Rebuilding your credit after bankruptcy is possible. Though it will take you time to raise your credit score, you can create a brighter financial future for yourself. This is one situation where being proactive truly pays off.
Here are some smart ways to rebuild your credit and improve your financial knowledge.
Start Small and Be Deliberate with Your Budget
After filing for bankruptcy, you’ll probably be eager to raise your score, and that’s certainly a good thing! However, be careful to avoid getting in over your head. Instead of taking on new loans in an attempt to prove your “worthiness” as a borrower, set yourself up for success with careful planning.
Focus on the following strategies:
- Create a budget that accounts for your monthly expenses and long-term financial goals. (Notes from your pre-bankruptcy credit counseling classes are a great place to start!)
- Build an emergency fund. We’ve all heard that we should have 6 months of expenses set aside. Start setting aside a couple hundred dollars a month where you can, and adjust your budget accordingly.
- Dispute any errors on your credit reports.
- Track your credit score each month from the same source.
Know Which Types of Loans are Available to You
After you have built up emergency savings and established a workable budget, it’s time to take a look at credit options. Unfortunately, there are companies who offer loans with unfavorable terms, mostly in the form of sky-high interest rates. In order to rebuild your credit, you’ll need to focus on secured loans and credit cards instead.
Secured loans are typically provided by community banks and credit unions. They differ from unsecured loans in that you borrow against a form of collateral.
In this case, the collateral is generally funded by money you have on deposit, and the money is inaccessible to you as you make payments on the loan. Some secured loans are made available to borrowers through a savings account, where the money is released as payments are made.
As you make payments, the bank or credit union makes a report to credit bureaus, which helps rebuild your score over time.
Secured credit cards function in a similar way. You make a deposit, which usually determines your credit limit. There are some caveats to using secured credit cards. Most come with annual fees and high interest rates.
The best plan of action is to use secured credit cards for a short period of time as a means to raise your score and improve your chances of being approved for an unsecured credit card.
Co-signed credit cards and loans are another option. Of course, you will need to ask a family member or close friend to cosign for you.
Co-signing doesn’t just mean you’re an authorized user on the credit card or another name on a loan. It means whoever signs for you is responsible for paying off any debt if you don’t pay. If you decide to go this route, make sure your co-signer understands the terms and that you’re able to keep up with payments.
As you rebuild with your credit card, do everything you can to avoid late payments and high balances. Keeping your balance at 10% of your credit limit is a good rule of thumb.
Tyler, Bartl & Ramsdell, P.L.C. has offered bankruptcy counseling and guidance to individuals and businesses for over 25 years. To begin rebuilding your financial future, contact us today!