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How Can I Increase My Credit Rating After Bankruptcy?

 


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Your credit rating is a number between 300 (poor) and 850 (good), also known as a FICO score which stands for Fair Isaac & Co, the company who developed the first scoring systems in the 1950s. The rating is compiled by three credit reporting agencies: Experian, Equifax and Trans Union from a number of factors, including:

  • How long you have had credit and what type of credit
  • Your payment history and outstanding debts
  • How many applications for credit you have made in the past
  • 'Black data’ - bankruptcies, defaults, late payments
  • Any past dealings with the company you are applying to

Your credit rating is important because banks and lenders will use it to determine which of their products you are eligible for. If you have a poor credit rating your interest rates will be higher and the amount of credit you can apply for lower. It also affects mortgages, buying a car, renting property and a number of other factors that will be important in your life.

What is bankruptcy?

Sometimes a person finds they have more debt than they can possibly pay back. This may happen for a number of reasons, a person may accumulate debt over a number of years until they suddenly realize it has gone out of control or perhaps they have invested in a business that collapsed. Bankruptcy results when both the creditor (the people lending money) and the person in debt realize that there is no chance of repaying that amount of money back. The person in debt then files for bankruptcy. Filing for bankruptcy means that the creditors cannot pursue the person owing them money outside the repayment terms in the bankruptcy agreement. This helps to alleviate some of the stress because the debtor is not being constantly pursued by creditors and there is a clear payment plan, which can involve some aspects of the debt being wiped.

How does bankruptcy affect my credit rating?

Bankruptcy may seem like an easy way out, but it has a very bad effect on your credit rating, which is why it should only be used as a last resort. A declaration of bankruptcy can remain on your credit files for up to ten years and will bring your credit rating down considerably making it harder to get loans and credit cards as well as pushing your interest rates up. It is important to start building up your credit rating again as soon as possible after bankruptcy.

How can I improve my credit rating after bankruptcy?

There are a number of ways to begin building-up your credit rating again. Although some creditors will see bankruptcy on your credit report and decide not to accept your application, others may be more lenient and take into consideration your most recent financial dealings. If you can prove that you can manage your money well, then the outlook wont be all bleak for the next ten years. Some things that you can do to heal your credit rating are:

  • Stick to the repayment plan that was agreed when you filed for bankruptcy
  • Make your payments on time, late payments will only add to a poor credit rating
  • Pay off more than the minimum amount if you can afford to
  • Open a savings account and deposit a small amount each month

Taking out a credit card after bankruptcy may be the last thing you feel like doing, but if you take out a secured credit card and use it strictly within your repayment budget each month you will build up a financial history indicating responsible use of credit, which will help to improve your credit rating. It is also worth applying for copies of your credit report from the credit reporting agencies (Experian, Equifax and Trans Union) and checking them for any errors. Although bankruptcy will be listed on your report it is important to make sure there are no mistakes that could unfairly add to a low credit rating. In some locations you may find ‘debtor education programs’ which will help you to develop strategies for re-establishing a good credit rating. To find out if there are any in your area, or for information on credit counsellings, contact the Federal Trade Commission: ust. cc. help@usdoj. gov / 1-202-514-4100.

Don O'Malley has an MBA from UCLA. Learn more about how to find your credit score and if you are ready to apply for a credit card then visit http://www.applyforacreditcardnow.com/

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