Bankruptcy is the worst thing that can happen to your credit score. Fortunately, if you are serious about rebuilding your financial life, you can be welcomed back into the world of credit, car loans and home mortgages even after experiencing bankruptcy.
However, in order to succeed, you must work hard to prove to lenders that you’re no longer the credit risk you once were. Seven years after you file, your bankruptcy will finally fall off your credit report, but there’s a lot of work to do in the meantime to ensure you can truly get back on your feet. Here we’ll take a look at the key steps you must take to rehabilitate your bankruptcy-ravaged credit score.
1. Check Your Credit Report
It is essential that any of the debts that were part of your bankruptcy be reflected as such, and any other information about repayments you’ve made is accurately reflected. After all, your financial profile is bad enough — you don’t want errors making it look even worse to creditors or banks.
Under U.S. law, each nationwide consumer reporting agency is required to provide you with a free copy of your credit report every 12 months upon request. You should be checking this at least once each year to ensure any changes that have occurred in that time are accurately reflected.
However, reviewing your credit report more often than just once a year will allow you to catch mistakes or fraud right away, before they can do too much damage. If you do find errors, vigorously pursue them with your reporting agency.
2. Set a (Very) Tight Budget
Planning and budgeting will not only help you rebuild your credit, it will also provide you with the skills (and savings) you need to stay afloat in case life throws you another financial curve ball.
Sit down and add up your essential expenses. This should be a very short list that includes little more than food, rent or mortgage, utilities, transportation and insurance. If these expenses take up most or all of your income, you will need to seek out ways to reduce them.
If you still have money left over, make it a priority to start saving some of it every month. This way, you will have something (besides a credit card) to rely on if an unexpected expense arises.
3. Pay Your Bills on Time
This should be your top priority — missing payments on bills of any kind will keep your credit depressed and any recovery far off.
If you don’t have online banking and bill payments, set this up and make a habit of checking your bank balance online at least every couple of days. Set up automatic bill payments from your bank account, or set up a schedule for paying your bills manually. Paying credit card bills is especially important, but if you miss out on utility or rent payments these may also eventually be reported to the credit reporting agencies.
4. Start Seeking Out New Credit
Granted, obtaining credit with a bankruptcy to your name can be very difficult and potentially expensive, but new credit is part of what it takes to convince lenders you are responsible enough to take on debt. This is important if you want to buy a home again, or a car in the future, or borrow money to send your kids to college.
The one caveat here is that you must use any credit you are able to get very sparingly. This will prevent you from falling behind on repaying this debt, and help you avoid the very high interest rates you are likely to receive from any lender who is willing to lend you money at this point. Also, remember you will not get any points on your credit score if you take on new debts and fail to repay them.
Those who are looking to recover from bankruptcy and become borrowers again need to keep their noses clean with credit bureaus for up to 10 years after they file for bankruptcy. This generally means that in order to regain much of the financial lives they’ve lost, those who have filed for bankruptcy must make major changes to their spending and their financial habits.
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