Life doesn’t come to an end after bankruptcy. It is rather a new beginning.
Yes, your credit score drops after a bankruptcy discharge. But that is not the end of the story. You can rebuild your credit and embark on a fresh financial journey. In this post, we will discuss how to do it.
How does bankruptcy affect your credit score?
That depends on your credit score. If your credit score is between 740 and 800, your credit score may drop by 200 points. If your credit score is between 580 and 739 points, you can expect to see a drop of 130-150 points. However, if you already have a bad credit score, the dip won’t be that much.
How to rebuild your credit after a bankruptcy discharge
1. Get your Bankruptcy discharge papers
When your bankruptcy process is complete, the court will mail you a letter of discharge listing which debts have been paid off. You need to check it immediately to be sure the document reflects the discharge of all of the debts listed on it. You will need this for future reference to ensure no discharged debt will ever mistakenly show up on your credit report.
2. Request Your Credit Reports and Review Them for Accuracy
When your bankruptcy has been discharged, you'll want to get copies of your credit reports from the three major credit reporting agencies: Equifax, Experian, and Trans Union. You are allowed to get one report for free every year from each agency through AnnualCreditReport.com.
Verify that all debts included in the bankruptcy have the notation "discharged" with a zero balance.
3.Make a budget and build an emergency fund
An important part of rebuilding credit is not getting into debts that one cannot handle. Having a reasonable budget will help you monitor your expenses and avoid unnecessary spending. Besides, building up even a small emergency fund offers a cushion against the need to continue relying on credit to cover unexpected expenses.
4. Take out a secured Credit Card
Secured cards require a cash deposit, which becomes your credit limit. Since the issuer holds collateral, secured credit cards are easier to get approved for and establish positive credit habits with manageable limits.
Be responsible with your secured card: make small purchases and pay the balance in full each month. Consistent on-time payment history will be reported to the credit bureaus and will reflect an increase in your credit score.
5. Make timely payments
Of all the factors that can affect your credit score, payment history is perhaps the most significant. After you've filed for bankruptcy, pay your bills on time. If you make late payments, it will slow down the progress and make it even more difficult to work your way back to good credit. If you have debts that have not yet been discharged, negotiate a debt settlement agreement.
You may want to consider setting up automatic bill paying or using one of the new budgeting apps to keep track of due dates and ensure you never miss a payment.
6. Become an authorized user on a trusted account
Ask a family member or a close friend who has a good credit history to make you an authorized user on one of their credit cards. Because you are simply an authorized user and the cardholder is responsible for payments, you enjoy all of the positive aspects of their good credit history.
Being an authorized user makes the history of the credit card account appear on your credit report, which might boost your score. Just make sure the primary cardholder has a good credit record, as late payments on the account could reduce your credit score.
7. Take out a credit builder loan
Credit builder loans are intended for low credit scorers to build a positive credit history. These loans are typically supplied by credit unions. They work just a little bit differently from traditional loans. Instead of giving you the money upfront, your repayments go into some kind of savings account, and you get access to the money at the end of your loan term.
On-time payments on credit builder loans will increase your score due to a positive payment history added to your credit report.
8. Monitor your Credit Score
Rebuilding credit after bankruptcy is usually very gradual, so monitoring this progress is important. Watching your credit score will allow you to see the effect of time and effort while also serving as a warning for unusual changes in your score, which may be symptoms of identity theft or reporting errors.
Most credit card companies, banks, and third-party services will give you access to your credit scores for free. Consistently checking your score may help to keep you motivated and up-to-date on your progress.
Tip: If at all possible, don't pay for credit monitoring services. Many banks and apps offer free access to your credit score along with credit alerts for unusual activity.
CONCLUSION
Apply for a low-interest personal loan after at least one year of responsible credit behavior. Only take out this kind of loan if you are sure you can pay it back in full. A personal loan at a low interest rate with regular payments will, over time, help your credit score.
About The Author:
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.