Rebuilding your credit after bankruptcy

After your bankruptcy is discharged, your credit scores will fall dramatically. However, there are ways to rebuild credit and increase your scores. One of the best methods is to obtain a secured credit card. These cards are fairly easy to obtain and are available through most major banks. Banks will generally allow you to open a secured credit account with a minimum of $500.00.

The most important payment to make each month is your mortgage payment. If you have been released from a Chapter 13 bankruptcy, never miss a mortgage payment, as your lender will be able to foreclose on your property much more easily if you make late payments after the bankruptcy, and your refinance options will become extremely limited.

There are many credit card companies that offer second chance credit cards. The credit cards are unsecured, but have a very small credit limit. Usually they charge a high interest rate and large annual fees. These cards will help to rebuild your credit over time. Keep a small balance and make sure to make your payments on time. The only true secret to better credit is time. The more time that passes from the discharge date of your bankruptcy, the higher your score will go.

Usually, when you file for a personal bankruptcy, whether it is a Chapter 7 or a Chapter 13, even if you make all of your mortgage payments on time, your credit report may not reflect this.

Generally speaking, once you go into a bankruptcy, the mortgage history no longer reports accurately to the credit bureaus. It usually looks as if the payments were not made on time, even if they have been.

One way to rectify this for purposes of obtaining a mortgage is to get a VOM from the current lender, which is a Verification Of Mortgage, or payment history. Therefore, for mortgage underwriting purposes, your actual mortgage history will be used, not the inaccurate one reporting on the credit.

The other problem is that since the mortgage is no longer reporting correctly, your credit score is being negatively affected, even if your payments are now all current.

One of the best ways to rectify this is by refinancing the current mortgage and beginning fresh with a new lender. This allows the old, negative mortgage history to slowly slide to the back of the credit report, losing significance over time, and ultimately falling off the report altogether.

It is true you must obtain new credit to build up your scores. To this end, it is beneficial to re-establish 2 or 3 lines of credit (auto loan, credit card, gas card) are good examples. A good mix is two credit cards and one installment loan, such as a small personal loan from a bank or a jewelry store. Make sure each new creditor reports to ALL three credit agencies. To boost your scores each month, make sure you do not use over 45% of the credit limit, never be late, and pay off the card each month. For example, if your credit limit is $300, never allow more than $135 on the card at any time.

After your bankruptcy has been discharged you will once again begin receiving offers for credit and for re-establishing credit. Do not be tempted to try and apply for too much new credit once again. Also, don't think that you are just simply not going to use credit ever again and pay cash for everything from now on because that will only negatively affect numerous things. Credit plays too big of a part in some-one's life. Your credit is checked when applying for auto insurance, homeowners insurance, a mortgage loan, potential jobs, credit cards, auto loans, etc... If you did not re-establish credit after your bankruptcy, it will take much, much longer for your credit scores to increase and it will negatively affect your ability to buy a home again, to obtain a competitive homeowners or auto insurance premiums, to obtain quality auto loan financing, and the list goes on and on. You need credit in today's world, but you need to use it sparingly and wisely.

Secured credit cards will help you increase your scores. However they usually have high fees. It is important to set a goal. Are you increasing your credit to purchase another home, refinance, pull out cash? Each goal has a different approach. The use of secured credit cards and secured loans will help with adding positive tradelines on your report. Along with time and limiting the number of inquiries your credit will adjust.

Try working with a credit union initially after your discharge when trying to establish credit. They are easier to work with when you are trying to establish credit and its important to keep you account in good standing.

Rebuilding your credit after bankruptcy may seem like a daunting task but can be accomplished with patience. There are many companies that will lend you money after bankruptcy but at a higher rate of interest. Your job will be to make sure you pay all bills on time and to limit your use of credit. Your credit scores will eventually rise as your positive credit builds and the bankruptcy effect lessens with the passing of time.

Many people who have filed bankruptcy have had their credit restored to good levels in about 3 years. It just takes diligent financial habits and realizing what caused the bankruptcy before and not repeating those steps.

One way to rebuild your credit after a bankruptcy is to get a secured credit card. With a secured card you deposit money and the bank issues a card and allows you to spend the amount of the deposit. All of these cards will have an annual fee. Compare different cards to determine the various application fees.

If your spouse or a relative other has established credit, you can have them request you be added to the account. This will help you establish credit quickly.

One very important thing to remember when rebuilding your credit is to keep your balances at no more than 50%, (30% is ideal, but 50% will work)of the total amount of available credit.

Having multiple pieces of credit is not a problem in the eyes of the repositories but having high balances in relation to available credit (i.e High Debt Ratio) looks very bad.

» DISCLAIMER: The information contained in this article on 'Rebuilding your credit after bankruptcy' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.