Improving Your Credit Score After Bankruptcy

You may believe that bankruptcy will pose issues for you especially in your credit score.  Unknowingly, this belief can be reversed if you know how to handle post bankruptcy life as this will be your chance for a fresh start and for your credit score to improve.

What is a Credit Score?

You may be too concerned about your credit score, which everyone actually is.  What is so important about your credit score that you would want to maintain, protect and improve it?

Your credit score dictates your creditworthiness as a borrower or debtor.  This is determined by figures based on your credit files as analyzed.  Your creditworthiness gives lending or credit entities the impression of how likely you can pay your bills or dues.

Where is My Credit Score Based On?

Your credit score is based on credit reports which are gathered from many sources such as:

• banks;
• credit card companies;
• collection agencies; and
• governments.

A credit report bureau gathers your data and provides the data to a consumer reporting agency and also to private lenders.

How Is My Credit Score Calculated?

Your credit score is assessed based on the following factors:

• types of credit;
• length of credit history;
• amount owed;
• payment history; and
• new credit.

The factors mentioned have more or less a share in the evaluation of your credit score as follows:

How these factors impact your credit score should be thoughtfully considered.  Your types of credit will prove if you have a mix of installment credits such as in the case of credit cards, mortgage loans, or car loans.  The length of your credit history will likely put lenders at ease since this will makeup your payment history. The amount owed by you determines your credit utilization or the credit available that is being used.  Your payment history takes the greatest share in your credit score evaluation.  This will show if you are paying your financial obligations on time.  The new credit factor looks into how many new accounts you have, how many new accounts you have applied for recently, and when the most recent account opened.

What are the Different Credit Scores?

Take a look at your credit score bracket and what it generally means according to the FICO scale :

Take note that credit scores do not go lower than 300.

In the event of a bankruptcy, your credit score may drop to a “Poor” rating but this does not mean that you will remain in that rating for the rest of your life.  This rating by the credit bureaus ensures that you are taking steps to improve your bad credit that led you to filing bankruptcy, before you take on another debt.

How Long Does It Take to Improve My Credit Score After Bankruptcy?

You cannot take away from your credit report the fact you filed for bankruptcy, however, you can improve your credit score in 12-18 months.  You just have to be a diligent paying debtor.

In What Ways Can I Improve My Credit Score?

There are many ways on how you can improve your credit score.  Some may be applicable to you, some may not.  What is important is you take steps to do something to help rebuild yourself and your credit score.

Here are some suggestions that you can checkout:

• Pay existing loans and credit card dues on time.  This practice will show that you are a responsible debtor, and lenders or creditors can trust you again with loans or credits the next time.  This will establish your creditworthiness which is very important to lending entities.

It would be a good idea to pay on time, but paying a few days before the due date can make a huge difference.  It will signify that you prioritize not only your needs but also your obligations to those whom you owed.

Making minimum payments work, however, paying extra can do the trick on these lending entities to trust you again.

• Apply for a new line of credit.  This may seem difficult knowing that lenders will definitely look into your credit report with your credit score.  However, you may consider these types of credit:

– Credit builder loans.  This loan helps build your credit score if you have little or no credit history at all. 

In this loan type, the lender agrees to loan you an amount but does not give the amount directly to you.  Instead, the lender deposits the amount in an account that he/she controls and keeps it there while you are paying for the principal loan amount and interest.  Only until you are fully paid that the lender will release the money to you.  The lender reports your payments to the three major consumer credit bureaus:  TransUnion; Equifax; and Experian, to create or add to your credit history. 

A credit builder loan will only work best if you adhere to your payment obligations.  If you do not comply from your end, then this option will never serve its purpose of helping you improve your credit score. 

– Be an authorized user on a credit card.  As a supplementary credit card holder of a family member, or a relative, or even a close friend, you can improve your credit score – as long as the principal credit card holder pays his/her credit card dues on time. The downside of this option is that it can hurt your credit score even more if the principal credit card holder misses a payment or has delays in paying.

– Secured credit cards.  Secured credit cards are considered low risk credit since you are required to make a cash security deposit equivalent to the credit card limit that you will be granted.  It is only upon making the security deposit that the credit card will be issued to you.

Your security deposit will be used to cover your credit card bill if you are late or miss a payment. 
You will eventually get your money back if you make on-time payments.

• Get a stable job.  Having a job will show lenders your capacity to pay money owed, however, having a stable job makes a big difference since this will give a sense of security to the lenders that you can fulfill your financial obligations because of your employment history.

A stable job and income will positively influence a lender’s decision to give you another chance despite your bankruptcy record.  If you are self-employed, be ready with all the available documents you can gather to prove the stability of your income.

• Pay attention to your credit report and credit score.  Make sure your financial or bankruptcy information is accurate and updated.  In cases where a delinquent account is carried under your name but does not belong to you, you have to immediately correct the inaccuracy by reporting it appropriately to the credit-reporting agency.

Errors in your credit information will harm your credit score and your chance to be trusted again by lenders.

•  Get a co-signer.  Applying for a loan on your own might be risky taking into consideration your credit history after bankruptcy.  A co-signer to sign with you in your application can increase your chances to have your loan approved with the lenders also looking into your co-signer’s credit score.  Your co-signer will not have any right to the amount loaned, however, his/her role will be as important during the repayment period of your loan if you fail to satisfy your payment obligation.

• Don’t borrow money too quickly.  Allow your credit score to increase again by giving it some time after bankruptcy.  Focus on your other options that will somehow restrain you from applying for loans as this will hurt your credit score even more and your chances of getting second chances will be bleak.

How Do I Prevent Having Too Much Debt Again?

After bankruptcy, you know better.  Your bankruptcy experience might have taught you financial lessons that if learned well can be used by you to prevent yourself from going down the drain of debt.  Make whatever new-found financial philosophy you have as your guide.

•  Save up.  Make it a habit to save a portion of your income for unforeseen expenses.  Your savings will prepare you to have something to use in cases of financial emergencies, and will prevent you from borrowing money. 

• Adhere to a budget.  You should allot a budget for all your financial obligations and personal expenses.  Do not overspend.  Overspending typically happens when you do not have a concrete budget to follow and are not aware of your spending habits.  When overspending happens too often, it will likely lead you to debts that you might find difficult to handle.

Cutting back on some unnecessary expenses will help you save up more.  Learn to prioritize needs so you will not end up wasting your income on those that are not immediate and can wait.

Freedom Law is Here to Help

If you are unsure, or have doubts about your bankruptcy option because of factors that you need to consider such as your credit score, do not hesitate to talk to us.  We might be able to give you a clearer picture of how bankruptcy might be your best choice for now to have a fresh start.

Freedom Law is ready to help.  Please request a call-back by submitting a short online form. All initial consultations are free and confidential.