You can have excellent credit within a year following your bankruptcy discharge.
I’ve seen it happen too many times to count, where a past client reached the highest credit scores of their life just a few months following entry of their bankruptcy discharge order.
Building excellent credit scores, quickly, following bankruptcy requires more than simply paying your bills on time. You need to understand the purpose for credit scoring, and how credit scores are calculated and used. You also need a personal system you follow to ensure your credit scores reach their maximum potential.
So, let’s start with explaining how credit scoring works…
What is a Credit Score?
Simply stated, a credit score is a numeric statement which supposedly describes your ability to manage having access to credit.
In other words, your credit score is the objective measure illustrating how likely you are to default on your financial obligations. The longer your history of paying your bills on time, the higher your credit score will climb.
How is Your Credit Score Determined?
Generally speaking, you have three FICO scores. The scores are generated by each of the three main agencies compiling your credit history data, Equifax, Experian and Transunion.
Each of these credit bureaus create compile credit reports tracking your financial history, and each uses FICO software to prepare your credit score based on the information contained in each of your three credit reports. This is why you likely have different credit scores from each of the three credit bureaus.
The credit scores range from 300 on the low end up to 850 on the high end. The higher the credit score, the less likely you are to fall ninety (90) days behind on your bills over the next two years. Credit scoring relies on using past performance to predict future ability to manage debt.
How is Your Credit Score Used?
Lenders, banks, credit unions, and mortgage companies use credit scores to evaluate the potential risk involved with extending you credit. Those with lower credit scores may receive lending offers with high interest rates, or may be denied credit altogether.
Those with higher scores will receive less expensive credit offers, in that credit offers will be accompanied by lower interest rates.
Other organizations such as cell phone companies, auto insurance carriers, and property management companies often use credit scores when underwriting applications for new customers.
Those with poor credit scores tend to pay higher auto insurance premiums, be required to pay additional security departments for housing, and be offered less attractive contracts with cell phone carriers.
Why Does Your Credit Score Matter?
Your credit score will dictate how much financing will cost. If your credit score is high, you will pay less money for car payments, mortgage payments, and insurance premiums. You will have access to credit cards with tremendous travel reward and cash back benefits.
Those with bad credit will pay dearly for any credit they may receive. Those with less money and less financial education pay the most for access to credit.
This model creates a relentless cycle of financial struggle that is definitely difficult to break. You were likely caught up in this cycle prior to filing your bankruptcy case, and it is time to get educated and take steps immediately to right the ship and improve your credit.
The good news is that your bankruptcy is complete, so you now have a clean slate. From here forward, building excellent credit scores will take you far less time than you probably expect.
Following the ten rules set forth below will enable you to create the habits necessary to achieve and maintain excellent credit going forward.
Rule 1: You will never hire a credit repair organization.
There is nothing a credit repair organization can do for you that you cannot easily do for yourself. This credit repair industry is wrought with scammers and predatory companies, and I’ve always encouraged people to avoid hiring credit repair companies altogether.
Rule 2: You will always pay credit cards off in full, every month.
Never carry a balance, and never pay interest. If you pay the entire credit card balance off in full, every month, then you will never fall into the trap of credit card debt dependency again.
Rule 3: You will always make the credit card payment immediately upon receiving the statement, and not by due date.
Making the payment immediately upon receiving the statement, as opposed to just before the due date, ensures that your timely payment will be reported accurately to the credit bureaus, as well as the zero balance.
Rule 4: Every six months you will pull a credit report and check for accurate reporting.
You went to the trouble and expense of filing for bankruptcy relief, so ensure that you are continuing to get the maximum benefit of your bankruptcy by confirming your obligations are being reported properly to the credit bureaus.
Rule 5: You will never use a credit card for any reason other than convenience, and you will always have the cash available to pay off the charges in full.
If you use credit cards as a convenience, you can generate incredible cash back and travel reward benefits. However, using credit cards to cover emergencies, when your cash is a little short, is debt dependency. Debt dependency is the opposite of financial independence, and must be avoided no matter what the circumstance.
Rule 6: You will never utilize payday loan or similar financing companies.
This is debt dependency gone wild. Avoid these predatory lenders.
Rule 7: You will always act immediately when you find inaccurate information on your credit report.
Again, filing bankruptcy was no easy thing. Make sure you are taking action to eliminate any inaccurate or improperly information being reported to the credit bureaus.
Rule 8: You will always maintain an emergency savings fund of at least $5,000.
Even a small emergency fund of $5,000 is likely enough money to cover most unexpected financial need which may arise. Start at $5,000, and build from there until you’ve set aside at least three months of living expenses. However, never find yourself without at least $5,000 in cash available to cover you if something unexpected arises.
Rule 9: You will always pay debts you reaffirmed in bankruptcy ahead of their due dates.
Coming out of bankruptcy with reaffirmed debt is not ideal, but I understand sometimes it seems unavoidable. With that being the case, reaffirmed debts are being reported to the credit bureaus, so they provide an easy and quick way for you to demonstrate your ability to manage credit.
Rule 10: You will never charge balances 30% or higher of total credit availability, on any one credit card or among all available credit.
Thirty-percent is the magic ratio which determines responsible vs. irresponsible credit management. Keep all individual credit cards balances below 30% (ideally 0%), as well as your total credit availability.
There you have it – 10 rules which will provide the guide posts for your re-establishing excellent credit as quickly as possible following your bankruptcy.
Image Credit: https://unsplash.com/@2mduffel