What is the best way to re-establish credit after bankruptcy?
Secured credit cards offer a way to rebuild credit after bankruptcy
Moving forward after debts have been discharged in a bankruptcy takes hard work for debtors trying to stabilize their financial situation. The bankruptcy will stay on their credit reports for up to 10 years and lenders may be reluctant to extend credit to them again.
Financial experts suggest one way to repair a bad credit score is to sign up for a secured credit card. Cardholders are required to pay a certain amount to gain the same amount in credit - if they pay $300 to the lender, they will have a $300 credit limit. Because their purchases and subsequent payments are reported to credit agencies as they would be with a regular credit card, they will begin to develop a good financial management record. Of all the factors that influence the reports made to the three national agencies - Equifax, Experian and TransUnion - making payments on time is more important than other data, according to Bankrate.com. Payment history is considered 35 percent of the credit score, amount of money owed counts for 30 percent and the length of a person's credit history counts as 15 percent. New loans and types of credit used each count for 10 percent.
The limit on secured cards is often raised as individuals show they can handle debt responsibly. In addition, financial experts say that within a couple of years post-bankruptcy, some lenders will extend mortgages with terms similar to those offered to people with the same financial profile who have not filed bankruptcy. Car loans frequently are available in one or two years following the court action, although it will likely be at a higher interest rate.
"While a bankruptcy stays on one's credit for a period of seven years for a Chapter 13 and 10 years for a Chapter 7, the bankruptcy effect weakens over time," writes Florida attorney Chip Parker on BankruptcyLawNetwork.com. "A two-year-old bankruptcy means more to creditors that a six-year-old bankruptcy because creditors are primarily interested in present financial circumstances."
The National Association of Chapter 13 Trustees warns debtors to be careful about the lenders from which they accept credit after bankruptcy. Some credit repair offers may do more harm than good and do not help re-build a debtor's financial record. Solicitations should be read carefully and the background of the lender should be checked before signing up for an account.