Improving credit after bankruptcy or foreclosure
Whether you filed for bankruptcy or faced foreclosure
, repossession or a delinquency on a loan, it is a fact of life that your credit score can fluctuate.
Access to credit is important when applying for a car or home loan or when starting a new business. The harsh reality is that the lower your credit score, the higher your interest rate will likely be. Bad credit can also make it more difficult to rent an apartment.
FICO scores range from 300 to 850; the median score is 723.
To get the best rates, you’ll usually have to have a score of at least low- to mid-700s. That is our target.
So, how can you repair your credit score after it has been damaged?
Steps to take to repair credit
Unfortunately, it is far easier to bring your credit score down than it is to make it go up.
Nevertheless there are steps you can take that are proven to work.
Step #1: visit annualcreditreport.com
Learn the extent of the damage and get organized.
Start by visiting www.AnnualCreditReport.com
, a website set up under federal law to give consumers access to their credit reports.
Be on the lookout for impostors, AnnualCreditReport.com is free, there will be no need to supply your credit card or make any payment.
There are three different consumer credit agencies (Experian
) that compile information that factors into your credit score. Not surprisingly, the three agencies don’t always agree.
It is important that you go through each report and identify any errors. Did you recently pay off a debt that is listed as delinquent?
Step #2: Write to the credit agencies
It is perfectly reasonable to write a letter to the credit reporting agencies explaining why you have been late on a mortgage or were forced to file for bankruptcy. Lenders need to view your credit score in its proper context.
Perhaps you have been a victim of mortgage fraud and were forced to file bankruptcy to protect your assets from an aggressive lender. Maybe the economic downturn brought on by coronavirus has caused a salary decrease that made it hard to stay current on car payments.
Whatever the cause of your credit taking a hit, it is crucial that you weigh in on the problem and voice your perspective.
It can help.
Step #3: pay your bills on time
Especially for those who have filed for bankruptcy, it is crucial to be meticulous in paying every bill on time from now on. Set up auto-draft, get very serious about no more late payments.
The same principle applies to anyone trying to repair their credit as payment history is one of the biggest factors in determining your credit score.
It is usually a good idea to open a single credit card, use it only for groceries and then pay the balance in full each month.
Step #4: debt to income ratio
Filing bankruptcy can actually improve your credit score.
Because one factor lenders use in their underwriting process is how much of a debt load is the potential borrower carrying? Are they swamped in debt relative to their current income? If the answer is yes, they will be less likely to be able to service more debt.
When large chunks of credit card debt are discharged in bankruptcy it can often have a positive impact on credit just a few months after filing.
Step #5: be patient
Your credit history factors into your score as well. The longer you’ve been borrowing and paying on time the better. In some ways this is the lender’s way of developing a friendship with you. When you meet someone for the first time, you might like them but can only develop a friendship or romance over time.
If you have been paying your bills for a long time, lenders are more likely to court you.
Be of good cheer, with a little patience and responsible use of credit, your score will improve.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.