Obtaining Credit After Bankruptcy

There are a lot of good reasons to be concerned about your credit score. Bad credit will make it more expensive to finance a car, and may have other adverse effects. It is becoming all too common for insurance companies, employers, and landlords to look at your credit.

The Federal Reserve Bank of Philadelphia Recently Issued a Report on Credit Access After Consumer Bankruptcy. They looked at both chapter 7 and chapter 13 filings in terms of access to unsecured debt, such as credit cards. Their findings include the following:

  • Credit scores begin to recover even before the date of discharge.
  • Despite the recovery in their credit scores, bankruptcy filers typically have substantially lower credit limits than before filing bankruptcy.
  • Chapter 7 filers have greater access to credit from new lenders chapter 13 filers do. Despite their reduced access to new credit, chapter 13 filers are better able to maintain old credit and, as a result, generally have higher overall credit limits than their chapter 7 counterparts.

The Good News About Credit After Bankruptcy

It is possible to rebuild your credit after bankruptcy. One immediate benefit of a bankruptcy is that the balance due on debts which are discharged will now be $0.00. Although many of the bad things on a credit report will remain (including defaulted loans, and the bankruptcy itself), creditors do consider the amount of current debt in determining a person’s ability to repay a new loan.

Before or after bankruptcy, automobile loans are usually easier to obtain than other types of debt. There are lenders who advertise that they will lend to anyone “with a heartbeat and a down payment.” You should look closely at the terms of any loan, and understand that these lenders will be charging a higher interest rate.

Some Words Of Caution About Credit After Bankruptcy

Getting too much credit after bankruptcy can lead to worse problems – if you default on your new loans, your credit score will go back down. Carrying large balances on your credit cards can also be a problem. It may not be possible to file another bankruptcy: there is a waiting period of 8 years between chapter 7 bankruptcies.

There are some types of credit cards that should be obtained only with a lot of caution. Look at the terms of the card, including the annual fee, the interest rate, and whether they offer a grace period before charging interest.

Some legitimate banks do offer low-limit credit cards with relatively favorable terms after bankruptcy. This can be a way to start on rebuilding credit. Think before you charge, however: using a debit card is often a better solution!

What Can Be Done To Improve Your Credit Score After Bankruptcy

There are several things that you can do to help increase your score:

1. If you have debts after bankruptcy, such as a mortgage or car loan which you have reaffirmed, make sure that you make the payments on time.

2. If you do have credit cards, don’t use too much of the available credit, and pay off the balance each month. In addition to saving you interest costs, one factor which is used in determining your credit is the percentage of your available credit which has been used. Ideally, this should be less than 30%.

3. Use your debit card, or pay cash.

What Will Hurt Your Credit After Bankruptcy

1. Making too many credit applications is a bad idea. These get reported, and if you have too many, it will reduce your score. Inquiries are reported for 2 years, although they only affect your score for one year.

2. Taking out the wrong loan. Persons who have been discharged in bankruptcy will find their mailboxes full of offers, from credit card companies, and car dealers. Look closely at the details, such as annual fees and interest rates. Capital One is one company that offers cards with reasonable terms, after bankruptcy.

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