Rebuilding and Improving your Credit and Credit Score after Bankruptcy

Why your Credit Score is Important

Your credit scores determine whether you can finance a car or a house, get an apartment and possibly whether you will be hired for your next job. If you do qualify for a loan, your credit score will determine how much interest you’ll pay. And insurance companies, cable companies and even utility providers use your credit score to determine the rates or deposit amounts to charge you.

Credit after Bankruptcy

In order to improve your credit profile and credit score after bankruptcy, you are going to have to get new credit, which means taking on new debt. You should be aware that there’s danger in taking on new debt, because taking on too much debt is most likely the reason why you had to file bankruptcy. But this is not like suggesting alcohol as a cure for a narcotics addiction. It’s like sticking to a diet to keep weight off. You have to eat. And in today’s modern society, you most likely need credit, even after bankruptcy.

• Secured Credit Cards

Unlike prepaid debit cards, secured cards can help you establish or improve your credit history, provided that the issuer reports your account activity to the credit bureaus, Trans Union, Experian and Equifax. With secured cards, you’re required to make a refundable deposit as collateral, similar to putting a security deposit down on an apartment. That money protects the card issuer in case you don’t pay your bill.

Before getting a secured credit card to improve your credit, be certain to ask whether the card issuer reports to the three major credit reporting agencies. And as explained below, keep your credit utilization rate below 20%.

• Small Personal Loans

The interest will be steep, but you can rebuild your credit with a small personal loan with consumer loan company. Again, before you take out a personal loan to rebuild your credit, make sure that the lender reports credit information to the credit reporting agencies. And again, keep the credit utilization rate below 20%. A personal loan along with a secured credit card could also help with your credit mix. Finally, do not turn to payday loan companies to improve your credit score. The road to financial hell is paved with and paid for with payday loans.

• Take out a Credit-Builder Loan

With credit-builder loans, you’re borrowing from yourself to build a credit history. The loan goes straight into a savings account, and you make monthly payments until the loan is paid in full. Then you get your money back, minus a small amount of interest. Some credit unions offer this product to members, calling it a Savings Secure loan.

An Austin startup, www.selflender.com, launched its version in March 2016, in partnership with Austin Capital Bank. You get a $1,100 loan with an interest rate of about 11 percent, which goes into an FDIC-insured one-year certificate of deposit in your name. You pay $12 to get the loan and, a month later, start paying $97 a month. Those payments get reported to the major credit bureaus. At the end of the year, you’ve paid off your loan and the CD has matured. So you’ve paid $1,176 and gotten back $1,101.10 (you earn a little interest on the CD), which means you’ve paid about $75 to Self Lender.com.

• Take out a Micro Loan

Lenny, www.getlenny.com, is a mobile lending app that targets consumers between the ages of 22 and 35. It is a sort of microlender that reports your payments to two of the three major credit bureaus, Lenny can help you build your credit score and can be a cheaper way to get emergency funds than going to a payday lender or getting hit with multiple overdraft fees.

For members, who pay $2 a month, Lenny can make loans from $100 to $10,000 in three minutes. You can then transfer the money to your bank account or send it to a friend who uses Lenny. If the loan is paid back within 30 days, there is no interest charge. The app has lots of prompts to alert you when you’re doing something that could hurt your credit score, such as getting too close to a payment date while having drawn down 30 percent or more of your credit line.

Other Things you can do to Increase your Credit Score

• Stop Using Credit Cards
• Increase Payment Amounts
• Pay Off Small Purchases Quickly
• Set Payment Reminders
• Regularly Request and Review Your Credit Report
• Keep Accounts Open
• Examine Your Debt Ratio
• Keep credit applications to a minimum

How these Steps Improve your Credit Score

Stop using credit cards and paying more lowers your credit utilization rates. Your credit utilization rate is a critical factor in determining your credit score. As explained by www.creditkarma.com:

Lenders don’t like high utilization rates because it tends to indicate there’s a higher chance of you not being able to repay your debts. Keeping your credit card utilization low, preferably under 30%, is a good goal to aim for. Our data suggests an even better goal is to use your credit some, but keep the utilization rate under 20%. Creditors want to see proof that you can manage credit wisely— something you can’t do without using the credit you’re granted.

A sure way to decrease your credit utilization (and hence increase your credit score) is to stop credit card purchases and to continue or to increase regular payments on your credit cards.

Notwithstanding the advice above, you can improve your credit score by making small credit card purchases and promptly and timely paying off the full amount each month. As explained by www.credit.com:

Thirty-five percent (35%) of the points that make up your FICO credit scores is based on your payment history. A full one-third of your score is determined on this category alone. This means that if you have a poor payment history then it is unlikely that your scores will be high enough to ensure competitive interest rates and optimal terms when you apply for credit. Conversely, having a solid payment history is a great first step towards earning a solid FICO score.

Raising your credit score is one of the best ways to gain a greater sense of financial stability in your life. Taking the necessary steps and following through on your commitments can make your credit score jump up even quicker than you may think is possible. Setting payment reminders on your phone, computer, or other devices helps to remind you to make payments on time.

Reviewing your credit report after bankruptcy: Three to four months after you received your discharge, you should pull a copy of your credit report from all three major credit reporting agencies: Equifax, Experian, and Trans Union. You should check each report to make sure that all of your prepetition unsecured debts have been either deleted or are showing a zero balance and discharged in bankruptcy. As for any secured debt that you re-affirmed, you should check to make sure the payment history is correctly reflecting your payments. Regularly reviewing your credit report in general is a good way to track the progress of your efforts to improve your credit score, including keeping a track on the credit utilization and payment histories. Regular credit report reviews help you catch false or incorrect information on credit report early. Credit vigilance is particularly important as you prepare for applying for credit for important purchases such as a home or a car.

You have the right to one free credit report each year from the big three credit reporting agencies: Equifax, Experian, and Trans Union. You can get these reports here:  www.annualcreditreport.com. Trans Union allows you to access your Trans Union and Equifax anytime you want for free at www.creditkarma.com. And you can get your full Experian credit report at www.freecreditreport.com. This last site is free, but it will urge you to enroll in several different programs that will cost you.

Closing credit card accounts can hurt your credit score. As explained by www.bankrate.com, closing credit card accounts:

(1)        negatively impacts your credit-utilization rate (less available credit means a greater credit usage rate even if you don’t increase your credit usage);

(2)        reduces the length of your credit history, which is another factor that goes into the computation of your credit score; and

(3)        changes your credit-usage mix. FICO credit scores consider your mix of credit types; the more diverse, the better for your score. Mix of credit contributes 10 percent to your overall credit score.

Applying for credit can lower your credit score. Credit applications result in credit inquiries that show up on your credit reports and are visible when a lender pulls your credit report. These are called “hard inquiries.” According to www.myfico.com, each hard inquiry can decrease your credit score by a little less than five points each. So, keep those credit applications to a minimum.