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After Bankruptcy
Blues
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My husband and I got ourselves in a
bad position a few years ago. I lost my job and went from excellent credit
to bad credit in just under three months. We couldn't believe that we had
lost control of our
financial
future. I know there are many of people just like us with the bankrupt
blues. How can we get back to the "good standing" that we were so proud of?
Is it true we will have this hovering for ten years? Goodbye first home!
~ Carrol H.
Carol asks a good question. And she's right. She has plenty of company. There
were about 1.5 million bankruptcies last year. So let's take a look at what
it takes to regain a good credit rating.
The first thing Carol needs to know is that there's no quick fix. Companies
that promise to create a 'new credit history' or erase accurate entries in
your credit file are to be avoided. In fact, if you knowingly include false
information in a credit file you'll be breaking federal law.
According to the Fair Credit Reporting Act the credit bureau can report accurate
information on you for up to seven years (ten years for bankruptcy). But
that's not a death sentence to obtaining credit. You can begin to rebuild
your credit standing immediately after bankruptcy.
The first thing Carol and her husband will want to do is to take a look at
their use of credit. Borrowing
money
commits us to repay it regardless of whether we lose a job or have a medical
emergency. So we should only commit to payments that we can make even if
we are unemployed for a short time or have some other financial crisis. Let's
face it. Some bad things happen to all of us.
Part of the problem that Carol faced was the lack of an emergency fund. And
part of regaining good credit is creating that fund. Every family should
have between two and six months of normal expenses saved for unexpected hard
times. For most of us that's not an easy thing to do. But it's still important.
Carol may find that it's best to put $5 or $10 a week into a separate saving
account as soon as she gets paid whether she feels she can afford to or not.
Yes, she'll be short on cash by the next paycheck, but it may be the only
way to accumulate some savings. It surprising how creative we can be when
need to be. And even $5 a week will add up over time.
The savings
will also be necessary for the next step in our project. Once she's accumulated
$200 or so she's going to apply for a secured credit card. Talk to the bank
where you keep your savings. They should be willing to issue a credit card
that's guaranteed by the money in your account. At first, your credit limit
will be the amount that you have in the saving account. The goal here is
for Carol to demonstrate the ability to pay her bills on time. So she'll
want to use the credit card each month. Not for extra purchases but for
essentials. Groceries are a good choice. Remember the key here is to pay
off the whole card balance each month. Do not begin to carry a balance on
the account.
As time passes Carol will begin to build up the savings account. The credit
limit on her card should also be increased. That doesn't necessarily mean
she should charge more. The fact that her available credit is going up will
be reflected on her credit file. The record will also show that she's keeping
the account current each month.
After about a year Carol can approach the bank about changing her credit
card to an unsecured one. If she's been consistent in making payments and
has been building her savings account the bank could make the switch immediately.
If not, they should be able to estimate when the change could take place.
In the second year Carol can begin to apply for additional
credit
and gradually build up to a more normal status. She should only apply for
one card at a time. An attempt to get numerous cards would be a mistake.
Any applications that are rejected will be reflected on the credit file and
will make it harder to get additional credit in the future.
After the first couple of years it should get easier for Carol. By then potential
lenders can see that she's been consistent in paying her bills. She might
even be able to get a car loan or a home mortgage without an unusually high
deposit or interest rate.
The key for Carol is to remember that the lender's primary concern is being
repaid. So they want to know whether the bankruptcy was a one time event
or is it a sign of someone who can't handle credit. The way to demonstrate
that she's worthy of credit is to handle it properly. The bankruptcy cloud
will fade over time and her credit worthiness will increase.
While it will take time and effort to rebuilt Carol's credit, it is possible.
Hopefully her money troubles are behind her and she's on her way to a brighter
financial future.
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Gary
Foreman is a former Purchasing Manager and Certified Financial Planner.
He currently edits The Dollar
Stretcher website. It contains the web's largest collect of free articles
to save you time and money. There's even a free weekly email newsletter.
Visit and save some money today!
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