Building Credit With A Car Loan
The next step in rebuilding your credit score will be to obtain some sort of loan. Car loans after bankruptcy are a good starting point, especially a short-term one with affordable payments. Managing the dual responsibility of vehicle and credit card payments can boost your credit score.
Capably managing your credit after bankruptcy could put you back above 700 the good-risk range in as few as four years. Again, this means minimizing your credit card balance utilization, paying off balances, and being punctual repaying your debts.
The timely repaying of other secured loans loans that are protected with deposits or collateral also can help rebuild your credit reputation.
What To Do After You Receive Your Credit Card
The tips below can help you to manage your credit card responsibly after youve been approved for a credit card:
- Make your repayments on time. Youll need to make all of your payments on time to build your credit score. It can help to set up automatic payments from your bank account or set up a monthly reminder on your phone to make sure you dont miss a payment.
- Pay your card in full each month. You can save money on interest and avoid your balance getting too big if you simply pay the amount you owe off every month. This can help you rebuild your credit and make sure you dont get sucked into another cycle of debt thats difficult to get out of.
- Avoid using your card for cash advances. Try not to take out cash advances using your credit card since these often come with higher interest rates and can be difficult to pay off. If you need emergency cash, you may be better off looking into a bad credit loan .
- Keep your card balance below 30% of your credit limit. Spend only a portion of your allowable credit limit each month to show the credit bureaus that youre in control of your spending. This can help to increase your credit score as well.
- Dont pay your credit card off with borrowed money. Avoid paying down your credit card debt with other forms of debt such as payday loans or cash advances from other credit cards. This is because your interest payments can quickly get out of hand, leading you to spiral into more unmanageable debt.
What To Do First To Start Rebuilding After Bankruptcy:
Organize all of your bankruptcy discharge information: After the bankruptcy, you will need all the paperwork you were provided for your discharge. If you lose them you can pay to get them online. It is important to keep all the paperwork, notes and debt information along with all the certificates you earned. The three most important papers are: the petition, notice of filing, and discharge.
There are several reasons to have these papers on hand. Your new lenders will want to see exactly what kinds of debt you filed for. The second reason is an old collector may come calling and you can then prove the debt is discharged.
That information can be seen on the credit report, but you do not want to risk errors or any creditor seeing more than they need to see to satisfy another loan.
Develop Good Credit Monitoring Habits: You are able to obtain your credit reports free annually. Do this religiously and make it a habit to monitor every piece of information on it to ensure it is correct. Any little detail can cost you going forward and post discharge is not the time to have that happen.
Make sure you know what collection agencies were on your credit report prior to discharge. In checking your post discharge credit report, you should not see a new company there. Sometimes old debt gets sold, so they can dupe you into paying. Make sure you stop this as early as you see it.
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Buying A House After Bankruptcy
If youre thinking about buying a house after a bankruptcy, youll need to wait a specific amount of time based on the type of bankruptcy you had and the type of loan you want.
It typically takes four years after a Chapter 7 bankruptcy discharge for a conventional loan. However, it only takes two years for FHA or VA financing. This is referred to as a seasoning period.
Of course, each lender has its own underwriting guidelines, so meeting this requirement alone doesnt automatically qualify you for a loan. For Chapter 13 bankruptcy, you might be able to get a conventional loan just two years after the discharge date. Its just one year for FHA and VA loans.
Rebuilding Your Finances After Bankruptcy
After bankruptcy, potential lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.
Heres how to stay on top of your debt:
Create a budget. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, dont hesitate to seek help from a . All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.
Begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to high-cost loans or running up credit cards, which can start a new debt spiral. Any money you tuck away in a fund now can help you tackle those unexpected expenses.
Practice good credit habits. Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits less than 30% is typically advised, but less than 10% is even better.
About the author:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more
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Save Up For A Down Payment
Also, save up cash for a down payment to help offset the loan amount. Even if you qualify for the full loan amount, youll likely be charged a high interest rate. So paying a sizeable down payment helps lower your financial burden to avoid setting yourself up for another financial debt trap.
Its also helpful to realize that you dont need a brand new car. A reliable used car can be just as functional without the huge depreciation as you drive it off the lot.
Other Tips To Help Fix Your Credit After Bankruptcy
Heres some more advice on how to revive your credit score after bankruptcy:
- Avoid : Dont fall for con artists who claim they can remove a bankruptcy from your credit report. Nobody can remove bankruptcy from a credit report before the allotted 7-10 years have ended.
- Avoid frequent job changes, if possible: Your state of employment has no direct effect on your credit score, but lenders may put less faith in borrowers drifting from job to job.
- Keep account balances low: From where the credit bureaus stand, maxed out credit cards are a sign of strained finances. Aim to keep your credit utilization ratio below 30%. Also, keeping your balances low will lower your debt-to-income ratio , which in turn will amplify your shot at landing a low-cost loan.
- Not applying for new credit often: Lenders and credit bureaus take note when borrowers rapidly apply for credit. Its not a good look. It makes you look desperate, which makes you look risky. Remember, lenders abhor risk.
- Saving money: This one is less about restoring your credit score and more about making sure youre financially sound. If youre dealing with the consequences of bankruptcy, youre probably not in the best financial shape to handle surprise medical bills or unforeseen car troubles. Saving a little money from your paycheck every week can bridge the gap when you need it most. It doesnt take a fortune to mitigate misfortune. Three to six months worth of living expenses should do the trick.
What To Do Next
Start thinking about new credit: After six months to one year, you will probably be safe to think about new credit. Just like any other financial portfolio, diversification is the key. It is not enough to have only credit cards.
The most important thing to remember is whether it is a small personal loan that you take out or a car to get to work, make sure it is the smallest loan possible. This ensures that you can pay it back on time and avoid interest charges or a late payment on your shiny new credit report.
Get a Secured Credit Card: A secured credit card is a revolving credit type and is used to pay for emergencies, vacations, special needs when you do not have cash. Make sure you only spend 30% of the limit given and pay it off on time. A secured credit line can be obtained from your bank or from a third party creditor that have cards made specifically for rebuilding purposes.
The steps for obtaining secured credit is easy. Research and choose the card that is best for you or simply walk into your local bank branch. Pay an amount that the card company keeps as collateral in case of a default. One important note is, you should be certain that you never, ever use that money.
Get a Credit Builder Bank Loan: Ask if your bank lends money that is put into a secured account that you may not have access to. Once the loan is paid off you may then access the funds. This is a little known way of rebuilding credit without a credit card or to help diversify your credit history.
Check Your Credit Reports
Until April 2021, you can check your reports weekly for free on AnnualCreditReport.com. Your credit scores are calculated using information in your , so any inaccurate negative information can make it even harder for you to dig out of debt. If you find mistakes, dispute credit report errors and get them corrected.
Of course, there will be negative information that is accurate. Bankruptcy wipes out or reorganizes debts, but it doesnt wipe your credit reports clean. Your reports will show a Chapter 7 bankruptcy for 10 years, or a Chapter 13 for 7 years. Late payments and debts that go to collection also remain on the reports until seven years after the delinquencies. You’ll just need to wait for that information to age off of your reports.
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How Long Does Bankruptcy Stay On Your Credit Report
Your bankruptcy will be listed in your credit report which may mean it will be harder for you to get credit. The bankruptcy can stay on your credit report for at least 6 years from the date you were declared bankrupt. This period can be longer if your bankruptcy continues. Once the bankruptcy is removed you will be able to apply for credit.
Evaluate Your Financial Habits
The first step? Take a good, hard look at why you had to file bankruptcy in the first place.
Though bankruptcy is sometimes unavoidable, we all have financial habits we could improve . Whether its forgoing shopping, purchasing health insurance, or building up an emergency fund, consider what you should do to avoid going bankrupt again.
And, if you havent already taken your debtor education course, look at it as a learning opportunity rather than just a legal obligation. By taking this course seriously, youll learn skills such as budgeting and using credit wisely that can help you avoid financial trouble in the future.
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Be Cautious About Job
As lenders often factor in your job history when approving a loan, holding down a stable job and having consistent income can boost your chances of getting a loan. Thats because stable employment can make lenders look more favorably on your ability to pay your loans.
While switching jobs might be okay, having gaps in income might make you seem more like a risk to lenders.
Why this matters: When youre trying to land financing after bankruptcy, because your credit is shaky, youll want to make sure as many financial ducks are in a row as possible. Having consistent income and not job-hopping too much can help you look more favorable to lenders.
How to get started: When researching lenders, see if employment history plays a part in the decision-making process. If youre self-employed or side hustle, be prepared to provide additional income verification. The more documentation you can provide that shows your income is consistent, and better.
Three: Maintain Your Good Habits For The Rest Of Your Life
Rebuilding your credit is not a one-time event. Think of rebuilding your credit after bankruptcy like losing weight. At the beginning, dragging yourself to the gym and making kale smoothies is hard work. However, as you start to see the weight drop, it becomes easier and easier. What happens when you reach your goal weight? Do you stop going to the gym and start eating pizza for breakfast? No! You just carry on as you are now because its become a habit, and if you slip back into old habits, youre quickly going to see all of your hard work come undone.
Your goal is to rebuild your credit and create good habits for life. Regularly checking your full credit report from both credit bureaus will help you see how your good habits are paying off. Kinda like weighing yourself to make sure youre still where you want to be. If you start seeing negative results, take stock of whats happening in your life that could be causing it and make changes to quickly get back on track.
Ultimately, whether youre declaring bankruptcy or entering into a consumer proposal, it will be emotionally difficult. There is a light at the end of the tunnel though. Many people dont realize that you can start building credit while going through both a bankruptcy or consumer proposal so that at the time of discharge, youre already a few steps ahead. Follow these steps and youll find that rebuilding your credit after bankruptcy isnt as difficult as you first imagined.
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Apply For A New Line Of Credit
Adding a new line of credit can demonstrate that you can responsibly make on-time payments. In turn, itll help your credit score. However, when you apply for new lines of credit, the lender will do a hard pull on your credit. Every time you apply for new credit, your prospective lender accesses your credit report, says April Parks-Lewis, director of education and corporate communications at Consolidated Credit. Those inquiries can drag down your credit score.
As too many hard inquiries will ding your credit score, try to apply for credit lines you know you can qualify for. You can also apply to get prequalified, which results in a soft pull of your credit. When youre trying to build your credit after bankruptcy, here are some types of credit for you to consider:
Why this matters: A new line of credit can help you build your creditworthiness.
How to get started: Choose one of the options from above that fits your situation best and work on keeping that line of credit in good condition.
Be Mindful Of Your Credit Habits
A good rule of thumb when rebuilding your credit is that whatever you did to ding your credit, you must do the reserve to rebuild your credit. For instance, if you hurt your credit score by having too high a debt-to-income ratio, then make a point to keep your DTI low. Youll want to keep your credit usage to 30 percent or under.
If you fell into the habit of missing payments, then do whatever it takes to stay on top of your credit card payments. Remember: your payment history makes up 35 of your credit score. If you tend to rack up a huge credit card bill over the holidays, and experience holiday debt hangover, avoid it at all costs this holiday season.
Why this matters: Your credit habits play a big part of keeping your credit score in tip-top shape. And when youre rebuilding your credit after bankruptcy, it is particularly important to show to lenders that youre financially responsible.
How to get started: Start by making on-time payments, monitoring your financial habits around using credit. It might also help you to sign up for a free credit monitoring service, which can show you how much progress youve made on building your credit back up.
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Diversify With A Loan
The types of debt that you have matter when it comes to your credit score. So, you dont want to just have credit cards, because this doesnt show that youre maintaining a good mix of debt. With that in mind, your next step on the road to better credit is to take out a smaller sized loan that you wont have any trouble paying back.
In most cases, this is going to be a small personal loan. You can use the money you receive for anything home repairs, making important purchases, or some people even take out loans and divert the money to an investment. That way, you get the credit benefit of paying off the debt while building a better financial outlook at the same time.
In some cases particularly if you really need a new set of wheels to get to work then you may want to take out a slightly larger auto loan. This doesnt mean that you head out to a luxury car dealer and go crazy. Instead, you opt for a much more economical car and may have to use a lender who specifically works with high-risk borrowers.
Even better, you can lend to yourself. Self, formerly called Self Lender, is a platform that allows you to take out a loan using your own money as a security deposit. Its a win-win: you get to build credit, and you dont have to borrow money you dont have to do it.