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Rebuilding Your Credit Quickly after Bankruptcy....or Not.


So, now that you've come through bankruptcy with a clean slate and made the decision to stay off the credit treadmill, it's time to examine your money habits and behaviors. It is surprising how many people view their credit limits as unofficial raises and create lifestyles that reflect a higher actual income than they actually earn. Are you one of them? Do you subscribe to the belief that credit scores are a reflection of your good character and trustworthiness?

One of the biggest concerns many people have when considering filing for bankruptcy is that it will absolutely ruin their credit rating for a very long time. They fear that they will never be able to buy a home or finance a new car. They believe they will not be able to get a credit card to travel, rent a car, or even a hotel room. And so there is a great deal of emphasis on quickly rebuilding credit scores by those exiting bankruptcy. Without decent credit, they fear, their lives will be reduced to a mere shadow of what they once were.

Well, in a sense, that last sentence is true -“ without the crutch of credit and the illusion of credit limits as extensions of their incomes, the lives of people who have gone through the bankruptcy process will be very different than what they were before pre-bankruptcy. But the difference is, they will be living on their actual income, not some inflated version of their income that they've invented through maxing out credit cards. There will be no heavy weight of debt on their shoulders, no trepidation on their way out to the mailbox, no creditor phone harassment. In short, without the potential pitfalls and enslavement of credit payments, a post bankruptcy life can be ever so peaceful-if it's managed right.

For those who landed in bankruptcy through money mismanagement rather than by some other external financial blow, such as medical bills, it may prove not to be. If those people continue to deal with money after bankruptcy the same way that they did before bankruptcy, they may find themselves right back in the same stressed out, overextended situation that landed them in bankruptcy in the first place. And credit card companies know it. They know that most people emerging from bankruptcy have not really learned to manage their finances any better than they did before bankruptcy. Most people who get a new credit card after bankruptcy are carrying a balance each month within one year after discharge.

Credit card companies know that those who have taken on a lot of debt in the past, carrying growing balances month after month, and then falling behind on their payments are apt to do it again. And so sooner or later, they will extend credit even to people who've declared bankruptcy. Why? Because doing so makes the credit card companies the most money. Although it seems counterintuitive, the truth is that creditors see bankrupt consumers as a much more profitable customer base than the general population. They know that a person can only file a Chapter 7 bankruptcy once every eight years, so chances are high that, once hooked, the debtor will be on the creditor's line for a long time.

You may be feeling like you've learned your lesson about staying on top of your payments since enduring the bankruptcy process, but even cautiously getting back into the credit game is like wading into shark-infested waters. Credit card companies, car finance companies, and mortgage lenders have all figured out ways to get you to put more and more of your hard-earned money into their bank accounts. Credit card companies offer introductory rates to get you to sign up again. Then they sit back and wait until you are even one day late on your payment, or they pull your credit report see that you are late paying any bill, from any creditor, or that your ratio of debt to available credit has increased, and they jack up your interest rate to near usury levels.

With the mortgage industry collapse, mortgage companies have reaped what they've sown over the past several years in the form of subprime and adjustable rate notes. However, the difference between them and you is that they are being bailed out by the government. Will you be bailed out if you become a victim of this predatory lending? Not likely.

The bottom line is, that so called 'Credit, or FICO Scores' are nothing more than a litmus test for how much debt you are willing to take on and juggle. People who never borrow money and always pay cash generally have very poor credit scores, yet society lauds those people as the wisest and most disciplined of us all.

The sooner you realize that you are not defined by your credit score, the better. It is possible to live a fulfilling and abundant life without being a slave to your credit report. Once you are free of the credit-as-income illusion, you can establish strategies for creating a healthier relationship with money, a positive vision of money, and the freedom that comes from being in control of your money and not letting it control you.

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