Sometimes, filing for bankruptcy can seem like the only way to recover from tough times. Maybe you have gone through a divorce, or have been unemployed far longer than anticipated, or perhaps you are dealing with exorbitant out-of-pocket medical costs due to serious illness. Just maybe, you made some poor financial decisions and over-extended yourself with excessive spending. Whatever your situation is, you may feel like you are out of options.
For some, bankruptcy is the appropriate course of action. If you are at risk of losing your home, your car is subject to repossession, or your landlord has threatened to evict you, bankruptcy might be the right choice. You may also want to consider this option should you be subject to a lawsuit or expect to receive property in the near term.
But whatever the case might be, if you are considering filing bankruptcy, or you already have, it is important to consider the consequences. And a bankruptcy will remain on your credit report for a long time – 10 years – significantly hindering future financial decisions that you may wish to make. According to FICO (short for Fair Isaac Corporation), the first company to design a proprietary algorithm for credit scoring, a bankruptcy will stay on your credit record for seven to ten years, depending on your type of claim.
How to raise your credit score
Following a bankruptcy, you should immediately begin to work to repair and raise your credit score.
- Pay your bills on time.
- Keep your balances low.
- Don't overextend yourself with too much credit.
- Add new credit.
- Check your credit report on a monthly basis.
Creditors want to know that you are a low risk to them and that they can trust you to pay them back according to the agreement that you went into. Timely payment of your remaining credit cards as well as your mortgage, utility bills, car loans, and so on are all important.
Your credit utilization measures the amount of credit you're using divided by the amount of credit you have available. A good rule of thumb is to keep your utilization below 30%.
Creditors want to make sure you will be able to pay them back, and the more debt you take on, the more risk you pose and your ability to pay back in a timely manner diminishes.
While this may seem counter-intuitive, you can indeed leverage secured credit cards or small installment loans to help you slowly improve that score, as long as you are following rules one and two above.
Leveraging FICO or one or three credit bureaus, be sure to check your credit score monthly (once your credit score has improved, you can likely do this once every two months). Viewing your score regularly will help you understand where you are currently. Also, make sure to check if there are any errors in the report. If so, you should file a dispute regarding the error immediately as it may take a while to resolve.
Note that when you look at your credit score on your own to understand what your score is, it is considered a soft inquiry, which will not have a negative impact on your overall credit score.
Adding new credit is absolutely possible, even if you have filed for bankruptcy. And as mentioned above, this can actually help you to improve your score. Thankfully, there are secured credit cards available for those with bad credit, and those working to improve their credit score. Secured credit cards make up less than 2% of the credit market, but they are available.
Credit cards for bad credit
CreditKarma provides a list of secured credit cards available to those who have filed for bankruptcy. A secured credit card is one that backed by some sort of secured collateral such as your home or your car. When selecting a secured credit card, you will want to review the various benefits offered by each particular card.
- Is there an annual fee?
- Is a security deposit required?
- What is the interest rate?
- If starting with a high interest rate, what are the options to lower the interest rate over time?
- What credit line can you get?
- Can you get a larger credit line over time?
- Is the card widely accepted nationally? Globally?
- What is the minimum credit score that you have to have in order to be approved?
- Will a credit check be required?
- Does the credit card offer any free type of access to your credit score through FICO or one of the credit bureaus?
- Is there on-line access to your account?
Note, this is important to understand. The act of applying for credit creates what is called a hard inquiry on your credit report. Contrary to a soft inquiry, a hard inquiry will have a negative impact to your score. Creditors want to make sure you will be able to pay them back, and the more debt you take on, the more risk you pose, and your ability to pay back in a timely manner goes down. If you are not familiar with what a hard inquiry is, this is when a creditor reviews your credit score in the process of deciding whether or not to extend you credit.
Again, whether you have already filed for bankruptcy or are considering taking that path, make sure you are well educated on the consequences. As a bankruptcy will stay on your record up to ten years, it is important to understand the impacts that you will face over the years to come.
