Life After Bankruptcy – Improving Your Credit Score After Bankruptcy
Is there life after bankruptcy? For many people, it may seem as if they will never get out of debt and have a good credit score again. They believe if they file a Chapter 7 or Chapter 13 bankruptcy case, their credit will be ruinedforever, and they will never qualify for a mortgage or car loan. In other words, they will be doomed to a life without credit, which means a life without new vehicles and a nice home.
This is a bankruptcy myth! There is life after bankruptcy,and you will qualify for credit again. By filing a Chapter 7 or Chapter 13 bankruptcy, you can get the fresh start you need, free from the burden of debt, to begin improving your credit score. Let our Daytona bankruptcy attorneys explain how you can improve your financial well-being by filing Chapter 13 or Chapter 7 during a free, no-obligation case review.
How Are Credit Scores Calculated?
Your FICO credit score is one of the major factors used by lenders and credit companies to determine if you qualify for a loan or credit account. Therefore, understanding how your credit score is calculated is the first step in improving credit scores after bankruptcy.
The information on your credit report is divided into five categories. Those categories are used to generate your credit rating. Some categories are more important than other categories because the information in those categories carries more weight when calculating your credit score than the other categories.
The five categories used by FICO are:
• History of Payments — This credit category accounts for the largest portion of your credit score (35%). Therefore, late payments can quickly harm your credit score.
• Amount of Money Owed on Accounts — This credit category is the second largest portion of your credit score (30%), so it is very important too. Creditors consider the amount you owe on each account and the total owed on all accounts when approving a credit application. Therefore, if you have a large amount of debt compared to your income or the balances on your credit accounts are close to the credit limits on the accounts, it could hurt your score.
• Length of Credit History — The longer you have had credit, the better it is for your credit score. This credit category accounts for 15% of your credit score.
• Types of Credit Accounts — Ten percent of your score is based on the mix of credit you have on your credit report. Creditors like to see a good mix of credit accounts, such as mortgages, car loans, revolving credit, and credit cards.
• Applications for New Credit — The final ten percent of your credit score is based on how many applications for new credit you have on your report. Creditors become nervous when they see that you have applied for several new credit accounts within a short period.
Your credit score is very important because it is used in other areas of your life. For instance, some employers may run credit reports if you will be handling money or assets for the company. Your credit score can impact the rates charged by insurance companies and other companies. Therefore, improving your credit score after bankruptcy is an important step in improving life after bankruptcy.
Steps You Can Take to Improve Credit Scores After Bankruptcy
You may see advertisements by companies offering to “fix” or “repair” your credit score or credit rating quickly. In most cases, these companies are not worth the money you spend to retain their services. The companies that use legal and ethical methods to help you improve your credit score are charging you for things you can do yourself. Some companies may use methods that are not completely above-board.
Ways that you can improve your credit score after bankruptcy include:
• Correct Information on Your Credit Report — You are entitled to free copies of your credit reports from the three main agencies (TransUnion, Experian, and Equifax) every 12 months. After your bankruptcy case is complete, order copies of all three credit reports. Compare the information on the reports to your bankruptcy filing. All accounts discharged in bankruptcy should have zero balances and notate the accounts were discharged in bankruptcy. If you find errors on your reports, contact the creditor and the credit reporting agency in writing. Continue to follow up (be a pest if necessary) until the information is corrected.
• No Late Payments! — As mentioned above, late payments usually lower a credit score very quickly,and it is difficult to overcome the negative impact that late payments have on your credit score. While you cannot erase the information already on your report, you can improve your score by making all future payments on time.
• Secured Credit Cards — When you are ready, you may want to apply for a secured credit card. You must place a deposit with the company to secure the charges you make using the credit card. However, if you choose a secured credit card company that reports information to the credit bureaus and you make all payments on time, it can improve your credit score after bankruptcy.
• Old Credit Accounts — Most creditors close accounts, even with a zero balance, when you file for bankruptcy relief. However, if an older account with a zero balance is not closed, you may want to inquire with the creditor about using the account. By using an older account, you can improve your length of credit history, mix of credit, and payment history. Just make sure you do not charge more than 30 percent of the total credit limit and make all payments on time.
• New Credit — When you are confident you are in a financial position to handle new credit, you can begin to apply for accounts. Keeping a good mix of credit can improve your score; therefore, an account with a furniture store or department store could help. Also, a personal loan or car loan may help. The key is not to over-extend yourself so that you begin missing payments. Use the information in your Debtor Education Course to help you manage your finances and credit to avoid problems.
The Federal Trade Commission (FTC) and USA.gov have information on their websites that can be very useful for improving credit scores after bankruptcy. Remember, your bankruptcy will not remain on your credit reports forever. With patience and dedication, most debtors begin to see improvements in their credit scores within a year or two after filing for bankruptcy relief.
Contact a Daytona Bankruptcy Attorney for Help
The first step in improving your credit score is to take advantage of the free bankruptcy consultation offered by our bankruptcy law firm. Our Florida bankruptcy lawyers help individuals, couples, and businesses throughout Volusia County get out of debt and begin taking steps on the road to a better financial future.
Contact our office by calling (888) 316-2131 or by using the contact form on our website.