Rebuilding Credit after Bankruptcy

An ordeal that too many Americans experience is to be in such financial distress as to have no other option than to file for bankruptcy. After years of struggling to pay your bills on time, asking lenders for a break and eventually falling so far behind that there’s no chance of recovery, you make the agonizing decision to file for bankruptcy protection. It’s a decision that never comes easy and is understandably embarrassing, especially when debts you had good intentions of repaying are forgiven so that you can begin anew. After a judge approves your appeal, much of your financial burdens have been relieved, but now you’re left with a trashed credit score and a long road back to a healthy financial reputation.

Impact of a Poor Credit Score

A perfect credit score is 850. But for most lenders, you will enjoy low interest loans and credit by maintaining a score of 723 or more. Drop below 620 and you’re more likely to be rejected or find it difficult to secure bank loans at reasonable rates. And even if you are approved, at the low end of a score, you will be charged an additional six percent APR for the privilege, raising the cost of borrowing substantially.

A bankruptcy will have a devastating effect on your financial future with your score dropping by as much as 200 points. That’s enough to make it impossible to be approved for a loan or line of credit. Neglect to improve your score and you may be denied for as long as the bankruptcy remains on your credit reports. Chapter 7, 11, and non-discharged or dismissed Chapter 12 and 13 bankruptcies will be displayed on your reports for up to 10 years.

There’s no doubt that a bankruptcy can have a negative effect on your credit scores. But for those who had a lengthy history and a good score before filing, the impact may not be as devastating as many think. The first step in reversing your score is to know where you stand by requesting two of your credit reports to determine an average. Use this figure to gauge how well you’re doing as you follow these tips to begin reestablishing a healthy credit history and improve your score at a quicker pace.

Review your credit reports! Take the time to go over them thoroughly for errors. Discrepancies can be costly, not only by lowering your scores but by giving lenders the wrong impression of your ability to manage your bills. Accuracy is vitally important to your score. If you discover false information, immediately file a dispute with the credit reporting agency for a correction or to have false information removed. Check for:

• Late payments, charge-offs, collections or other items that aren’t yours.
• Credit limits reported as lower than they actually are.
• Inaccurate accounts listed as settled, paid derogatory, paid charge-off.
• Accounts that are still listed as unpaid that had been included in a bankruptcy.
• Negative entries more than seven years old (10 for bankruptcy) that should have been removed.

Pay every bill, on-time, every time! One missed payment could be devastating to your credit score with a drop of up to 100 points. This becomes even more important following a bankruptcy. You must, once again, show evidence that you are able handle your finances responsibly.

Eliminate revolving credit debt! If you happen to still have credit debt not eliminated by bankruptcy, work on reducing these debts first. By lowering your overall credit card debt, you will increase the total amount you have available to spend – a plus to lenders looking at your credit reports. In fact, keeping your balances below 30% of their combined limit will help raise your score. Pay off balances so that you have fewer accounts to juggle, making it easier to manage your bills. It’s a good idea to focus on the accounts that you’re closest to paying off rather than the ones with the highest interest rates to have paid off accounts posted to your credit reports.

Open a new line of credit! What may seem like bad advice will actually help raise your credit limit and be a good sign for potential lenders in the future. While it may be difficult to open new accounts after bankruptcy, you may be able to begin this process again with basic gas or retail cards. Just be sure to use the account minimally and pay it off in full each month. In addition, your credit score will benefit from having a variety of loan types – mortgage, car loan, personal or student loans.

Never close your older accounts! Closing an older account won’t help your scores but may hurt them. Any account that demonstrates a lengthy credit history is valuable to your credit score. Keep your older cards active by using each for a small purchase at least once per year.

No matter how little or far your credit score drops after a bankruptcy, you’re financial future will benefit from your efforts to rebuild and raise it up again. Remember, scores that slipped only slightly still may have an impact on future borrowing. Remain diligent in maintaining responsible financial habits and you’ll build up to or maintain a healthy score. Remember, bankruptcy is meant to help you with a new beginning and opportunity to take what you’ve learned and deal with your finances with a fresh outlook and new approach…take advantage of it.

Author Bio: Noreen Ruth is a regular contributor to www.asapcreditcard.com and numerous financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit.