Bankruptcy and Credit
One of the most common concerns among individuals contemplating bankruptcy is potential damage to their credit score. Many filers fear the inability to secure a loan in the future following the completion of their bankruptcy case. Realistically, although discharging your debts in bankruptcy will harm your credit score, it also better positions you to rebuild your score over time. How fast you build back your credit will depend on a number of different factors.
The most obvious thing that happens when you file for bankruptcy is that you get a notation on your credit report, and your credit score will likely take a hit. Just how badly it will suffer depends on how high it was before you filed and how many accounts have been included in the bankruptcy case. It also depends on your current income and outstanding financial obligations. If you managed to retain your house, for example, paying your mortgage on time will improve your credit report. Your bankruptcy can be reported on your credit report for up to 10 years after the case was filed.
A few things to consider in raising your post-bankruptcy credit score:
»1. Look over your credit report. Carefully review your credit report and make sure it does not contain any errors - all of the accounts included in your bankruptcy should be listed. If you filed Chapter 7, their balances should be listed as zero. Your credit score would suffer unnecessarily if a creditor continues to report the account as delinquent after the completion of your bankruptcy case. You are entitled under federal law to a free annual look at your reports from AnnualCreditReport.com.
»2. Get new credit cards. This is arguably the most significant step in rebuilding your credit. If getting approved for an unsecured credit card poses a challenge, start out with a secured card. A secured card requires a cash collateral deposit that becomes the credit line for that account. So long as you make regular payments and don't go over the limits, your credit score will improve and you'll be able to "graduate" to an unsecured credit card. Screen your card issuer carefully and watch out for outrageous application or annual fees and punitively high interest rates.
»3. Piggyback. The fastest way to establish a credit history can be to "borrow" another's record, either by being added to a credit card as a joint account holder or by getting someone to co-sign a loan for you. Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit scores.
»4. Get an installment loan. Good credit scores usually reflect a mix of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages). Once you've had and used your credit bard responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short (no more than a year or two) will help you build credit while limiting the amount of interest you pay.
Rebuilding your credit after bankruptcy requires patience and responsibility, and it can take quite some time before your credit score begins to increase. However, with a healthy financial mentality, proper planning and careful spending, you too can be on the road to reestablishing good credit.
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