#how to repair your credit
Personal finance columnist
CHICAGO (MarketWatch) — You’re one of the millions of consumers who have erased financial hardships by filing for bankruptcy. Now what?
If you’re earnest about getting your fiscal house in order, you will be welcomed back into the world of credit, car loans and home mortgages by proving that you’re no longer the credit risk you once were. But it will take time, patience and a whole lot of discipline.
It’s the single worst thing you can do to your credit rating, but the good news is that you can recover from a bankruptcy, said Craig Watts, public affairs manager for Fair Isaac Corp. which created the FICO credit-score rating.
A growing number of consumers are taking the bankruptcy plunge. U.S. consumer bankruptcy filings for the year ended June 30 popped 21% to 1.51 million. Coupled with the nearly 60,000 business bankruptcies in the same period, filings reached a level not seen since 2005.
Some 422,061 bankruptcies were filed from April to June, pushing past the 400,000 mark for the first time since the fourth quarter of 2005. At that time, 667,431 bankruptcies were reported as consumers rushed to file before Congress changed the laws that tightened eligibility.
There’s some good news for filers: There’s no red B written on your chest.
Nowadays lenders pay greater attention to other factors, Watts said. If you mind your Ps and Qs after the bankruptcy, you can restore your credit rating once the bankruptcy data finally falls off your credit report.
Still, though the debts are off the books, it will take up to 10 years to completely clean your credit-report slate.
It matters how much negative information is on your credit report, but also when it was reported and how bad it is. Watts said the scoring models consider bad credit information through three different criteria: how recent the information is, how severe it is and what the frequency is.
You want to replace the most current information on the credit report with positive credit activity, signs that you’re paying your bills on time, Watts said.
This, of course, will take time. How much time varies by lender, according to Steven Katz, senior director of consumer brands for TransUnion Credit Bureau.
Different lenders have different thresholds for risk, he said. You may still receive some credit-card offers but they will be few and far between for the first year or two and you will pay dearly for the privilege, in terms of the interest rate charged.
That doesn’t mean you shouldn’t get the cards, but you should pay them off monthly to help build your credit and your history of timely bill-paying as well as to manage your budget.
As time passes and you begin to establish a new track record of positive credit, the impact of the bankruptcy starts to dissipate, Katz said.
Filing for bankruptcy is a new beginning but it’s a new beginning with consequences, he said. It’s not a step that one should take lightly.
Here are eight tips to get your credit back in shape.
- Examine your credit report to make sure the bankruptcy is reflected as it should be. Make sure the debts that were part of the bankruptcy are properly noted, usually with a BK notation. You want creditors to know that those items are no longer in your pool of debt.
- Examine your credit reports — again. Repeat the task, because it can take time to get those debts cited.
- Put a tight budget in place and stick to it.
- Seek new credit but do it in moderation. You need to prove to lenders that you are capable of handling revolving credit and higher debt loads like a car loan. If you stay out of the credit market for five years, that might be marvelous for your financial health but it will do nothing to help your credit rating, FICO’s Watts said.
- Pay bills with automatic payment plans so you don’t miss a payment.
- If you have a student loan — those aren’t discharged in bankruptcy — be sure you pay on time. That will help rebuild your credit.
- If you’re having trouble getting unsecured credit, look to secured credit or a prepaid credit card. Those have a credit limit that’s equal to an amount you deposit at the bank. But be careful you don’t get sucked into one that demands big upfront or annual charges.
- Don’t max out your credit cards. Your scores are tallied by what your credit ratio is, or the amount of outstanding credit you have to available credit.
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