Amongst other things, a bankruptcy also adversely affects your credit score, and will send your already ailing credit rating plummeting. Most people know what are credit scores and what they mean to lenders! And bankruptcy is a blemish on your credit history which most lenders will look very closely at, and use it as a reason to not give you the financing you need. So post-bankruptcy, you have to maintain a really good credit score to be able to avail credit when you need it and at a low interest rate. So there is obviously an urgent need to restore credit score.
Analyze Your Mistakes
Agreed that bankruptcy is a huge setback. But one should learn from one's mistakes. Ask yourself the question: Why did bankruptcy occur in the first place? The answer to this question will tell you where you went wrong financially. In my opinion, you could have made either of these three mistakes.
Mistake 1
The most common mistake which people make is overspending on their credit cards. People never realize when they turn slaves to that little piece of plastic and start spending beyond their current earning. Slowly, the credit card debt becomes too much for your salary and before you know it, your liabilities balloon to an amount which your existing assets can no longer cover, and you take a nosedive on the credit score scale This is the first reason for bankruptcy. In this case, what you need to do is to set yourself a budget for all your expenses each month and make sure that you do not end up spending beyond that budget that you have set.
Mistake 2
The second reason why bankruptcy occurs is because people do not have an emergency fund. If you do not have the habit of saving and you lose your job, then your cash source evaporates and you have no income to pay monthly installments on a mortgage loan or a credit card bill payment. Basically, you never thought that such a situation might occur and a contingency fund might come in handy. To avoid this, make it a point to save a certain percentage of your income every month. Bank your savings so that in case, God forbid, you lose your job in the future, you have a ready asset base to cover your liabilities.
Mistake 3
The third reason for bankruptcy is a bad investment decision. Sometimes people invest in an expensive, high risk investment using lender financing rather than their own financing. Now if this investment does not give the necessary returns, you will end up with outstanding bank payments and hence, increased liabilities. To avoid this mistake, the investor should ensure that proper research is done before taking any haphazard investment decision. It is always better to know what is hedging and hedge high risk investments with low risk ones.
So these were some of the most common reasons for bankruptcy. Credit restoration starts here. If you can examine where you went wrong in the first place, you will know what mistakes you made and learn from them. My advice is that you should start with all the three ways to restore credit rating. Set yourself a budget for expenses, always set aside an emergency fund and always continually review your investments.
Final Steps on Improving Credit
Now that you have analyzed your mistakes, you need to refrain from committing those again. Bankruptcy is hard and credit restoration is harder. So you surely wouldn't want to go through that all over again. So learn to use your funds more responsibly. Along with that, you also need to take some serious steps to get yourself back in the good credit score range. After bankruptcy, you might be left with the option of using a secured credit card. Make sure you get the best and the cheapest one. You might have to pay a high interest on the credit card owing to your low credit score, so try to reduce other costs. See if you can find a secured credit card with no/reasonable application fee and a low annual fee. A sustained showing of responsible credit usage will drive up your credit score and ensure effective credit repair.
If you feel that you can responsibly handle credit, the best thing to do is use your credit cards and pay the bills off within the 35/40 day 'no-interest' period. This has several advantages as you can make credit purchases and if you pay the bills within the no-interest period, you will be saving a lot of money which you unnecessarily paid as interest. Ensuring timely credit card payments will increase your credit score. The other thing to do is take a reasonable installment loan for a car or a house. Buying a house shows that you are making an effort to build your asset base. Make timely payments on that loan. If you have any outstanding loan payments, pay them off too. If you are unable to make installment payments immediately, contact your lender/creditor and arrange for a mutually agreeable alternative arrangement. It is said that a good investment portfolio is also an answer to restore credit. After all, a well thought out investment portfolio increases your asset base and makes you look a lot more reliable. Also do not trust shady looking debt management agencies. If they make lofty promises to repair your credit within no time, they might be scam agents out to make a quick buck at your expense. And lastly, keep an eye out to make sure that there are no mistakes in your credit report.
I know it is easier said than done, but it is essential that you make a positive start in life again. Learn from your mistakes and move on in life. Bankruptcy is not always the end, it might just be a new beginning.
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