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If you're considering bankruptcy and are worried about the impact it will have on your credit score, there's good news for you. The first thing to understand is that while a Chapter 7 bankruptcy filing will stay on your credit for 10 years, it’s better than allowing old debt to languish on your credit report unpaid and lowering your credit rating constantly. It’s important that once you file your bankruptcy and it goes through, that you immediately begin working to rebuild your credit.
The first thing you need to be able to start rebuilding your credit is an official notice from the court called “Discharge of Debtor” or something of that ilk. Future creditors will want to see this prior to offering you a line of credit. With that in hand, you are ready to get started rebuilding your credit. What’s critical is that you make the most of your fresh start and be sure not to overextend or abuse the credit you get.
#1 Avoid Excessive Credit Inquiries – You may be so eager to rebuild your credit that you apply for a bunch of credit cards to see who will approve you. This is not a good idea. Credit inquiries appear on your credit report and an excess number of them can lower your credit score. Only apply for credit you are sure you have a high chance of getting. Consider the steps below as a way to progressively rebuild your credit rather than trying to jump in over your head again.
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#2 Secured Credit Cards - Banks, credit unions and other creditors offer secure credit cards for those who need to rebuild credit. You send in a deposit and this will be the upper limit of your available “credit” – it’s not really credit since you have secured it, it’s more like a debit line masquerading as a credit card, but it’s a first step. As what fees are associated with the card - you’ll want to find a card with the lowest upfront fees. If you deposit $500 and there are $200 in fees, you’ll be giving that money away and only have $300 in “credit” – that’s not a bargain! Make sure the creditor reports to all three major credit bureaus.
#3 Unsecured Credit Cards – Once your debt is discharged, your mailbox may be flooded with unsecured credit card offers. It’s critical to sift through these cautiously. If you don’t get offers right away, after you have a secured card for 10-12 months and are managing it well, you should begin to get offers. Look for offers that have the lowest upfront fees, annual fees, lowest interest rates and highest credit limits. Some cards will charge so many introductory fees that you will have no line of credit available – try to avoid this at all costs. It’s better to take a card with lower annual and set-up fees and higher interest because you’ll learn in #4 below why you should never run a balance.
#4 Keep Balances Low or Non-Existent – You may have heard that you need to have a balance to increase your credit, but that’s not true. Instead, what you need is activity on the card. Your best bet is to use your card a few times a month for something you would ordinarily pay cash for (gas or groceries) and then pay off the balance in full. By paying off in full each month, you’ll minimize interest charges. Don’t use your credit cards for anything you can’t afford to pay cash for. If you have the money for a health promoting spa visit, that’s great, but don’t splurge if you can’t afford it. Focusing on rebuilding credit means you need to be extremely responsible about how you tap into your line of credit. Charge a little each month and pay off in full like clockwork and your credit score will love you for it.
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#5 Never Miss or Make a Late Payment – This is so important! Missing a payment or making a late payment not only triggers late payment charges and interest charges, but also gets reported to the credit bureaus and dings your credit score. Since you should never use a credit card unless you can afford what you’re buying, you should always be able to make your payments. Remember, overcharging and missing payments is likely what contributed to your bankruptcy and you don’t want to start yourself down that path again.
Take these steps to use credit cards to rebuild your credit after a Chapter 7 bankruptcy. Once you have one or two unsecured credit cards, you can close your secured card account. Your credit score related to credit cards is based on a couple of different factors but most importantly is the percentage of credit you have available and the dollar amount of that credit. By paying off your balance each month, you’ll have 100% of your credit available which will increase your score. To find out more about how Chapter 7 bankruptcy can give you a debt-free fresh start, contact a reputable North Carolina bankruptcy attorney today.
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