Filing for bankruptcy is perhaps one of the most financially debilitating decisions you ever take. Depending on the type of bankruptcy you have filed under, it has probably washed out all your assets or kept your debts lingering for a few more years. Either way, once the bankruptcy filings are done with, your credit score is going to nosedive in no uncertain manner. But one thing is for sure, that before getting credit post-bankruptcy, you are going to have to learn how to restore your credit after bankruptcy. This step is very important as a good credit score ensures that you get credit when you want, and at a lower rate of interest as well.
Learn From Your Mistakes
The best bankruptcy advice I can give you is to learn from your mistakes. The way I see it, people who have faced bankruptcy have made financial mistakes that can be broadly classified in one of the following three groups. Learning from mistakes will not be a sure fire way of getting credit after bankruptcy, but at least it will help people realize the mistakes they have made and the things they need to avoid to secure their future better.
Mistake 1: Overspending
The first, most common mistake is overspending on their credit cards. People are tempted to top their credit limits and hence rack up bills which they cannot pay. Slowly and steadily the debt starts eating into your salary till it reaches a point where your salary can no longer cover your expenses. Add to that, credit cards have a pretty high interest rate, so the interest payments on credit cards too is phenomenally higher. The lesson to be learned here is to make a budget of the expected expenses every month and try not to go beyond them. Set aside a part of your monthly salary as savings which will enable you to buy assets later.
Mistake 2: A Bad Investment Decision
A lot of people have had to face bankruptcy because of a bad investment decision. It will be pertinent to point out that the recent sub-prime crisis happened because what people thought is a sound investment decision (home investment) did a u-turn and the prices came crashing down. There could have been several such investment decisions which seemed secure at first, but due to changes in the markets, couldn't perform to what was expected of them and people suddenly lost a lot of money. This money, if acquired as a debt or a loan, comes with a liability of having to pay it back. But you can't because you lost it! The lesson to be learned here is to not enter a touchy investment decision with borrowed funds. Due to investments like these, people not only lost assets, but gained liabilities.
Mistake 3: Lack of a Contingency Fund
Losses are a part and parcel of life and can be dealt with - if you have an emergency fund ready. It is always a good practice to set aside a part of your monthly income as an emergency fund which will cover up for any losses which you make. Since people did not have an emergency fund, they did not have something to fall back on once they lost the money they had invested. The lesson to be learned here is to always set aside a part of your income for that rainy day.
Steps to Get Credit
Now you surely know what was the mistake you made that led to your bankruptcy. It was perhaps one of or a combination of one of these mistakes that led to your bankruptcy. But mistakes happen and one should learn their lesson. Keep the above points in mind and most probably you will never have to face the grim prospect of bankruptcy again!
One thing is for sure, a bankruptcy is a horrible blot on your credit history. A bankruptcy reduces your credit score and thus, your chances of getting credit in the future. So steps must be taken to repair your credit. So how does one go about credit repair?
Step 1: Learn What Makes Up Your Credit Score
The first step to improve your credit rating after bankruptcy is to know what exactly makes up your credit score. Credit rating agencies recently revealed the weight-age of each factor that determines the credit score. Knowing these factors will help in giving you a direction in your attempts to improve your credit score.
- Payment History - 35%
- Amounts Owed - 30%
- Length of Credit History - 15%
- New Credit -10%
- Types of Credit Used - 10%
That's right, the very bane which caused your downfall will be the way out of this mess. Get a secured credit card with a low interest rate. But this time, make sure you use the 35/40-day no-interest period on your credit card and pay off all your debts. Purchase something on credit and then wipe the debt off. It is a very good way of getting back into the good credit score range as it shows that you have been paying off all your debts quickly. This helps improve your credit rating as it hits on two of the largest factors that make up your credit score-payment history and amounts owed.
Step 3: Avail Other Credit Sources
Other than a credit card, you could also go for other credit sources. Once your credit score comes to an acceptable level, you could take a short-term loan or a bad credit loan with a negotiable interest rate. A negotiable interest rate is one which the lender agrees to reduce if your credit score rises. Pay off this debt systematically. Along with improving the payment history and reducing the amounts owed, you will also be showing your ability of managing different types of credit.
Step 4: Do Not Shut Zero Balance Accounts
These zeros may well turn out to be heroes for you! Most people do not realize the role that zero balance accounts have to pay. They are actually a silver lining in your current bleak financial situation and hence it is not good to shut them. They show a wider number of credit used, a better payment history and a longer credit history.
Step 5: Maintain a Good Relationship with Lenders
This may come as a surprise, but maintaining a good relationship with your lenders may help you. There will be times when you will find yourself unable to pay off the debts owed to your lender. In such cases it is always beneficial to be in a position where you can renegotiate the terms on your debt which is well suited to both your needs. This is a good arrangement for both the parties as the lender will get the money which is owed to him, while you avoid getting a bad remark on your credit report.
It is always a good practice to keep an eye on your credit score from time to time to check if there are no mistakes in it. Do all the above given things well and see your credit score bounce back in style!
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