Five Steps to Rebuild Credit After Bankruptcy

With the recent economic downturns over the past several years, bankruptcies have become more common.  There are a number of different options for filling bankruptcy, if you have questions, you should contact an attorney.  The purpose of this article is to provide you some simple actionable steps to help with the reestablishment of your credit after your bankruptcy has been discharged.  The following link from the United States Courts website states over 1.2 million consumers filed bankruptcy in 2012. http://www.uscourts.gov/Statistics/BankruptcyStatistics/12-month-period-ending-december.aspx.  For individuals looking to rebuild after this event, below you will find some simple and actionable steps to help.  

1.        CASH is king:  With a bankruptcy discharged, most creditors will be unwilling to grant new credit.  When you have a nest egg, no matter the size, you can leverage you savings to help.  The obvious statement which follows is “if I had cash, I wouldn’t have to file bankruptcy to start with.”  That’s true, but hopefully while in bankruptcy you’ve been able to alleviate some of the debts restricting your cash flow.  If that’s the case, you may have to start by simply purchasing items using your nest egg.  This will help from repeating the cycle of debt accumulation via credit.

2.        Secured Personal Loans:  One of the components of your credit score is the mix of types of credit.  The variety of credit items, installment loans (mortgage, student loans, etc.), revolving debt (credit cards) comprise 10% of your FICO.  http://www.myfico.com/crediteducation/WhatsInYourScore.aspx a good mix of credit is essential.  Visit your local bank or credit union, speak with one of the bankers and explain your situation.  Ask them for a savings secured loan, agree to the terms of repayment, and then cash the check for the new loan the same day.  You now have a new installment loan reporting, there’s no way for you to default, if you can’t make the payments, the loans secured by your savings account, and you are safeguarding future credit mishaps.

3.        Secured Credit Cards:  The same strategy as the installment loan, with one exception.  When you secure a credit card, which is a great idea, the money used to secure the card will not be immediately available.  You will either have to setup a bank draft or send a check or money order, in most cases.  Also, keep in mind, it takes time for the credit card company to process your request, setup the account, and send the card via regular or express mail.  So if you are using money that’s not necessarily from your nest egg, keep this in mind.

4.        Pay your bills on time:  Timeliness of payments is 35% of your FICO score, follow the link above more information.  This one is self-explanatory and there’s not more to say.

5.        Be patient:  Following the steps above you will see some improvements; however, it will take time for your score to rise significantly.  With the initiation of multiple credit options, a couple of installment loans, a credit card or two, you will see improvements.  The thing to keep in mind, it’s a rebuilding process.  Take the steps and you will begin to see results, and it may happen much quicker than you expect.

Six steps to raise your score 200 points

Raising your credit score by step by step 200 points is like as refurbishing a residence, it may take some work, but after the process is complete, it’s certainly well worth the effort.  Most items remain on your report for at least 7 years, so we listed some simple, actionable steps to help insure the process is worth the effort..

Step 1

Apply for your free credit report.  There’s no way to raise your score if you don’t know what’s on your report.  www.creditreport.com  and www.annualcredittreport.com.   The industry standard for credit scoring is FICO.  There’s a fee for obtaining your score, but this is the one most lender reference when scoring is concerned.  You can obtain a copy here:  http://www.myfico.com/. 

Step 2

Clear out mistakes on your credit report.  ABC News reported 90% of total credit reports have to mistakes.  Removing inaccurate items from your report is NOT the responsibility of the reporting agency.  You MUST request removal of inaccurate information.  

Step 3

Please check your credit report details to ensure your credit limits are right for every credit card. Available credit is 30% of your FICO score.  To view the percentage and components to determine your FICO, follow this link: http://www.myfico.com/crediteducation/WhatsInYourScore.aspx

Step 4

DO NOT close your accounts.  It sounds counter intuitive, but this ties into Step 3.  When you close an account you now have less available credit.  When 30% of your score hinges on the amount of credit you have available and the max score is 850, doesn’t take a genius to figure out closing accounts can actually lower your score.

Step 5

Use bill pay or automatic payments.  Most banks have some service allowing for payment of bills in a timely manner.  FICO weighs timely payments as 35% of your score.  If you live an active lifestyle like most Americans, using automatic payment methods is a convenient way to insure timeliness. 

Helpful hints:  A late payment with your credit card doesn’t have to affect your score.  When reporting payments, lenders report for varying monthly periods, i.e.…30 days, 60 days, etc.  So you may have to pay a fee to the credit card company for your late payment, but if it’s not more than 30 days late, it WILL NOT be reported as late to the credit bureaus. 

Step 6

Minimum payments:  If you keep a balance on your credit cards, like most of us, make an effort to pay more than the minimum amount due.  The reason is three-fold.  First, by making only minimum payments, it will take your much longer to pay off your balance.  Second, you will accrue more interest and the compounding effect of revolving debt interest will make it extremely challenging, depending on the balances you carry, you may end up simply paying on the interest of your balance and NOT the balance.  Third and most importantly, refer to Step 3.  The higher your balance, the lower your available credit, so keep those balances as low as possible.  

Helpful Hint:  Call each of your credit card companies and ask them to raise your credit limit.  This one simple step will increase your available credit and raise your score virtually overnight.