Rebuilding A Credit Score After Bankruptcy

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August 24, 2017 | By RGR Marketing Blog

5 Steps to Improving Credit After Declaring Bankruptcy

When you put yourself in their client’s shoes, you realize that it’s easy to get down on yourself after getting into a negative financial situation in which bankruptcy was the last option. Unfortunately, filing a Chapter 7 is effective for eliminating past debt and wiping their slate clean, but it does have a tremendously negative impact on their credit score. And, if your clients are like most people, they might believe that their dreams of having good credit are now unattainable.

The truth is, rebuilding credit after a bankruptcy is not only possible, it is easier than they might think. Your clients will have to keep in mind that it doesn’t happen overnight and that they will have to make sacrifices and better decisions along the way. By helping them to follow these five steps, they will be on their way to a better credit score, even with a bankruptcy on file.

#1: Go Back to Basics

Remember, the bankruptcy is going to remain on their credit report for ten years and any debt collection action taken against them will remain on it for seven years. Bankruptcy gets rid of their debt, but it doesn’t erase their negative credit history. The good thing is that the older these marks get, the less of an impact they have on their creditworthiness, as long as they keep their credit clean, that is.

As with anything in the world, knowledge is power. So, the first thing they’re going to want to do is obtain free copies of their credit report and their credit scores from the three major reporting bureaus. Carefully review them to see if there are any errors. If they find errors, they should dispute them with the bureaus and once they’re removed, their credit will most likely increase by one or more points.

Next, they should create a plan of action for regaining control of their credit history. Pick one credit bureau and stick with that one to monitor their credit moving forward. This will give them a more accurate picture of how their credit is progressing. If they know which bureau a particular lender that they want to use in the future relies on, pick that one.

#2: Create a Budget

In order to gain control over their finances, they need to know how much money they have coming in and how much they spend every month. Encourage them to gather up all of their essential expenses, like their rent or mortgage, their utility bills, insurance bills, and their grocery bills and add them up to find out what their basic living expenses are.

Then compare that number with their household’s monthly income to see how much money they have left over every month after their essentials are paid. Next, you’ll want them to look at their nonessential expenses, such as gym memberships, magazine subscriptions, etc. Determine which nonessential expenses they can live without. They can also check their cable TV and cell phone packages to see if there are more affordable options available.

This process will help them uncover ways to increase their leftover money. Some of that money should be placed into an emergency fund, some deposited into their savings, and some should go toward paying more towards any new credit-building products they utilize.

#3: Pick a Credit-Building Product

After filing bankruptcy, don’t expect lenders to offer any unsecured credit products. Your clients will be considered very high-risk customers at the start. So, to start rebuilding positive credit, they should select a secured credit product, like a secured credit card or a secured loan. These products are secured using their own money so if they fail to pay, they’re the one who is losing money, not the lender.

Another option is to have a friend or family member with good credit co-sign for a credit card or loan. Similarly, your client can be placed as an authorized user on a credit card of someone with good credit. Both of these situations can be beneficial to their credit score, but they have to keep in mind that should they fail to meet their obligations, the co-signer or the credit card’s owner will suffer derogatory marks on their own credit reports.

Your client must be committed to their new credit-building lifestyle if they choose to go this route because they won’t be the only one getting harmed if they revert back to bad credit habits.

#4: Pay Everything On Time

Their secured credit product is going to require them to pay a minimum monthly payment just like a secured credit card does. Don’t let them make the mistake of thinking that should they not have money to pay their minimum due, that it won’t hurt their credit because it’s secured with their own money.

Your client must pay all of their debts on time if they want to keep their credit-building journey moving forward. They should strive for no more than 30% of their credit card limit or loan amount being used at one time. Or, for optimum credit building, keep their balance at 10% of the limit.

#5: Don’t Go Crazy Applying for Credit

Every credit application your client submits causes their credit score to drop by a point or more. After filing bankruptcy, it is crucial that they start rebuilding their credit slowly. Start with one secured credit product and focus on keeping that one current. The more they apply for credit, the larger of a risk they’re going to look to lenders.

#6: Keep It Up

Re-establishing credit after filing for bankruptcy takes time, but by being consistent and maintaining timely payments, it will happen. Remind and encourage your clients to stay committed, keep their eye on their credit, and avoid the temptation to apply for more credit than they need and they’ll notice their credit score climbing month after month.

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5 Steps to Improving Credit After Declaring Bankruptcy

#1: Go Back to Basics

#2: Create a Budget

#3: Pick a Credit-Building Product

#4: Pay Everything On Time

#5: Don’t Go Crazy Applying for Credit

#6: Keep It Up

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money today!

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5 Steps to Improving Credit After Declaring Bankruptcy

#1: Go Back to Basics

#2: Create a Budget

#3: Pick a Credit-Building Product

#4: Pay Everything On Time

#5: Don’t Go Crazy Applying for Credit

#6: Keep It Up

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