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Rebuilding Credit

Rebuilding Your Credit After Your Bankruptcy Filing

By Bruce C. Truesdale

Ok, you filed for bankruptcy like approximately one and a half million other people did last year. Maybe you were struggling with a divorce, you lost your job or your overtime, your mortgage became impossible to manage or the credit card companies raised your interest rates. Whatever the reason, you’ve gotten relief, your case has been completed and now you want to start rebuilding.

Your bankruptcy case can stay on your credit report for up to 10 years, but that does not mean that you are barred from doing all the things you did before – so do not lose heart, you can reestablish your credit rating.

The key is to qualify for loans with good interest rates. It should take approximately 3 years to qualify for the better mortgage interest rates and less time to get a decent interest rate on a car loan.

So, how to get started. Get a credit card, yes – that might have gotten you in trouble in the past but now you are wiser. Get ONE card and try to get one with low fees if possible. You may have to start with a “secured” card. This is a card that is backed up by a deposit at the bank issuing the card that the Bank can draw against if you do not make the payments. The card limit will be low, (matching the deposit you have with the bank securing the credit given), so this will keep you from over spending on the card. But remember, you want to make timely payments on the card to build your credit worthiness and to avoid interest charges!

Beware that some lenders have cards out there with just outrageous interest rates and application fees. Use the internet to find credit cards with the best terms. www.bankrate.com is a site that, among other things, lets you care credit card rates and make application right from the site. Be certain that the bank issuing the new card will report your payment history to Experian, Trans Union and Equifax, the “big three” of credit reporting agencies. You want to establish that you are making timely, reliable payments on your debts.

You will be able to get new credit cards as now you have little or no debt and the banks know that you can not file another bankruptcy and get another discharge for some time.

You must be certain that you are making the proper payment, on time EVERY TIME! A late payment will set you back and drop your credit score. By paying the debt on time you are building your credit score but you are also avoiding steep interest charges and unnecessary expense.

As the months pass and you continue to use your credit card and make timely payment, you may see your credit card interest rates fall. After approximately 1 year of on time payments you may want to contact your credit card issuer and try to negotiate a lower interest rate based on your year of good payment history.

If you need a car, a years worth of on time payments to your credit card issuer on your credit report can go a long way in helping you get that loan. Initial interest rates can be high, but as your history of reliable payments continues, you may be able to refinance the car loan on better terms later on – remember, the car loan is going to last several years in most cases.

Be sure not to forget what you learned in your bankruptcy case – credit card debt can spiral out of control rapidly if not handled wisely. Keep low limits on your credit cards – handling your debt well will result in offers of higher and higher credit limits, do not fall into that trap. Pay your debt quickly and you will not need high credit limits. Live within your means. This also means setting something aside each week for savings. Ask the bank to set up an “automatic” savings plan for you so that when you deposit your pay check to your checking account each period, a small amount is automatically diverted to a savings account or money market account or IRA account. Making it automatic ensures that you save regularly. Having cash savings allows you to handle unexpected emergency expenses and to demonstrate financial solvency when you seek to obtain different types of credit.

Setting yourself up for a mortgage. Some home loan programs will not consider you for a mortgage if you have filed a bankruptcy case in the previous four years. The Federal Housing Administration (FHA) often will lend after only two years out of bankruptcy.

Given the tremendous number of homes that have been foreclosed upon recently and the tremendous inventory of real estate owned by the banks at this time, it would not be surprising that the banks may be more flexible in their mortgage lending practices when trying to sell their own foreclosed properties.

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