Filing for bankruptcy can stir up a mixture of emotions. It may feel like a personal failure, a big relief, or it could cause feelings of anxiety about your financial future. One area you may be anxious about is your credit. Your credit score will take a pretty big hit after a bankruptcy filing, so it will take some time to rebuild. The key is to stay committed to taking the steps necessary to move toward an ideal credit score. Although bankruptcy negatively impacts your credit, in some cases it can help you get back on the road to financial health sooner.
“Ironically, a bankruptcy may help you start building good credit sooner than if you don’t file for bankruptcy and continue to struggle with more debt than you can pay, especially if you wind up filing bankruptcy later anyway. Eliminating or reducing debts through bankruptcy will help you (when the bankruptcy is over) to meet the two most important goals for a good credit score: making your payments on time (35% of your score) and not using most of your available credit (30% of your FICO score),” said Robin Leonard and Margaret Reiter in the book Credit Repair.
Here are four tips for attaining healthy credit after a bankruptcy.
1. Build savings
Not having enough savings is likely a big part of what got you to the point where you needed to file for bankruptcy. It will be important to begin putting away at least six months of savings so you can have enough cash on hand for emergencies. This way you won’t have to rely on credit to get through a tough financial situation. You can start by having a set amount of money automatically withdrawn from your checking account and placed into savings each pay period.
2. Add positive information to your credit report
Have you taken a good look at your credit report lately? There may be positive information missing that could help boost your score. This is one of the simplest ways to improve your credit. You can write a letter to the credit reporting agencies, requesting that positive information, such as an account in good standing, is added. Sometimes a creditor will submit your account details to one major credit reporting agency, but forget to send this information to the other two. If this is the case, you will have to send a copy of the credit report that has the complete information to the other two major agencies. Include a letter asking for the information to be included. You can also contact your creditor directly and ask for unreported accounts to be reported to the agencies.
3. Consider a secured credit card
You may be flooded with credit card offers after finalizing your bankruptcy, but many of them have high annual fees and interest rates. A secured credit card may be your best option. This type of card will require cash a collateral deposit. This cash will become the credit line for the card. Cash is used as collateral in the event that you are unable to pay off your debt. Once you have used the card responsibly for one to two years, you may be able to get an unsecured credit card.
“Your recent actions have a bigger impact on your credit score than negative events in the past, so you want to make sure that you are giving your credit report positive data in the years following bankruptcy to build up from a score. The best way to do this is to get a secured credit card from a bank…for the best possible score, you want to use only 30% of your available credit (if your limit is $500, never use more than $150 each billing cycle). Always pay your balance in full and on time when you get your bill,” advises InCharge Debt Solutions.
4. Hire a financial planner
Now that you have a clean slate, get in contact with a financial professional who can help you stay on track with your finances. A certified financial planner is the best person to assist you with managing your money and setting goals for the future. The Certified Financial Planner Board of Standards has an online directory.