Most people assume that filing a bankruptcy case is the worst thing they can do with regard to their credit rating; however, that is a common bankruptcy myth that many people believe to be true. While a bankruptcy will remain on your credit report for 7 to 10 years, the filing of a bankruptcy case often improves your credit score as quickly as one year after the bankruptcy case is filed. Many of our clients are concerned with how to repair their credit rating after filing a bankruptcy. The first step to improving your credit history is to take care of the debt that is causing your credit score to drop.
What has caused your credit rating to drop?
If you are contemplating a bankruptcy, the chances that your credit rating has already been damaged is high. Missed payments, late payments, judgments, over-the-limit accounts and collections have probably already caused damage to your credit rating. However, filing a bankruptcy case can actually help improve your credit score by discharging much of the “bad debt” that is being reported on your credit report. If you ignore the negative accounts on your credit report, your credit score will never improve. Potential lenders will view you as a high risk and deny you credit in the future. You can change this by filing a bankruptcy case.
Once your debts are discharged, the negative accounts will cease to reflect continued late payments and open balances. Because your debts have been discharged, your debt-to-income ratio decreases which has a positive effect on your credit score. After your bankruptcy case is complete, you can begin to rebuild your credit and improve your credit rating by using the tools learned in the credit counseling and financial management courses you were required to complete as part of your bankruptcy filing.
Ways you can rebuild your credit after bankruptcy
Filing a bankruptcy case will cause an initial drop in your FICO score (your credit score). However, there are steps that you can take after your bankruptcy case is closed to improve your credit rating so that you can recover and rebuild your finances.
- Request copies of your credit reports – You are entitled to receive a free copy of your credit report from all three credit-reporting agencies every 12 months. You should review your credit reports to ensure that all accounts listed in your bankruptcy state “discharged in bankruptcy” and reflect a $0.00 balance. If there is inaccurate information, contact the creditor and the credit-reporting agencies to have the information corrected.
- Apply for a secured credit card – Secured credit cards require that you place a deposit with the bank or company. This deposit secures any charges that you make with the credit card in the event that you default on the payments. The payment history will be reported to credit-reporting agencies thereby helping you improve your credit score with on-time payments.
- Make all payments on time – Pay your car payments, mortgage payments and any other debt payments on time. Payment history makes up a significant portion of your credit score; therefore, late payments can quickly decrease your credit score. Setting up payments on an automatic draft can assist you with making your payments in a timely manner.
- Maintain low credit card balances – As you begin to repair your credit, maintain very low balances on the one or two credit cards you obtain and pay the payments each month on or before the due date. You do not want your debt-to-income ratio to become a problem again. Most people with great credit ratings charge no more than 30% of their credit limit at any one time.
- Apply for an installment loan – Installment loans will help improve your credit score; however, it may take a year or two for you to qualify for a loan with an affordable interest rate. Shopping around and checking with a credit union or your current bank may help you find a lower interest rate.
- Do not rush to obtain credit – Even though you want to improve your credit rating as quickly as possible, rushing to place yourself into debt is not a wise choice. It will take time and patience, but you can rebuild your credit score by using credit wisely.
Learn how filing bankruptcy can improve your credit score
Attorney Gene F. Turnwald helps individuals just like you solve their financial problems every day. Mr. Turnwald has the knowledge and experience necessary to assist you with finding an affordable solution to your debt problems. He understands the stress that dealing with a financial crisis can cause and wants to help you get the fresh start that you need to recover and rebuild your finances. Contact our office today to schedule a free bankruptcy consultation with an experienced Michigan bankruptcy attorney.