If you've recently found yourself falling behind on your regular bills due to unforeseen expenses or job loss, you may have filed for Chapter 7 or Chapter 13 bankruptcy protection to help stem the financial losses and begin rebuilding your life. While a strategic bankruptcy can provide you with the financial breathing room you need, the negative impact on your credit is unparalleled -- filing for bankruptcy can drop your credit score to the mid-500s even if you started out with a score of 780 or above. What can you do to begin rebuilding your credit and move on from this life event? Read on to learn more about when your credit score may be used and what you can do to quickly and effectively improve it.
Why is it important to begin rebuilding your credit score after filing for bankruptcy?
After going through the hassle and expense of filing for bankruptcy, you may not want to rebuild your credit -- especially if this means taking on further debt. However, a good (or climbing) credit score is important for a variety of reasons not only related to your finances. Some industries may use credit screening tools to weed out job applicants, making it more difficult for you to find a higher-paying job to begin rebuilding your life. In other cases, a low or stagnant credit score could leave you without many options in an emergency -- for example, if your car needs thousands in repairs and you don't have a backup method to commute to work.
Fortunately, with some time, patience, and a bit of work, you can find yourself with the pristine credit score of someone who has never even flirted with bankruptcy. And after ten years, the bankruptcy filing (and any related closed accounts) should fall off your credit report entirely, no longer being factored into your credit score or causing a raised eyebrow from a potential employer.
What are the best ways to quickly begin rebuilding your credit without going into unnecessary debt?
There are several ways you can begin establishing responsible credit usage immediately (or almost immediately) upon your bankruptcy filing. Your first is to continue paying your utility bills on time -- and if you filed for bankruptcy alone and most of the bills are in your spouse or roommate's name, you may want to go ahead and have these accounts switched to your name. By maintaining a history of on-time payments, you'll prove to credit providers that you've committed to a debt-free future, even if your past shows some mistakes.
You can also take out a secured credit card to establish a revolving line of credit. Unlike unsecured credit cards, secured credit cards require an initial deposit and may only permit you to spend as much as you've deposited -- more like a debit card than a credit card. However, unlike the checking accounts to which debit cards link, secured credit cards report to each of the three major credit reporting bureaus, helping them increase your credit score without requiring (or even allowing) you to incur any credit card debt. After a while, you'll be able to take out unsecured credit cards as well, albeit usually at a higher interest rate than your peers with higher credit scores.
Another option that can quickly increase your credit score is an auto loan. While it generally isn't a good idea to run out post-bankruptcy and buy a car you can't afford, purchasing a well-maintained used vehicle that has held its value and is reliable enough to get you to work in one piece can often be a good investment in your future. In addition, owing less on the vehicle than it's worth -- even at a higher interest rate than you'd be paying with good or excellent credit -- can give you some flexibility if you decide to reduce your debts and pay off the loan in full. Click here for more info about auto financing.