If you are like most people, you have realized that Chapter 7 bankruptcy is not the end of the road, but the beginning of a long and positive journey.
After paying off your debts in court, you have a unique opportunity to restore your credit without overwhelming financial burden.
But that doesn’t mean you won’t have to deal with negative consequences. According to myFICO, you will see a significant drop in your FICO score if your credit history was excellent prior to applying, and a less severe drop if you started with a lower score. Either way, your numbers will probably be at the bottom of the 300 to 850 scale.
Luckily, you can overcome credit damage with smart strategies. Here are nine ways to improve your credit score after bankruptcy.
1. Make sure you are zeroed
Ashley Morgan, a bankruptcy and debt attorney based in Herndon, Va., says the first thing to do is make sure that any bills you filed for Chapter 7 bankruptcy show up as “zero balance payable” on your credit reports.
“If there is still money left in these accounts, your scores will be even lower than they should be,” says Morgan.
Get copies of your Experian, TransUnion and Equifax credit reports from AnnualCreditReport.com. If you find an incorrect balance, discuss it with one of the credit bureaus (this will warn others) and attach bankruptcy papers that indicate a dismissal. When your credit reports are updated, your scores should be adjusted upwards.
2. Handle Confirmed Debts Carefully
If you left any debt behind after bankruptcy, you’re in a good position, Morgan says. You are ready to use them to your advantage.
Instead of applying for and getting new loans and credit cards, you have what it takes to add great information to your credit reports. Payment history is the most important factor in assessing creditworthiness, so stick to these deadlines. And if you still have a credit card, only withdraw what you can and pay it off in full when the bill arrives.
Chapter 7 bankruptcy will remain on your credit reports for a total of 10 years, but as you provide evidence of responsible credit use on your credit reports, your scores will increase, especially as bankruptcy escalates.
3. Apply for a secured credit card
Don’t have an active loan or credit card? No problem, says Adam Selita, CEO of The Debt Relief Company.
“The best and most profitable way to increase your credit after bankruptcy is to apply for a secured credit card,” says Selita, who explains that you can get one regardless of a bankruptcy record or an extremely low credit score.
Secured credit cards are secured with a cash deposit, which usually corresponds to a line of credit. So if you bet $500, that same amount will be your limit. Many lenders will refund you after you make a certain number of timely payments, turning it into an unsecured card. Some even offer a rewards program so you can earn when you charge.
For example, a Discover it® secured credit card offers 2 percent cash back at gas stations and restaurants (up to $1,000 on purchases per quarter) and 1 percent cash back on other purchases. In addition, starting from seven months, your account is automatically verified and if you have used the card responsibly, you can switch to an unsecured line of credit and get your deposit back.
4. Consider an unsecured credit card suitable for bankruptcy
Another option is to get an unsecured starter credit card specifically for people who have filed for bankruptcy, such as the Indigo Mastercard. However, the limits tend to be low, many charge an annual fee and are less inclined towards reward programs.
Michael Sullivan, personal financial adviser to Phoenix-based nonprofit credit counseling agency Take Charge America, also recommends low-limit department store or gas company cards, as they can be even easier to qualify than general-purpose accounts.
Just don’t wait, he says: “A consumer with good habits can have a credit score of over 600 within a few years of filing for bankruptcy, and it can be a very good score before the 10-year period is up.”
Use low limit cards carefully. Credit usage is the second most important FICO scoring factor, so if your balance is close to the limit and your scores are calculated before you pay your bill, you will be out.
A weekly groceries bill can put you at the limit with these cards, so charge whatever you want, but remove the balance immediately. This guarantees a low credit utilization rate as well as timely payments.
5. Use automatic payment with fixed invoices
Whatever credit card you have, simplify your credit recovery plan. Set up fixed monthly expenses (for example, a $49 gym membership), charge them to your card, and then that amount will be automatically redeemed through your bank’s bill payment system.
If you’ve had trouble paying off debt before, this is the perfect way to stay on track, Selita says. You won’t have to do anything other than make sure you have enough funds in your checking account to cover your expenses and keep track of your credit card statements.
In addition to being simple, this strategy ensures that a steady stream of positive data is added to your credit report. By consistently charging and repaying a loan, you demonstrate that you are a reliable borrower, so your scores will increase.
6. Get a loan builder loan
To create a really high score, prove that you can handle a variety of loan products. This is where loans come in. Since you cannot qualify for an unsecured loan, consider a loan builder loan instead.
Usually offered by credit unions and local banks, you deposit a certain amount of money and then you are given a loan for that amount. Basically, you are just borrowing your own money.
Like all loans, it comes with a repayment schedule and fixed monthly payments. Sunrise Bank, for example, offers construction loans for 12 to 18 months, and your money will be invested in a certificate of deposit, so you will receive a small percentage.
The lender sends your account information to the credit bureaus and your creditworthiness will improve thanks to your stable payment history. After payment, your deposit will be returned to you and you should see a positive jump in your credit history.
7. Get a guarantor
Want to get even more credit? This can make sense if you need to finance something expensive, like a car or a new laptop. If you know someone with an impressive credit score and a high income who is willing to act as a guarantor, this is another way. Loans for a couple of years will help extend your overall credit history.
Credit will appear on each of your credit reports and will be calculated on your credit history, but you will both be responsible for the debt. If you don’t pay properly, your guarantor will have to.
This arrangement should suit the lender since the guarantor is a low-risk borrower, but you will have to make every effort to pay on time. If you don’t, not only will your credit score worsen, but you could also jeopardize a valuable relationship.
8. Become an authorized user
It’s less risky for the other person to ask if you can be an authorized user of their credit card. If they agree, you will be added to a specific credit card account. It will then be listed on your credit report and count towards your credit history.
“This use of someone else’s credit is a great idea for people who have just filed for bankruptcy,” says Selita. “If the cardholder pays on time and keeps debt low, your credit score will go up.”
All you have to do is check your credit report regularly to make sure the card is in good condition. When your credit score increases enough that you can claim your own account, you can thank the owner for the trip and ask for it to be deleted.
9. Add alternate details to your credit report
Another near-easy way to improve your credit score is to add alternative data such as utility bills and mobile phone payments to your credit profile.
You can add them to your Experian credit report using the credit bureau’s free Experian Boost program. There are no eligibility requirements and once registered, all you have to do is pay those bills on time.
This program works especially well for people with a low credit score or thin profile. Experian reported that consumers with a FICO score of 579 and below had the highest score gains, with 87 percent increasing their scores, with an average gain of 22 points. Twenty-one percent jumped from “bad credit” to “satisfactory.”
How to avoid re-accumulating debt
Paying off your credit card debt in full every month is one of the best ways to avoid building up debt. If you cannot pay off the entire balance, try to pay as much as possible to minimize the amount of interest you will have to pay. You should also work on creating an emergency savings fund so that you have money set aside to cover unexpected expenses.
Finally, living within your means can help you avoid overspending and make it easier to pay your bills in full each month.
bottom line
There is no need to be afraid of a paltry credit score after bankruptcy. With time and effort, you can make huge strides.
“They call bankruptcy a fresh start for a reason,” Morgan says. “Without the many thousands of dollars weighing you down, you can use credit again, but this time by raising your credit score!”
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