Opinions, reviews, analyses & recommendations are the author’s alone and have not been reviewed, endorsed or approved by any of these entities.
This is a guest post from Tina Roth of ProFinance Blog
Bankruptcy is like a double-edged sword. If you use it in the right way, the financial tide will then turn in your favor. But if you screw up, it can ultimately damage your credit score.
Simply put, you have to be very careful when dealing with bankruptcy. One of the problematic aspects of bankruptcy is that it leaves a negative impact on your credit report. A chapter 7 bankruptcy takes ten years to remove, and a chapter 13 bankruptcy takes seven years to remove from your credit report.
ROUTE THE DEBTS
After the bankruptcy proceeding, you need to engage yourself in repairing your credit score. The first step taken towards that direction is ensuring that the debts you have on your credit report are considered a part of the bankruptcy settlement. What’s the benefit of doing that? If you do that, then the debts won’t show up as current debt.
The only thing that hurts your credit score is the debt, period. Hence, if you can show your existing debts are included in the bankruptcy settlement, you can prevent them from showing up on your credit report after the bankruptcy is discharged from your report.
CHANGE YOUR FINANCIAL HABITS
Rebuilding your damaged credit requires persistence. Unless you have healthy financial habits, you can never rebuild it. Such practices include paying bills on time, not keeping any debt overdue, reviewing your credit report, analyzing the score, fulfilling credit liabilities, etc.
Just like bankruptcy, delinquencies also stay on your credit report for seven long years. Delinquency is just another fancy term for a missed payment. Many people take it lightly, but once you gauge its importance, you stop taking it that way. Your new financial habit should rest on not missing any payment and avoid delinquency.
MAKE A BUDGET
After you file bankruptcy, you need to maintain budgeting skills for the next seven to ten years. If you spend money recklessly during that time, and not pay the debt on time, or only pay the minimum due amount, your credit report will register more debt and will be far away from recovering.
Hence, the wisest thing for you to do is to avoid incurring debt for seven to ten years. That’s impossible without budgeting skills. Budgeting helps you identify the areas from where money is coming in and the areas from where it is flowing out. Don’t spend more than what you earn, and this way, you won’t need to borrow money.
Budgeting stops you from incurring debts. But that’s not enough. You need to apply for credit too. The first step of doing that is to open and savings and a checking account. Open those accounts either at a bank or a credit union.
Before opening accounts, compare the interest rate the organization is offering to other agencies. Also consider what additional services, the bank or the credit union offers. Rely on referral from your friends and acquaintances.
APPLY FOR CREDIT CARDS
After you open accounts, apply for credit cards. It’s best if you request a secured credit card because your spending will then never go past the money that you’ve deposited in your account. $500 to $1000 is a good deposit amount. Banks often offer secured credit cards, but sometimes credit card companies also offer them.
MODERATE USE OF CARDS
Use your credit card, but don’t use it too much. Remember, you are using the card to repair your damaged credit. So, use it only when cash is not available to you or when cash is not recommended as a mode of payment, such as, when you are purchasing something from an online merchant.
PAY DOWN DEBTS
As you use your credit card, debt is registered. Pay the debt as soon as you can. It’s best if you pay it the day after you get the billing statement. Why does it matter? It’s important because 35% of your credit score is your payment history, and a timely payment of your debts boosts your score.
DON'T CLOSE ACCOUNTS
Keep the account open even after the card expires. Closing an account marks a decrease in your credit limit, which ultimately reduces your credit score. The credit utilization ratio makes up 30% of your credit score. To increase the score, you need an active account.
Follow these nine ways to repair your credit score and compensate for the negative impact made on your credit report by bankruptcy.
- Check your credit score free at CreditKarma.com.