Bankruptcy can be a financial lifesaver. However, while filing bankruptcy eliminates most or all of your debts and takes huge stress away, it usually doesn’t completely solve your financial challenges. Many people struggle to make effective financial decisions after filing bankruptcy, which brings continued stress and frustration and sometimes the need to file bankruptcy again years later. The good news is that there are many things you can do to improve your finances and credit score after bankruptcy. Within a few years, you can rebuild and improve your financial situation and have a more fulfilling future.
Should I accept a pre-approved credit card?
People are surprised with how quickly they receive credit card offers in the mail after their discharge. You should be especially cautious with these because they are generally not the best deal . The interest rates and fees are often very high, even for someone with not-so-great credit. If you do decide to accept one of these offers, look for a card without annual fees and plan to pay off the balance each month.
Limit how many times you apply for credit
When you decide to apply for a credit card or loan, each application makes a hard inquiry on your credit report. Too many hard inquiries in a short amount of time can hurt your credit score. You can always research credit cards that will accept users with your credit score, so you have a higher chance of being approved. If you’re not having any luck, focus on paying all of your bills on time and reapply in six months.
Look for upgrades to your current card and don’t close unused cards unless it’s necessary
Better credit cards will become available to you over time and as your credit improves. Keep an eye out for cards at your institution with lower fees and better perks. You may be tempted to pay off a credit card, close the account, and switch to a new card. Sometimes closing accounts can increase your utilization ratio, which hurts your credit score. It is typically best to keep your credit cards open so that you have a lower ratio of credit card debt to available credit. There are times it makes more sense to close your account; if there are high annual fees or if leaving the account open causes too much temptation to charge more, closing it may be the best decision.
Purchase a Car
Even before you receive a discharge, you will have more than likely received a number of solicitations in mail to purchase a car. While buying a car for the sake of buying a car is not the best advice, most of us need a good reliable car to get to and from work, take the kids to school, and get to the grocery store. You may have filed bankruptcy to get out from a junker that you were way upside down on. So for some it may be a good idea to buy a new (or used) car if it is truly needed. Whether you are just fresh out of a bankruptcy or not, it is always a good idea to buy within your means, and to not go all out on that $80k Super Duty with massagers in the seats. Don’t expect to have the best interest rates right away either, and keep the purchase price within budget. Successful on-time payments on a car can greatly increase your credit score.
Secured credit cards
If you do not qualify for an unsecured credit card, you may want to consider a secured credit card. Because monthly payment history is key to improving your credit, making a monthly payment to a secured card can help.
A secured card gives you a credit limit at least up to the amount you deposit. You use the card like normal and at the end of the month pay off the balance. Eventually, the credit card issuer might increase your credit limit or offer you an unsecured card. Make sure you check the annual fees, interest rates, and other charges before selecting a card. Your bank may be able to offer this service and can hold your deposit amount in your savings account.
Secured loan aka credit builder loan
Another way to build credit is through a Credit Builder Loan. Again, this gives you a steady monthly payment history to make and improve your credit score.
You can apply for a loan from your bank in the amount you choose, and the bank will secure the amount from your savings account or a certificate of deposit. You pay off the loan over 12-24 months, and each month the bank will report your payment history to the credit bureaus. At the end of the loan term, it unlocks your savings account or certificate of deposit and you get your money back. As always, be aware of finance charges your bank may charge. You may not get all of your money back, but it may be worth the investment to improve your credit report.
Retail store and gas cards
These types of cards are more likely to approve people with lower credit score than other unsecured cards. Cards such as the Target Redcard, Lowes, and Amazon.com require no annual fees (besides prime dues for Amazon) and are available to those with fair credit scores (640-699). As usual, these types of cards come with a high-interest rate. If you’re going to use these, make small purchases and pay off the balance each month.
Ask someone to co-sign a loan with you
If you have a loving family member or friend, you can ask them to co-sign a loan with you. This is a big ask. You are asking someone to be legally responsible for the loan amount and any fees if you are unable to pay. You can also affect your co-signors credit score if you fail to make payments on time. When you have a co-signor, you get credit under your name and successful payments can improve your credit score.
Ask to be an authorized user on someone’s card
You can ask someone to add you as an authorized user to the credit card to help improve your credit score. The credit card company will then send the primary account holder a card with your name on it. You are not responsible for paying the bill and this route may not have a huge effect on your credit score. If the person you asked is hesitant to give you a card with your name on it, you can always be an authorized user and never even use or receive the card.
With so many types of accounts and credit cards out there, it is easy to feel overwhelmed. Just take your time and remember that rebuilding credit will not happen overnight.