How to rebuild your credit after bankruptcy

Demonstrating financially responsible behavior and securing debt can help you recover from bankruptcy. (iStock)

Declaring bankruptcy may seem like a tough decision, but it can be the best way to get back on a solid financial footing if you are in dire straits.

Bankruptcy allows struggling consumers to eliminate crushing debt or establish long-term repayment plans, depending on the circumstances and the type of claim filed. It can stop collection calls and can protect debtors from foreclosure.

While bankruptcy will damage your credit rating – the filing information stays on a credit report for up to 10 years, depending on the Federal Trade Commission – it does not need to place a permanent cloud over your financial life.

You can start working to restore good credit immediately. In fact, the median credit scores of people who file for bankruptcy protection increase steadily each year thereafter, according to one. US Bureau of Consumer Financial Protection report.

“Bankruptcy will haunt a filer for a while, but it gives leeway to reassess what’s wrong and how to rebuild,” said Scott Cole, CFP, founder and chairman of Cole Financial Planning and Wealth Management in Birmingham, To the.

Here are several steps that can help a person restore their creditworthiness after filing for bankruptcy.

Check your credit report

Regularly monitor your credit report for errors, because mistakes are common, according to Greg Plechner, CFP, a partner at Greenspring Advisors, a New Jersey corporate retirement and wealth management firm.

HOW TO CHECK YOUR CREDIT RATING FOR FREE WITHOUT PENALTY

Federal law allows you to obtain a free credit report each year from each of the three major credit bureaus via AnnualCreditReport.com.

Once your bankruptcy is finalized, Plechner said, confirm that the bankruptcy filing date is correct and that accounts released during the process are declared released.

Explore alternatives to credit cards

Secured credit cards can help you build credit when you don’t qualify for a regular credit card. While you can make purchases with it just like you would with a traditional card, you “secure” – or back up the account – with a cash deposit.

“This helps protect the lender in the event that you cannot make payments,” Plechner said.

FICO SCORE VS. CREDIT SCORE: WHAT’S THE DIFFERENCE?

Use the card reliably over time and you can restore your creditworthiness with the credit reporting agencies. A word of warning, however: fees and interest rates can be high on secured cards, Plechner said.

A credit loan can help you both boost your credit score and build cash by making regular payments, including interest, to a blocked savings account opened by the lender – often a credit union. The funds are yours after you pay off the loan over six to 24 months, according to the CFPB.

Another possible option is retail credit cards that you can use at your favorite stores if you don’t qualify for a regular unsecured credit card. The criteria for purchasing or approving store cards tend to be more liberal, but fees and interest rates can be high, Plechner said.

Get support from your friends or family

If you can’t get a loan or credit card on your own, a friend or family member with good credit might agree to co-sign for you, which can improve your credit score. This can be a big request, however.

“A co-signer risks their credit to help you,” Plechner said. “If it’s problematic to ask someone to co-sign, you can instead ask to be an authorized user on a friend or family member’s personal credit card,” he added. . “Be sure to verify that the credit card will report authorized users’ payment activity to the credit bureaus. “

Adopt good financial habits

Responsible financial behavior is the cornerstone of good credit.

“The secret to rebuilding your credit is essentially the same as getting good credit in the first place. Pay your bills, on time, every time, all the time, ”Cole said. “This is the number one route. By doing this, you show creditors and potential lenders that you know you’ve learned how to manage the credit you have.DEBT SNOWBALL METHOD VS. DEBT AVALANCHE: WHAT’S THE DIFFERENCE?

It also means refraining from falling back into old bad habits and gaining the upper hand.

“You just have to stick to it. Don’t overextend yourself and make sure you can handle the current obligations, ”Cole said. “The longer and more consistent the process, the less risky you become for potential lenders and the higher your credit score will be. Be consistent, don’t overuse available credit, and pay bills on time.

Plechner recommended paying more than the minimum on credit cards when you can, and being aware of two don’ts.

HOW TO AVOID CLOSING YOUR CREDIT CARDS

He warned consumers to avoid credit repair agencies because there is nothing a credit repair agency can do that you cannot do on your own.

He also recommended not to use payday loans. “The effective interest rate is almost always unreasonable,” he said.

Experian, one of the credit reporting agencies, notes that student debt is usually not discharged in bankruptcy and recommends making monthly payments on time to help rebuild your credit score.

Experian, like many financial experts, suggests budgeting to get your spending under control and control your debt.

“Bankruptcy can be a significant financial lifeline,” Cole said. “Don’t waste it.”

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