In my opinion, the single most important tip to rebuild credit after bankruptcy is to not be afraid of credit. One of the biggest mistakes people make is completely avoiding credit after they file bankruptcy. Although avoidance is likely done with good reason, it won’t help rebuild your credit.
Filing a bankruptcy case is an emotional process that most people never want to repeat during their lifetime. However, it is also a process that allows individuals who are suffering from debt problems to receive the help they need to recover from a terrible financial crisis. Taking on credit again after filing a bankruptcy can be scary because credit probably played a role in your decision to file bankruptcy in the first place.
Jane’s Experience with No Credit, Post-Bankruptcy
When Jane filed bankruptcy because she had lost her job and could no longer pay the bills she had accumulated while she was employed, she vowed to never have another credit card in her name again. Jane vowed to only use cash for all purchases so that she would never be in the position again where she might have to contemplate filing a bankruptcy case. Jane did not consider the fact that she needed to show she could handle credit responsibly in order to rebuild credit after bankruptcy. While Jane’s vow may seem like the smart move, in order to avoid another bankruptcy in the future, she was actually doing herself more harm than good.
Jane did not understand she needed to rebuild her credit after bankruptcy to create a strong financial foundation. Three years after filing bankruptcy, the transmission in Jane’s vehicle failed and her engine required major repairs. Jane was faced with borrowing money to pay for repairs or to purchase a new car. Because Jane had avoided all types of credit after her bankruptcy, her credit rating was low due to her lack of credit history. When Jane applied for credit, her interest rate was astronomically high because of this. If Jane had used credit after her bankruptcy, she would have established some good credit history and been rewarded with a much lower interest rate on her new car loan.
Tips for Handling Credit and Rebuilding Credit after Bankruptcy
It is very important to rebuild your credit after bankruptcy. Here are some tips to use, in addition to the lessons learned in your Financial Management Course, for handling credit and rebuilding credit after bankruptcy.
- Secured credit cards – This is one of the easiest and simplest ways to begin rebuilding your credit. You deposit money with the bank that issues the credit card (usually up to $500) to secure the card in the event that you do not make the payments. You may use the credit card and make monthly payments just as with any other credit card. Make sure that the bank reports this account to the three main credit reporting agencies so your management of credit will be documented.
- Store credit cards – Store credit cards are often easier to obtain than a major credit card. Even though your interest rate will be a little higher and your credit amount will be low, this will allow you to begin rebuilding your credit history. Charge small sums that can be paid off immediately, or in a short period of time (three to four months, tops). By paying the monthly payments before each due date, your credit rating will improve quickly.
- Credit Unions – If you are a member of a credit union, you may be able to work with your credit union for an unsecured personal loan to buy a car, make home repairs or purchase other necessary household items. Credit Unions will typically work with customers in need of rebuilding credit but you will probably pay a higher interest rate until you prove yourself.
- Pay bills prior to the due date – Paying your bills on time will help increase your credit rating quickly. Payment history is responsible for 35% of your credit rating. Schedule bill payments for automatic withdrawal if possible, or set up a reminder system to make sure you pay all bills on time.
- Make a budget – Living by a budget will help you know if you are getting in over your head with credit. You must know your income and expenses in order to ensure that you do not take on more debt than you can handle. Having a budget will also help you to quickly identify problems before they become too big to solve.
- Do not close accounts – Closing accounts may actually hurt your credit rating. If you feel you may be tempted to use the credit card, destroy the credit card but allow the account to remain open until you are ready to replace that account with another credit account you intend to use.
Schedule your free bankruptcy consultation to begin rebuilding your credit.