your changes of getting that loan.

When used wisely, credit can be a great tool. However, take steps now to control credit or it will quickly control you!