How to Mend Credit Post-Bankruptcy

Deciding whether or not to file bankruptcy is a personal decision that shouldn’t be taken lightly. The types of bankruptcy are different, but it is intended to help individuals start anew. While bankruptcy can be a financial relief from bill collectors and past-due accounts, filing bankruptcy and having debts forgiven through the bankruptcy proceedings can cause damage to an individual’s credit report and score.

For those who have just finalized their bankruptcy proceedings, building credit is an important step to financial recovery. Here’s how to potentially mend credit post bankruptcy:

●     Apply for a credit card

●     Buy a car

●     Pay bills on time

●     Inquire if payments can be reported to the three reporting bureaus

●     Monitor credit reports and scores

Why Apply for a Credit Card?

Individuals who had debts released in a bankruptcy might wonder why they would want to apply for a credit card. Maybe credit card debt was part of the reason why they needed to consider bankruptcy.

Not everyone feels comfortable applying for a credit card after a bankruptcy. However, a credit card with a small credit limit may help individuals build their credit after bankruptcy. To ensure that credit cards don’t become a financial burden, consumers should only charge one small item per month and remember to pay the card’s balance in full for each billing cycle.

This method of credit card use allows the individual to establish a relationship with a lender or bank and demonstrates responsible credit use. When applying for a credit card after bankruptcy, individuals will notice that their interest rate is higher. This higher rate is another great reason to avoid accruing charges on the card.

Buying a Car Can Help the Score

After bankruptcy, an individual might need to buy a car. While it’s possible to be approved for a traditional auto loan after bankruptcy, car buyers might need to shop around for a lender who will take on the risk. However, a car loan could be beneficial for building credit.

Some lenders might report timely payments to the credit reporting bureaus. These bureaus are Experian, Equifax and TransUnion. Timely car payments can help the credit score and potentially help individuals mend their credit post bankruptcy.

Before signing on the dotted line for a loan, though, individuals need to understand their interest rate and how that rate impacts their monthly payment. After bankruptcy, lenders might only approve a loan with a high interest rate.

Post-bankruptcy, individuals might be considered too much of a credit risk for some traditional lenders. Buy Here Pay Here (BHPH) could be another option for a car loan, but these lenders won’t always report timely payments to the credit bureau.

Pay Bills on Time

Not every consumer is ready to take on a loan or open up a new credit card. The easiest way for consumers to build their credit after bankruptcy is simple: pay every bill on time. Utility companies and other creditors might report timely payments to the credit reporting bureaus and these positive ‘hits’ to the individual’s credit can increase the credit score.

While timely payments reported to the bureaus help the credit score, making late payments is a bad habit that could cause the credit score to plummet even lower. Take control of bills; schedule payments via bill pay systems or set reminders on a phone.

Requesting a Payment to Be Reported

In some cases, timely payments are not always reported to the bureaus. Consumers might request payments to be reported, but this request isn’t always granted. In some cases, timely payments cannot be reported (more about this below). Some lenders or creditors simply won’t report payments.

Monitor Credit Reports and Scores

Every individual can access their credit report for free every 12 months. However, a free credit report doesn’t include a credit score. To understand the credit score, individuals will need to visit sites like CreditKarma.

Reviewing a credit report is important. While a credit score lets an individual see the number that denotes their creditworthiness or risk, the report shows them what accounts and debts are impacting their score. Typically, a Chapter 7 bankruptcy stays on a credit report for 10 years; while the impact of the bankruptcy will begin to decrease a bit through the years, it takes a decade for it to disappear from the report.

As long as a bankruptcy stays on a credit report, the individual’s credit score will likely be lower. Immediately after bankruptcy, the score might be incredibly low. How is a credit score calculated? A credit score is computed by considering many factors. According to myFICO, these factors include:

●     Credit length

●     New credit

●     Mix of credit

●     Payment history

●     Account balances

What does all this mean? Credit length denotes how long the individual has been extended credit. New credit refers to any new loans, credit cards, etc. A mix of credit is important for the score because it shows the individual is trustworthy with credit and has been approved for different loan or credit products; for example, an individual might have a home mortgage, a car loan and a few credit cards.

Payment history is the most important factor in calculating the credit score. An individual’s payment history accounts for 35 percent of the score.

Account balances are the second biggest factor for the credit score; in fact, account balances make up 30 percent of the score. The balances are the amounts owed on each line of credit compared to the amount of credit extended; this is known as the debt to credit ratio.  A low debt to credit ratio can help boost a credit score, while maxing out cards will have the opposite effect.

Some Bill Payments Might Not Show Up on Credit Reports

In Chapter 7 bankruptcy, the trustee could take possession of cars or an individual’s home and sell it to pay off creditors. However, these assets also could be protected if there is little or no equity or if the equity is safeguarded under bankruptcy exemptions.

When a home or car cannot be sold in bankruptcy, individuals might keep the car and continue living in their home. However, to avoid foreclosure or repossession, individuals need to remain current on their loan or mortgage. Unfortunately, these payments might not be reported to credit bureaus. The debts have been released in bankruptcy and, for legal reasons, the lender cannot report them (or chooses not to report them).

While paying on a home mortgage or car loan that was released in bankruptcy won’t benefit the credit score, current payments allow the individual to keep that asset (and avoid foreclosure or repossession).

Start a Budget Post-Bankruptcy

For individuals who recently had their bankruptcy case finalized, the emotional impact could be a mix of relief and a little fear. What’s next? After bankruptcy, budgeting will be important. Use bankruptcy as a lesson and try to move forward into a financially sound future.

Individuals who file for bankruptcy must take credit or financial counseling. This helps them become better money managers. After bankruptcy, consider making a budget. This requires individuals to understand their income and take control of their expenses.

Those who earn a salary can compute their income easily. Those who are hourly or whose income fluctuates might need to average their income. Next, calculate monthly expenses. Write down all fixed and variable expenses; fixed expenses include payments that are always the same (like rent, insurance mortgage, etc.). Variable expenses change each month; these expenses include utility bills, food, fuel, etc.

Income should exceed expenses. If this isn’t the case, it might be time to cut expenses or take on another job. Again, the goal for post-bankruptcy finances is to thrive, not simply survive. Cut out any spending that isn’t necessary. Understand that wants are not ‘needs.’

While life post-bankruptcy might look a little different, the goal of bankruptcy is to start anew. There are numerous classes for free that can help consumers learn financial literacy and understand basic financial skills like budgeting. Take control of finances and take control of the credit; make a plan to build credit and become financially literate post-bankruptcy.

What is the Best Way to Build Credit Post-Bankruptcy?

Mending credit and boosting the credit score is important for individuals who have declared bankruptcy. However, not all individuals feel comfortable taking on a credit card obligation or even signing paperwork to begin a car loan.

How to rebuild credit after bankruptcy depends on each individual’s financial comfort level. Those who know that they can use a credit card responsibly and not accrue more debt might choose to apply for a new credit card.

Some consumers might find that they have no choice but to go car shopping. Their vehicle might have reached the end of its life or maybe public transportation isn’t an option. Securing a car loan might be the only way they can afford a vehicle.

The easiest method for rebuilding credit, though, is to pay bills on time. To ensure that payments are made in a timely manner, individuals might set a reminder on their phone. They also could set up automatic payments via their online banking.

Credit monitoring also could help individuals be mindful of their credit and their credit score. Review the credit report yearly to understand the details of the report.  Remember that a Chapter 7 bankruptcy will remain on a credit report for a decade. The credit score also will reflect the impact of bankruptcy.