Ways to establish credit after bankruptcy
It's an uphill climb to re-establish credit after bankruptcy. To succeed, you need a clear game plan and a little patience.
While a bankruptcy removes your responsibility to pay your current debts, it comes with some strings attached: most notably, it destroys your credit.
"It results in an R9 credit rating, which remains there for seven years," says Jody Dwyer, estate administrator at Spergel Trustees in Bankruptcy. Ratings on your credit report range from R1 to R9, the latter being the worst.
Because of the damage to your credit, a bankruptcy should be considered a last resort.
"If you're going to be late a couple of times, it's definitely better to do that and get caught up and keep it going, rather than filing a bankruptcy that does ruin your credit and blemish that for seven years after the fact," Dwyer says.
However, if a debt professional advises you to file for bankruptcy - and you follow that recommendation - here are some steps to take to re-establish a good credit history.
Find the thread that unraveled.
First, get a sense of where you went wrong, says Cavan Cottell, estate administrator at bankruptcy service Paul J. Pickering Ltd.
"Be very wary of what got you into this scenario," Cottell says. "It could be a job loss, it could be that you borrowed money and then faced financial difficulty."
When you can pinpoint where things began to spiral out of control, you can avoid repeating the mistake in the future. It also can psychologically help you come to grips with your situation if you have a solid place to point to and say, "There's where it all went wrong."
Build a new budget from scratch.
By assessing your budget and making changes where necessary, you can avoid trouble in the future by creating a savings category.
Set up automatic payments to a savings account to establish an emergency financial buffer. You can do this via online banking, or you can go to a banker and ask for help.
It's always best to turn to savings first in an emergency, but for someone rebuilding credit, it's especially important.
For example, if you suddenly need $500 for car repairs, your bankruptcy means you won't easily be able to borrow that money. And if you are able to borrow money, chances are it'll come with a high interest rate, which could put you back in a debt cycle.
Rebuilding good credit takes time, and you don't want to ruin your progress by borrowing more than you can afford. That's when having some savings comes in handy.
Get a secured credit card
After an honest assessment of your budget, you can start to re-establish your credit history. The first step to doing that? "Don't miss any payments," Cottell says. Your repayment history is the biggest factor in your credit score, so if you can keep it in top shape, you're on your way to a higher score.
You might not have credit bills anymore, but you still have other bills, such as utilities or a cellphone bill, that you can use to start re-establishing yourself as a good candidate for borrowing.
Not all of your service providers report good behaviour to credit bureaus, but it's best to be in the habit of paying all bills on time. Some may only report bad behaviour - which is something you definitely don't want.
Once you demonstrate a habit of paying bills on time, you can apply for a credit card. Your bank will likely recommend a secured card, which is backed up by a deposit. The credit limit will be whatever amount you deposit.
Use the secured card as you would a regular credit card, by charging purchases and paying your bill in full and on time every month. All secured credit card activity is reported to credit bureaus, just like traditional credit cards, so as long as you use the card properly, it will help you begin to rebuild credit, Dwyer says. Then, you'll be eligible to apply for a regular card or other loans with great interest rates.
Use the card wisely
Use your card for your everyday spending, rather than thinking of it as "for extra purchases."
"I always tell people to use their secured credit card for small purchases, such as gas and groceries," says Dwyer.
But don't charge a couple hundred dollars to the card and then pay the minimum for six months. Determine how much money you can allot toward your credit card payment each month, and do not charge more than that, Dwyer says.
"When the statement comes in, pay it off right away," Dwyer says. "And just keep doing that, every month."Add a note to your credit file
Finally, you can place a note on your credit file with each of the major Canadian credit companies: Equifax and TransUnion.
This is a 50-100-word statement, explaining what special circumstances may have led to your credit problems, or noting a dispute over one specific account that has marred your report. Whenever your credit report is pulled, that person viewing your file may read the note and cut you a break.
By following each of these steps, you will be on the road toward establishing a new, better credit history after your bankruptcy - and maybe avoiding the financial problems that got you into trouble in the first place.
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