One of the most difficult legacies of financial hardship is the damage it does to your credit. While your debts may be forgiven, the credit penalties that came with those discharges will last for years to come. Late or missed payments remain on your credit history for up to six years, while a penalty for bankruptcy can remain for up to 14 years if you’ve filed before. Even if the bankruptcy only remains on your credit for six years in the case of a first bankruptcy, that still means your credit is going to take a big hit for over half a decade. After a bankruptcy penalty period ends the penalty may be gone, but so is any credit you’d built up over the years before you go into financial distress.
So what do you do when you have to start over with your credit? How do you get your credit back to where it needs to be when you are starting from scratch? The following tips can help you rebuild your credit following a bankruptcy or other period of financial hardship:
1. Repair your credit. Credit repair involves reviewing your credit reports from Equifax and TransUnion to correct any errors or discrepancies. These can range from repeat account listings, incorrect account statuses, or incorrect start dates on penalties. Particularly following bankruptcy or financial distress, you want to check your credit report to make sure everything is accurate. Mistakes have been reported to cost as much as 100 points on your credit scores.
2. Get a secured credit card. Also called a pre-paid credit card, this type of credit line allows you to put a deposit amount into the account that can be used to cover what’s owed if you are late or miss a payment. Since you offer the deposit as collateral, you can get a much lower interest rate even with bad credit. A secured credit card will allow you to build credit without struggling around high interest rates on an unsecured credit card.
3. Take out a small unsecured personal loan. Personal loans often offer more competitive interest rates than credit cards, so you can get a small unsecured personal loan at a much lower rate of interest than an unsecured credit card. In addition, you have an easier time with a loan, because it’s a finite amount of money you have to pay back, rather than an open line of credit you can run up and get into trouble with. You can use the loan to build savings or make investments such as retirement contributions and then use paying the loan back to build your credit.
4. Keep your debt at a healthy level for your income. Total debt owed makes up roughly one third of the weight in your credit score calculations. The more debt you have, the lower it drops your credit scores. With this in mind, you want to maintain a healthy amount of debt for your income level. Ideally, you never want your monthly debt payments to exceed 36 per cent of your income.
If you are currently carrying debt and need to improve your scores, paying off the debt efficiently with extra payments to reduce the debt can make a big impact in improving your credit. Always pay your bills on time and with the full amount requested to avoid incurring additional credit penalties. Then, focus any extra cash flow to reduce one debt at a time until you have your debt back to a good level for your budget.