How do I rebuild my credit after bankruptcy?
If you've recently filed for bankruptcy, you may be feeling a mix of relief and trepidation. You may also be asking yourself “how do I rebuild my credit after bankruptcy?” While having filed for bankruptcy can eliminate unsecured debts in the case of a Chapter 7 filing or allowed you to renegotiate them in a Chapter 13 filing, you may be worried about how a bankruptcy on your credit report will affect your finances going forward. These are legitimate questions and you can find the answers right here!
The good news is that responsible individuals are able to rebuild their credit quickly; in fact, within two years of filing for Chapter 7 bankruptcy, people with good credit histories are eligible for FHA home loans. Once you've filed for bankruptcy, you should follow these steps to ensure that your financial situation continues to improve.
Plan Your Finances
Many individuals file for bankruptcy as a result of events out of their control, such as the loss of a job, a divorce or medical bills far beyond their ability to pay. It is not uncommon for people to also allow their spending to get out of control and to use credit as a method of living beyond their means. Whatever the reason for your filing, you should be sure that you keep an eye on your finances to help you avoid ending up in a situation similar to the one that resulted in your filing for bankruptcy.
An important part of this process is creating a budget and following it. It is essential that you create a realistic budget that you can follow, especially if you are trying to reign in poor spending habits. If you outline a budget that assumes only $20 per month for food, you're going to stop following it fairly quickly, and it won't do you any good. Figure out what the majority of your discretionary spending is, and try to reduce those expenditures or find less costly alternatives.
Rebuilding Your Credit With Secured Credit Cards
Part of the process of rebuilding your credit involves showing lenders that you can be trusted again. There are a few ways to do this, one of which being to take advantage of secured credit cards. Secured cards require a deposit, and some also carry yearly fees, but many can be converted to standard credit cards after a period of time. Please note that pre-paid credit cards generally do not improve your credit because they are not reported to agencies.
There are also gas cards and department store cards that are available to people who have filed for bankruptcy and their lenders are more lenient about approval than many standard credit card companies. These cards may also carry more reasonable interest rates and don't always come with yearly fees.
Avoid Making The Same Mistakes
Once you've started regaining access to credit, it is important that you keep paying off cards as soon as bills come due. It is all too easy for many people to fall back into the habit of relying on credit rather than saving up, especially if this was the reason they ended up having to file for bankruptcy, so prompt payment of cards is essential.
Creating an emergency savings fund is also a good idea, whatever your reason for filing. An emergency fund allows you to pay for medical bills, car repairs or getting your A/C fixed without having to use a credit card. If you are not able to access credit cards yet, having the funds on hand to pay for emergencies out of pocket is critical.
Keep An Eye On Your Credit Report
Lenders may report you in error for debts that you do not owe, and lenders also have a limited time frame to report that you have paid off debts or had them eliminated as a result of filing for bankruptcy. Keeping an eye on your credit rating and history will help you ensure that you are on the right track as well as allowing you to catch errors made by creditors before they have a negative effect on your credit.