Filing bankruptcy has its pro and cons, but it is the chance to escape financial problems and restart with a clean slate. The biggest drawback of either chapter of bankruptcy is the massive blow to one’s credit score. However, it doesn’t really matter if you had a poor score to begin with and you were drowning deeper in debt every day. The good news is that you can recover an ideal credit score if you are willing to put in the effort. Your credit score will be thriving within a few years following bankruptcy if you start making better financial decisions and seek help from a professional like Bankruptcy Attorney in Chula Vista, CA.
You might not be able to acquire new credit or apply for a loan right now, but rest assured that these setbacks are temporary. Higher insurance and interest rates may have you baffled, though you should view it as a small price to pay for previous mistakes. Rather than getting upset, be motivated to improve your financial management skills and spending habits. Your bankruptcy attorney can guide you on how to restore good credit after bankruptcy by taking the following steps:
1. Budgeting
If ‘budgeting’ was not a word in the dictionary of your past life, it is high time to create a budget now. The definition of budgeting is to prepare a financial plan or determine a fixed allowance for a term/period. You can start by setting up a monthly spending limit that helps you keep expenses below your regular monthly income. You will probably have to let go of several luxuries and expensive habits in order to not spend more than you earn. The shift of lifestyle is going to be hard and uncomfortable at first, but it gets easier and you don’t have a choice for now.
2. Staying on top of Bills
Start paying your bills on time and see your credit score recover rapidly. Don’t wait past the due date of bills; otherwise, you will have to pay a fine or surcharge. Timely payments save you money, as well as assist you in redeeming yourself as a financially responsible and reliable citizen.
3. Timely Payments on Balances
If you filed Chapter 7 bankruptcy, it is likely that all your unsecured debt has been discharged. However, you are still accountable for outstanding dues on secured loans and leases. Your bankruptcy trustee might liquidate non-exempt assets to compensate your creditors. If you filed for Chapter 13, you are obliged to abide by the financial reorganization plan approved and enforced by the bankruptcy court. You may have to pay off debt partially or in full through smaller installments over an extended time period. Your credit score will improve as long as you keep up with the repayment schedule.
4. Reviewing your Credit Report
When you understand the different aspects of your credit report and realize how your credit score is calculated, it become easier to fix the damage done to your credit post-bankruptcy. In the wake of the Covid-19 pandemic, consumers are allowed to claim a free credit report per week until April 2022. Therefore, utilize this incentive and familiarize yourself with the elements of a credit report. Look for errors and inaccurate records that could be hurting your score. Reviewing and reporting mistakes will speed up the recovery process.
5. Monitoring Credit Score
Monitoring your credit score on a weekly or monthly basis will help you track your progress and stay motivated. You will obtain a better understanding of which of your actions have the most effect on your score and what puts your score in jeopardy. Properly reviewing your credit information will also help identify red flags, such as credit theft or fraud. When you have completely paid off a loan or debt, make sure that it is registered on your report.
6. Living on Debit and Cash
It is best to stay away from plastic (i.e. credit cards) until you have regained a fair amount of financial stability. If you apply for new credit, you will either face outright rejection or be subject to insanely high interest rates. Shifting strictly to debit and cash is the right move initially. If this situation is troubling for you, seek counselling from a financial advisor or attorney.
7. Obtaining a Secured Credit Card
One of the most important steps in restoring good credit post-bankruptcy is to cut down your dependence on credit cards. While keeping your distance from plastic privileges for a while is all well and good, you can go one step further by signing up for a secured credit card. Secured credit cards work by submitting a deposit to the lender, which is refundable. The interest rate on a secured credit card is usually high, but they help demonstrate that you are capable of handling a conventional credit card.
8. Applying for a Credit Builder Loan
Instead of applying for a traditional loan (which is not a great idea right after filing bankruptcy), opt for a credit builder loan. The lender of a credit-builder loan will keep an amount of cash in a secured savings account or hold a certificate of deposit in your name. You may also borrow from a bank against money in an existing savings account under your name. You will issue monthly payments (with interest) until the loan is completely paid off. The activity on your credit-builder loan is reported to the main credit bureaus, thus your score will improve substantially in due course.
9. Co-signed Credit Card or Authorized User status
If you don’t get approved for any kind of loan or credit in your name, try getting a co-signed credit card. The co-signer in this case must be someone who possesses an excellent credit score and financial record. By co-signing the card with you, this person agrees to back you up in case you cannot pay back a loan in time. This implies that their credit score also suffers if you fail.
10. Opening a Savings Account
It is always wise to save up for a rainy day. If you don’t already have an emergency savings account, open one now. The money you put aside every month will come in handy when you encounter unanticipated expenses in the future, such as healthcare cost or automobile repairs. The saved up funds will prevent you from falling into another financial black hole.
