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Secrets to Building Credit After Bankruptcy
Can’t pay bills? Creditors calling? Imagine someone throwing a rope down in that black hole of debt. Bankruptcy is your hypothetical rope. When you are only making minimum payments and not paying all of the bills, things probably won’t get better without assistance.
But…what about your credit score? Most people are worried about a credit score nosedive – and rightfully so. No matter what type of bankruptcy you file, your credit score will be impacted. Credit scores often determine your interest and eligibility when applying for a loan. Therefore, scores are undeniably important to loan seekers. However, when you are going through bankruptcy, you shouldn’t be taking out any loans anyway. The goal is to get rid of the debt that haunts you, not add to it.
Credit scores are just numbers. You will only need them to be “good” or “excellent” when you are seeking a loan. At some point after bankruptcy, you might want to go for a mortgage or a car loan.
Here are some secrets to build your credit after bankruptcy:
- Monitor your credit. Online tools, like Credit Karma, allow you to peek at the two largest credit institutions, TransUnion and Equifax. Your bank might even offer credit monitoring. Keeping an eye on your credit helps you see progress as your credit number moves higher and higher. This can be a great motivation! You should also know what positively and negatively affects your credit score. The following points are the main factors.
- Payment History. Make payments before the due date or on time, always. Even one late payment can significantly lower your score. By monitoring your score, you can be alerted if you forgot something and be sure that it doesn’t turn into a 60-day late. Set your payments on autopay so you don’t forget a payment.
- Credit Card Use. This is how much credit you have available compared to your total limit. It is best to keep your usage low; you can accomplish this by paying off the balance monthly. Keep in mind that you probably won’t be eligible for credit cards with good rates right after bankruptcy. That’s okay! Apply for a line of credit designed for people who are rebuilding their scores. Also, if credit cards played a role in your debt, make sure to leave it in a drawer at home and use only as a way to build your credit. Make sure to spend within your means and pay it off monthly.
- Derogatory Marks. Your bankruptcy might show up in this section. Make sure to dispute any debts that aren’t correct or have been discharged. Keep an eye on this section as it makes a large impact on your overall score.
- Credit Age. Keep an open account with a zero balance to improve this section on your credit report. You may have to use the account once and awhile, so that it doesn’t close on its own. This shows potential lenders that you have experience with paying back loans responsibly.
- Total Accounts. Having a mix of loans and credit cards looks good. Don’t overthink this section and bite off more than you can chew! Only open accounts you can handle.
- Hard Inquiries. When you apply for credit, the hard inquiry (credit check) can stay on your report for up to 2 years. It is normal to see a bit of a dip in your score, but the impact diminishes with time.