One of the biggest fears we hear from clients is the fear that bankruptcy will destroy their credit score. In reality, once your discharge is done bankruptcy usually improves your credit score, sometimes by as many as 80 points.
That doesn’t help you much if you’re starting from a 520 credit score. Ideally, you want a credit score that will offer you job options, better insurance rates, better loan terms for a house or a car, and access to unsecured credit.
While the hope is you’ll never get into trouble with credit again the fact is our society is structured in a way that makes it very difficult to survive without it. So we want you to actively work to rebuild your credit score when the bankruptcy is done.
Get a secured card, but keep balances small.
Secured credit cards are easy to get, but do a little shopping around. Look for the lowest interest rate you can find. Once you’ve selected your card, you’ll pay a security deposit to the lender. If you can’t make your payment the lender already has the money in hand and is covered.
Even though you have a security deposit on file you’ll still need to make your monthly payment. Don’t use your secured card for emergencies (build an emergency fund for that). Don’t use it for big purchases. Use it for one small purchase that you’d buy anyway, every month, and then pay off the card in full, every month.
This keeps your available credit balance higher, raising your credit score, while building a positive payment history (the biggest determinant of a good credit score).
Get a credit builder account.
A credit builder account lets you rebuild your credit score while saving some money. The bank opens a certificate of deposit and you make monthly payments into that CD every month. They report those payments to the credit bureau. It’s almost as if you’re practicing to make regular monthly payments, but you’re earning interest on everything you deposit, too.
With a credit builder account you can raise your credit score by as many as 30 to 60 points. If you’re absolutely sure you can make the payments, this is a nice way to go. At the end you get the matured CD which you can keep or roll over into a new credit builder account.
Resist most of the other credit offers you receive.
It’s counter-intuitive but true: you tend to get a lot of credit offers directly after your discharge. This is because lenders know you can’t declare bankruptcy again for quite some time. They feel confident they’re going to get their money one way or another.
Unfortunately the terms of most of these offers are not going to be favorable. They’ll come with extremely high interest rates, which mean higher payments and a return to the same slippery slope you just left. Unless you really need one of these loans to live your life (i.e., you don’t have a car and you get a car loan credit offer) then you should probably steer clear.
Keep living within your means.
Ultimately, your credit score is about how well you manage your finances. If you keep living within your means and making regular payments to the accounts you do open, you might well raise your score to new, unprecedented heights.
Don’t be afraid to file for bankruptcy. It truly is a fresh start, and may be the first step in building the credit score you’ve always hoped to have.
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