Credit Scores (Part 2)

March 19, 2016

In part two of our blog on credit scores, we will discuss how to rebuild your credit score after completing a bankruptcy.

While the filing of bankruptcy places a negative report on your credit, rebuilding your credit rating after completing a bankruptcy is a manageable task. Once completing a bankruptcy, the debtor’s credit report will not reflect a positive credit history, which makes up the largest influence on the overall credit score. Also included in credit history, is the public record of filing bankruptcy.
One method of keeping at least some positive credit history after completing a bankruptcy is reaffirming debts during a Chapter 7. In the typical case, debtors have the option of reaffirming their secured debts, including mortgages, car notes, and debts secured by other property such as furniture or electronics. After reaffirming those debts, the terms essentially stay in place as if they were not including in the bankruptcy. The payment history for reaffirmed debts should continue to reflect the payments made prior to, and after, the bankruptcy has been completed.

Even if there are reaffirmed debts after a bankruptcy, debtors will need to establish a positive credit history to help rebuild their credit after the completion of their case. One method of establishing a positive credit history is to open, and use, a credit card after discharge. While many debtors believe they will be unable to qualify for a credit card after bankruptcy, they will likely get inundated with credit card offers soon after their discharge. Although there is generally a negative perception to one’s ability to maintain credit with a bankruptcy on their record, many lenders will offer credit to recent bankruptcy filers because their debt has likely been eliminated and they are ineligible for another discharge for eight years.

It is important to note that any credit cards obtained after a recent discharge will likely come with unfavorable terms and high interest rates. Accordingly, it is generally considered the better practice to open one or two secured credit credits after bankruptcy. Secured credit cards work like regular credit cards but require a security deposit to open which generally range between $500-$1,500. The deposit typically becomes the credit limit for the card. As with unsecured credit cards, each offer varying terms and differing interest rates. When using the card to establish and build credit, it is important to use the card each month and pay off the entire balance. Prior to signing up for a secured credit card, you will want to ensure the issuer reports to all three major credit bureaus. After a period of making regular payments on time, you will eventually qualify for an unsecured credit card at near market terms.

After building a positive credit history through the use of credit cards, you can eventually look to purchase a car or even a house. Federal Housing Administration (“FHA”) loans are available to former debtors after 2 years from a Chapter 7 discharge. In addition, FHA loans may be obtained during a Chapter 13 after one year of timely plan payments. These timelines may be adjusted if the borrower provides an explanation of extenuating circumstances which led to the bankruptcy filing along with their application for the FHA loan.

When working to reestablish your credit and build a favorable credit score, it is important to continue to monitor your credit report for errors and inconsistencies. While there are Credit Repair companies willing to assist, these companies are generally perceived as a scam. Disputes to information on the credit report can be done effectively on a “Do-it-Yourself” basis. Most disputes can be completed online at through the websites for the three major credit reporting companies.

GUIDELINE FOR IMPROVING CREDIT

Below is a suggestion for steps to take following bankruptcy to rebuild credit:

1) Get a Credit Report and Check Your Score

Credit reports can be obtained for free from each agency once per year. After completing a bankruptcy, it is important to review the credit report to check for any errors. Make sure debts which were discharged are reflected correctly. Also ensure that any debts which were reaffirmed continue to show the credit history. Dispute any inconsistencies with the credit agencies.

2) Open a Bank Account

If you do not already have a checking or savings account, open a new account. Get an account that allows automatic bill pay and set it up to prevent missed or late payments.

3) Apply for a Secured Credit Card

Although you will receive offers for unsecured credit cards shortly after completing bankruptcy, secured credit cards will likely provide better terms and lower limits which should help prevent falling back into debt. The credit limit on secured credit cards is generally the deposit required to open the account.

4) Pay Off the Balance Every Month

Make sure to use the card to make small purchases every month. Having an open credit card without any usage does not help build credit. It is also important to pay the balance in full on time each month. The amount of debt owed makes up a large portion of the credit score. Because the credit limit is likely to be small when opening secured credit cards, it is best to not leave running balances on the cards from month to month. Paying off the balance in full also prevents accruing interest.

5) Continue to Monitor Your Credit

Continue to pull a credit report and monitor for inconsistencies. Make sure any new accounts are showing their timely payments and continue to dispute any incorrect information. As previously mentioned, you are entitled to one free credit report per agency per year. It is best to spread these free reports over the year and obtain a report every 3-4 months from one agency at a time.

If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

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