Everyone who walks into my office presumes that their credit score will be irretrievably ruined for years to come as a result of their bankruptcy. I am always happy to tell them, “Stop listening to the doomsayers and panicky prognosticators!” Even though the court filing will stay on your credit report for 10 years, that does NOT mean your score will remain low. It also does not mean no one will allow you access to credit.
Of course, most people filing bankruptcy have low credit scores already. The financial challenges that have damaged their credit are the very reason they are filing in the first place. But decent credit can be right around the corner! And with time and a few good strategies, you can bounce your score significantly within a year or two. To fix credit after bankruptcy, all you need to do is follow the following suggestions.
Review Your Credit Report
It is always a good practice to begin each New Year with a review of your credit report. This is especially true for clients who have filed bankruptcy. The reasons for this essential habit are that you:
- keep your finger on the pulse of your credit and review the progress of your efforts to improve, refining your strategy of recovery;
- uncover any mistakes in how the creditors are reporting so that their proffered information doesn’t unfairly damage you;
- see if any creditors are engaged in unlawful conduct (yes, they do!) for which you might be entitled to compensation; and most importantly,
- guard against identity theft.
Ordering your credit reports is actually quite simple. You can visit www.annualcreditreport.com or my.bankrate.com once every year and receive free copies for each of the three reporting agencies: Equifax, TransUnion and Experian. We tell our clients to order the first set of reports approximately 2-3 months following their bankruptcy discharge. This allows us the opportunity to review them with trained eyes. We go through the credit report with the client to check for the accuracy of trade lines. We also check whether the client consented to certain credit reviews, and if any creditor is violating the bankruptcy discharge order.
When you are trying to fix credit after bankruptcy, sometimes it will be necessary to dispute information on your credit report. In order to assure that any incorrect entry is either removed or fixed, you must clearly state exactly what the error is and how it should be remedied. We urge clients to include evidence supporting your contention. Also, be sure to send the notice by certified mail, return receipt requested.
Avoid High Interest Debt
Recently discharged folks often become deluged with offers for immediate credit from car dealers, payday lenders and other sources of high-interest debt. The reason they do this is that they know you will not be able to declare bankruptcy again any time soon. They’re looking to get their feet in your door. We urge our clients to resist these entreaties. Instead, consider other ways to find a little breathing room or work on building up your credit scores.
A good way to avoid high-interest debt and to fix credit after bankruptcy is to:
- create a monthly budget and
- set aside 5-10% of your income for savings.
That way, you make sure you don’t have to resort to high interest debt just to get by or address a sudden emergency. If setting aside something in a savings account doesn’t seem to fit into your budget, consider reducing nonessential expenses such as fees for cable TV or high-speed internet, dining out at restaurants, or renting new furniture.
Avoid Unscrupulous Credit Repair Companies
According to the Federal Trade Commission, “anything a credit repair clinic can do legally, you can do for yourself at little or no cost.” That includes ordering copies of your credit reports and writing letters to the agencies to challenge inaccurate information. Of course, it does not include filing suit against a creditor or one of the three agencies because they are breaking federal law.
But it is important to be aware that some unscrupulous credit repair companies suggest they can accomplish things to fix credit after bankruptcy that they cannot. The Credit Repair Organizations Act prohibits untrue or misleading statements and compels companies to make certain disclosures. The Act the collection of advance payments, requires all contracts to be in writing, and allows consumers an unfettered right to cancel a contract within three business days. If we discover one of our clients has engaged one of these companies, we urge the client to contact us immediately. We can help to ensure they have actually been well-served and that the company has complied with the law.
Consider a Secured Credit Card
Applying for a secured credit card is probably one of the most popular ways of beginning to rebuild a credit score. In order to receive the credit line, the company will usually charge a start-up fee and require you to deposit a certain amount of money (between $200 and $500 is not uncommon). In our estimation, those funds should accumulate interest as a sign the lender is a reputable company. As you use the card and promptly pay it off every month, the lender may slowly increase the debt limit.
It is important to shop around a bit before alighting on a particular company. Some will charge exorbitant up-front fees, insist on high annual fees and include huge hidden costs. Avoid these predators. Keep in mind that many reliable lenders will require a certain waiting period after you receive your discharge before they agree to issue a secured credit line. This is a good sign that they aren’t trying to take advantage of you.
When you do finally receive a credit card, be sure to keep the balances low. The purpose of have the card is NOT to spend. It is merely to run planned expenses through a mechanism that enhances your credit score.
Finally, be sure the lender reports the credit history to the three bureaus. If they are on the up and up, this should not be an issue.
Consider Applying for a Retail Card
After you have begun building credit with a secured card, consider applying for a retail credit card. Retail companies such Sam’s Club, Amazon, Bed Bath & Beyond, Costco, Kohl’s and WalMart offer credit lines with rewards such as cash back on gas, travel and restaurant purchases. Of course, these incentives can lead to a high debt load due to high interest rates and the constant urging to spend more than you can afford. So these credit lines should also be used judiciously and only for the purpose of boosting your credit score.
Do Not Close Accounts
Every time you close an account, your credit score will go down. Seems counterintuitive? Keep in mind that part of your score is determined by how much you owe as a percentage of your total credit limit. Since your limit goes down whenever you close an account, so does your score.
Don’t Try to Remove Bankruptcy From Credit Report
There may be the occasional ad suggesting you can remove a bankruptcy from your credit reports. Nonsense. The only way to eliminate the reporting of a bankruptcy is by illegal means. Why create additional headaches at this point? The bankruptcy will be a matter of public record. And it is not the end of the world if it remains on your reports for 10 years.
Purchasing a Home or Car
Many of our younger clients want to know when after a bankruptcy they will be eligible to purchase a new home or a new car. Purchasing a new car is easy immediately after an order of discharge is received and the bankruptcy case is closed. However, purchasing a house or condo is a different story. It is not uncommon to have to wait 2-3 years after discharge before a lender will even consider issuing a home loan. Then, interest rates may be higher. They may be as much as 0.5% to 3% above conventional rates, depending on the applicant’s credit score. Requirements vary from lender to lender. Therefore, beginning to shop around immediately following the close of one’s bankruptcy case is a good idea.
If you are a first-time homebuyer or are of low-to-moderate income, the Federal Housing Administration has special opportunities and requirements for people in, or coming out of, bankruptcy. The FHA offers unique consideration for those with serious illnesses or those who have just lost a primary household income provider. As of 2018, FHA requires applicants to put down a mere 3.5% of the value of a home as long as they have a credit score of at least 580.
To Learn More About How to Fix Credit After Bankruptcy, Contact Us Today
With the right strategy and the help of a good bankruptcy lawyer, you can fix credit after bankruptcy. Call our Cleveland Bankruptcy Attorney at the Benson Law Firm today to learn more.