- Bankruptcy can be challenging, but it can also be an opportunity for a fresh start to turn around your finances.
- With the right steps, many people are able to raise their credit score above a 640 within two years of declaring bankruptcy.
- Taking stock of your past financial mistakes and increasing your credit mix are two ways you can begin to rebound.
Bankruptcy sounds scary, but it's not all doom and gloom. In fact, some studies show that within two years of declaring bankruptcy, most people have raised their credit score above a 640 — into what's considered fair or good credit territory. And when these borrowers sought a new mortgage loan, they paid an average of only 19 basis points more in interest than those without a bankruptcy history.
The truth is, bankruptcy can be a challenging time, but it can also be an opportunity for a fresh start to take hold of your finances and make a turnaround. These key steps will quickly increase your credit score and get you on your way to a more prosperous financial future.
You can obtain a free yearly report at freecreditreport.com. After a bankruptcy, it's especially critical that your report accurately reflects you're no longer being held liable for any of the debt that was erased during your bankruptcy. And you'll want to check your report regularly, to keep track of any questionable changes — as well as to keep an eye on your improving credit history.
People who file for bankruptcy can be bombarded with offers for credit repair. Keep a look-out for some classic signs of scams, such as asking for payment upfront, not telling you your legal rights, or telling you to not contact the credit reporting agencies, says the Federal Trade Commission. They may even suggest you apply for credit using your Employer Identification Number (instead of your Social Security number), or that you use a fake Social Security number, altogether. Both of these constitute identity fraud, and it should go without saying that they're illegal. Consult with your State Attorney General's Office or the FTC if you have any doubt regarding the veracity of a credit repair offer.
Many of us are prone to repeating the same mistakes, so it's important to identify these and studiously avoid them in the future. Were you lured in by high-interest credit cards or loans? Then it's imperative that you avoid high-interest credit products now. Were you lax on budgeting or cash-flow management? Create a realistic budget that's within your means — and stick to it. The goal is to identify your weaknesses and ensure they don't compromise your fresh start.
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Now is also the time to start rebuilding your credit, and a secured credit card can be one of the most powerful tools for a fresh start, according to credit reporting agency Experian. First, it's important you have an emergency fund of three to six months of living expenses saved, prior to committing much needed resources to a secured card. Once you have emergency savings, however, consider obtaining a secured credit card using a down payment to obtain a credit line. Once you've made on-time payments on your secured card for about a year, you'll likely qualify for an unsecured card – and see a measurable increase in your credit score.
Your credit mix is the variety of loans in your credit file. How well you manage that blend is reflected in your credit score. Your mix of credit can count for as much as 10% of your overall score. Companies such as RentTrack or RentReporters allow you to report your on- time monthly payments to the credit bureaus. This can increase your credit by 50–70 points in a few months. Other options include small, so-called "credit builder" loans, which allow you to repay manageable principal amounts of $500 to $2,000 over a few years. This can help you build confidence in your money-management skills as you gradually increase your credit score further.
Remember, the judicious use of any credit — car loans, mortgages and so forth — can boost your score. But it does have to be judicious use: Don't take on new credit if you're in any way unsure that you can handle it. Otherwise, you'll end up right back where you started.
A bankruptcy can be a new beginning — a chance to wipe the slate clean and make a stronger, more prosperous future for yourself. Consider it an opportunity to grow from your experiences — and make wiser financial choices every day.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.