By Shiv Nanda, Financial Analyst | MoneyTap
Bankruptcy is a life-changing event. Although filing bankruptcy may have helped you discard your debt or make a repayment plan, it causes serious damage to your credit score. But the good news is, this damage is repairable. With a little patience and a lot of discipline, you can get your financial life back on track.
If you want to know how to build your credit score after bankruptcy, read on.
Best Strategies to Rebuild Your Credit After a Bankruptcy
# 1: Carefully Review Your Credit Report
The first step is to review your credit report. You can get your credit report from the credit reporting bureaus. After getting the credit report, go through it carefully. Ensure that the report is current and has no discrepancies. Also, make a list of all your old debts and start paying them off immediately.
# 2: Make Timely Debt Payments
Your payment history is a crucial factor in determining your credit score. When you make your debt payments regularly on time, it reflects new and positive information on your credit report, giving an impression of a responsible borrower. This helps in rebuilding your credit score.
# 3. Establish a Budget
A realistic budget will ensure that you have enough funds to pay your bills on time. One of the ways to ensure that you pay your bills on time is to set up automatic payments. Also, make sure that you avoid taking on new debt. Taking new debt will not only affect your credit score but also prevent you from staying within your budget. As a rule, keep your credit utilisation ratio below 30%.
# 4. Start Using Secured Credit Cards
After a bankruptcy, people tend to use their debit cards more to avoid taking on new debt. But, it’s important to understand that your debit card transactions are not reported to the credit bureaus. So, you miss an opportunity to show how responsible you are with your debt payments. In fact, what you should do is get a secured credit card that requires you to deposit cash to open the account. The cash deposited acts as collateral, and the credit limit is often equal to the deposited cash. The transactions made with this secured credit card are reported regularly to the credit bureaus. This positive information of good debt repayment behaviour reflecting on your credit report helps you in rebuilding your credit history.
# 5. Diversify Your Credit Portfolio
Diversifying your credit portfolio is one way of rebuilding your credit. Having a mixed type of credit accounts positively affects your credit score. Consider taking small, affordable personal loans and use the money for a variety of reasons, such as home repairs, paying off debts, etc. However, make sure that you have a repayment plan in place before you take any kind of loans/credit.
# 6. Create an Emergency Fund
When you are bankrupt, a small unexpected expense can throw a wrench in your finances. It is a good idea to set up an emergency fund so that you are not tempted to take on new debt. After going through bankruptcy, you might not afford to put away a substantial amount in emergency funds. But, you can start small and build on it gradually. Set aside an amount, which you can afford to put towards your emergency fund. Setting up automatic deductions from your salary account is a more successful way of doing it.
