Life after bankruptcy: Four tips for rebuilding your credit

 

People who have filed bankruptcy can rebuild their credit scores by using credit again, tracking their progress and avoiding common financial missteps.

Each year, thousands of Connecticut residents seek to discharge debt that they can no longer manage by filing bankruptcy. According to data from the U.S. Bankruptcy Courts system, 5,914 cases were filed statewide during the one-year period ending on Sept. 30, 2016. For many of these consumers, bankruptcy can offer a “fresh start,” but problematically, it may also result in damaged credit.

Most people experience a significant decrease in their credit scores immediately after filing bankruptcy. This may limit a person’s ability to secure financing for housing, vehicles and other necessities. Fortunately, it is possible to begin rebuilding credit after filing bankruptcy, even while the filing still remains part of a person’s credit history, by taking the following steps.

1. Start utilizing credit

Since using credit is the only way to build credit, consumers should take stock of their options after bankruptcy. Some people may qualify for credit cards with low limits and higher interest rates. For others, using a secured credit card – which extends credit based on a cash deposit – may be an option. Before opening one of these cards, consumers should confirm that usage and payment activity are reported to major credit bureaus. If not, using the card will not help restore credit.

2. Use best practices

People who are starting to use credit again after filing bankruptcy should work to establish prudent habits for doing so. Most people can reduce their risk of falling into unmanageable credit card debt by setting the following ground rules:

· Do not use the card for purchases that would otherwise not be affordable. People who spend more than they are able to repay are more likely to carry a balance, which can lead to high interest fees and snowballing debt.

· Avoid using the full amount of credit available on the card. A high utilization ratio – which is the ratio between used credit and available credit – can result in a lower credit score.

· Do not make late payments. This can also lead to a reduced credit score. Consumers may want to consider setting up automatic payments to ensure that payment deadlines are not missed.

In addition to taking these steps, consumers should make a working budget that accounts for all income and liabilities. This can help a person assess what he or she can afford to spend and use credit accordingly.

3. Check credit reports

Periodically, people who are rebuilding their credit should check their credit reports. Besides helping measure progress, this can give a person the opportunity to identify and contest any errors that may be harming her or his score. Some credit card companies offer free credit reports as a service to cardholders. Under federal law, the three major credit reporting agencies must also provide one free report per year to consumers who request one.

4. Start off successfully

The steps that a person takes during and immediately after bankruptcy often help determine his or her success in regaining financial stability. For example, choosing the optimal chapter to file under and creating a reasonable post-bankruptcy budget may position a person more strongly for life after bankruptcy. As a result, most people may benefit from working with an attorney to navigate the filing process and make a plan for recovering financially once the debt discharge is complete.