People often tell us they imagined that rebuilding credit after declaring bankruptcy was essentially impossible. The media maintains and encourages this mythology with stories of “financial ruin” and jail time for white collar offenders, conflating the issues of major companies with the far more common issues that face the average consumer. The truth is that it is not only possible to rebuild your credit after a bankruptcy, but that the system was designed expressly to help you do just that. All you need to get the process started is some good advice and a little discipline, and New Jersey’s forgiving financial system does the rest.
Make a Plan
So how to begin? Step one is to make a plan. This means more than simply jotting down some goals and taking a vague vow of thriftiness. Most people who file for Chapter 7 or Chapter 13 bankruptcy do so not because of a single mistake, but because of many years of acquired unsecured debt or falling behind on mortgage payments that were allowed to go mismanaged. Starting with a budget can help you make reasonable goals and stick with them, and it may even help to define your priorities in the coming years: do you want to qualify for a certain loan, or home ownership, or simply stay in the black from here on out?
Rebuilding your credit in the eyes of the “system” takes a few more steps, but it is hardly as daunting as it sounds. There are various types of credit, including, auto financing, mortgage, luxury items, such as a boat, and credit cards, and the criteria for each of these types may be different. Furthermore, a bank will not only review your credit history, but also: loan to value ratio; income, expenses, debt to income ratio and your credit score. While many people filing for bankruptcy in New Jersey say that they will never use credit cards again, this approach is less than effective. Specifically, a lack of a credit history will likely negatively affect your ability to obtain credit in the future. That is, the better your credit, the more likely you will be to obtain loans with a lower interest rate.
Typically, when an individual thinks about rebuilding their credit, there credit score comes to mind. The type of credit score that people are most familiar is a FICO score, which was named and developed after the Fair Isaac Corporation. A FICO score is a number that reflects a future predication of an individual’s payment behavior, and considers the following variables: timely payments; type of debt; length of time using credit; variety of accounts; and number of accounts recently opened. Reestablishing credit, generally means increasing your credit score. The higher the score, the better the credit risk and the more favorable the individual’s credit. Each person has three credit scores that are created by the following three credit reporting agencies: Experian, TransUnion and Equifax.
An individual should initially obtain a credit report from the three companies reflected above and first check for inaccurate information. Any incorrect, misleading, unverifiable and outdated information should be removed. The key to reestablishing credit is to obtain credit from mainstream and reputable institutions that report your good habits to these listed credit reporting agencies. Please note that every time a person attempts to obtain credit, the bank or entity will pull your credit report, which will lower your credit score.
Credit scores rely on a complex algorithm to arrive at their numbers, but a few habits are considered mainstays. A checking and savings account should be opened, with a mainstream and reputable bank. Thereafter, try to obtain two secured Visa and MasterCard credit cards. Sometime after, one should attempt to obtain unsecured credit cards. If you can spend no more than 30% of the limit on each card and pay the balance off each month, your score will rise inexorably over time. The higher the unused and available debt limit on the card, the more favorable the effect on your credit. Therefore, a person should ask to increase their credit limit. Most importantly, a person must pay all bills early each and every month. You also want to ensure there are no mistakes remaining on your credit report, as these can follow you for years and cap the score lower than it belongs.
It is important to start reestablishing your credit as soon as possible. Typically, this will commence after discharge, which is when your bankruptcy case is completed.
Although a bankruptcy stays on your report for ten years, lenders and employers are far more interested in your most recent financial habits, which means you have ample opportunity to begin climbing out of debt within a mere matter of months. Contact the New Jersey bankruptcy and credit lawyers at The Law Offices of Robert Manchel today for help with your case. Call 866-503-5655 today for sound advice on where you can go from here.