January 29th, 2012 11:32 EST
What are The Most Important Things to Know About Credit Repair After Bankruptcy?
Question: What are the most important things to know about credit repair after bankruptcy?
Philip Tirone: Contrary to popular belief, credit repair after bankruptcy is not impossible. In fact, if you ever again plan on buying a home, renting a car, applying for a job that runs a credit check, or even going on vacation and securing a rental car, you are going to need credit.
If you have declared bankruptcy and want to know how to build credit after your bankruptcy, follow a two-fold plan.
- First, you will need to open new lines of credit.
- Second, you will need to pay your bills on time and in full to best achieve credit repair after bankruptcy.
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Opening New Lines of Credit
Do not be fooled by companies that say they can wipe a bankruptcy off your record. You cannot legally erase the bankruptcy from your credit record. The good news is, however, that credit bureaus will pay more attention to your recent activities than to things that happened in the past, so if you immediately start using credit responsibly, you will be well on your way to a clean credit record. We talk more about this in the articles about credit repair and credit score scale. Obtaining new lines of credit after bankruptcy tells the credit bureaus that while you might have hit hard times, you are on your way up! If you follow this advice and obtain new lines of credit, you can easily raise your score well before the bankruptcy is removed from your credit report in ten years.
As part of your plan for credit repair after bankruptcy, you should:
- Open three new credit cards, which you keep active by using in lieu of cash, but pay off in full after each use. If you are at lunch with a friend and have cash to pay the $12 bill, charge the lunch to your credit card. As soon as you return home, make an electronic payment in the amount of $12 (assuming you are not charged for electronic payments). My point is this: keep the cards active, but keep the balance as low as possible month-round.
- If you are buying a new appliance, household furniture, or a computer, ask the sales associate whether you can buy it on installment loan. Again, pay the loan off quickly and with cash.
Two things to keep in mind when opening new accounts:
- Because you likely have low credit, you might not qualify for loans and credit cards with low interest rates. This is yet another reason to pay your bills immediately and in full. That said, you might be willing to find lenders willing to compete a little for your business. Trying to negotiate a lower interest rate is always wise.
- To best achieve credit repair after bankruptcy, try to open all your new accounts as soon as possible after the bankruptcy discharge. This might cause your score to drop immediately as lenders might think you are preparing to go on a spending spree. In the long run, though, your credit will benefit from this strategy as credit-scoring bureaus will award more points to those who have the longest relationships with lenders. If you stagger the accounts by opening a new one every six months, you will keep lowering the average age of your accounts.
Paying Your Bills on Time and in Full
To achieve credit repair after bankruptcy, you must never make a late payment. You cannot pay one minute past the deadline. This is the number-one rule of bankruptcy facts. The credit-scoring models consider you an extremely risky borrower, so any indication that you are slipping into old patterns will not bode well for your credit score. You must pay on time and in full each month.
If you cannot pay your credit cards in full, you must never exceed a balance that is more than 30 percent of your limit. Your balance-to-limit ratio is a big part of the credit score scale. This means that you must make a budget and stick to it. You cannot splurge on a latte just this once. "Â" You cannot make the minimum payment as your credit card balances creep up. Not even once.
If you suspect that your financial problems occurred because you are a compulsive spender, visit the Debtors Anonymous website so you can continue to work on credit repair after bankruptcy.
Register for a FREE Seminar