Credit after Bankruptcy
Although bankruptcy can remain on your credit report for up to 10 years, its effect can begin to dissipate the day of your bankruptcy discharge.
It's going to take 3 to 5 years to re-establish your credit score, (the three-digit number lenders use to gauge your credit-worthiness) so it's best to get on with it right away.
You would be well advised to contact the credit bureaus and make sure that your accounts be properly reported. Your credit worthiness is based on the information in your credit report. Errors can seriously affect your score, insist that they are corrected.
You have to obtain and use credit to build your credit score but be careful. This is your opportunity to begin building future wealth and with it well-being by adopting healthy credit habits like following a sensible budget, paying your bills on time, using only a portion of your available credit and not applying for too much credit at any given time.
Applying for Credit after Filing for Bankruptcy
As you are no doubt aware, filing for bankruptcy makes it difficult to obtain credit and the credit you do obtain will be at higher interest rates. This is a fact of life. It is also true that if you follow the tips listed below, you will re-establish your credit and by managing your debt properly, you will find that loans become more readily available and at lower interest rates.
Secured Credit Card
A secured credit card generally gives you a credit limit that is equal to an amount that you have on deposit at the credit card issuing bank. Typically, the amount of credit available is from $200.00 to $1,000.00.
Managing this small amount of credit over time will greatly benefit your credit score. Do not charge more than 30% - 50% of your credit limit and pay off the amount each and every month. Light, regular use of your credit card establishes a history that helps build your credit score.
When shopping for a secured credit card, avoid those companies that charge large upfront and annual fees. As the object of the exercise is to re-build your credit score, make absolutely certain that the secured credit card you choose will provide regular reports to the three major credit bureaus, Equifax, Experian and TransUnion.
Many banks will allow you to convert to an unsecured credit card after 1 to 1 ½ years of on-time payment history.
Department Store Credit Cards
You may also want to consider applying for a department store credit card as they are generally more lenient. Sears or JC Penny would be good choices as they report to the credit bureaus. Make small regular purchases that you can easily pay off each month.
Installment Loans
Any loan that was not discharged by your bankruptcy (student loans, mortgages etc…) will be useful in re-building your credit rating. It is critical that you make your payments on time, every time. Paying down your debt is the best way to improve your credit score.
Car Loans
Car loans are one of the first creditors that will consider doing business with recent bankrupts and are therefore an avenue for you to begin to reestablish your credit.
Your first car loan will be at astronomical interest rate of around 20%! After dutifully paying these exorbitant fees for up to 2 years you can trade in at about 14%. In the third year, assuming you have been making timely payments, you will probably be approved for a loan at around 8%. In your fifth year you will be approved at or near the best rate available. Make certain that your loan doesn't have a prepayment penalty as you will no doubt want to refinance your car at a lower interest rate as your credit improves.
See the new bankruptcy law relating to Chapter 13 Limit on Auto Stripping.
Mortgages after Bankruptcy
Mortgages can sometimes be easier to obtain after a bankruptcy than to get other types of installment loans. You may be able to qualify for a high interest mortgage 6 months after your bankruptcy.
You should also consider waiting about 2 years at which time you would probably qualify for an FHA loan which is usually only about a half a percentage point over regular mortgage rates.
Remember, to effectively re-build your credit rating, you must make your payments on time all the time.
