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Money January 2013

Dollar Sense

There is Life after Bankruptcy: Tips to Rebuild Your Credit

By Teresa Ambord

Many credit repair services are legitimate but the truth is they can’t do anything you can’t do yourself, for free. Make timely payments and keep your overall credit use low and do this without fail every month, and you will accomplish the same thing a credit repair service will charge you for.

ps_ambordIf you have recently filed bankruptcy or are considering it, you are part of a rapidly growing group. While the median age for those filing bankruptcy is still in the mid-40s, the number of people age 65 and up who have filed in recent years has tripled. Many say they turned to bankruptcy as a solution because they were unprepared for retirement. Some returned to the workforce after retiring, in order to make ends meet or to get better health care. Uncovered medical expenses, rising costs, and a sorry economy have forced others to turn to credit cards to plug those financial holes.

In 2012, a Washington D.C. public policy group known as Demos reported that Americans 65 and over carry an average of $10,235 on credit cards. That’s up 25% from seven years ago. Seniors are still in the minority among bankruptcy filers, probably because we remember the stigma attached to it. Surveys show that younger people are about twice as willing to admit need and ask for help, from family, friends, and charities as we seniors are. We are also much less willing to try to negotiate with creditors to accept a lower total. It’s just not the way we were taught.

But today, many senior citizens report they are going without necessities and falling behind on rent and mortgage payments. Nobody wants to file bankruptcy, but it does not carry the stigma that it once did.

If you are considering bankruptcy, you should know… there is life after filing. It is true that your filing will remain on your credit record for 7 to 10 years. But that doesn’t mean you are powerless to start rebuilding your credit immediately. You can begin to speed your recovery in a much shorter time period by making smart financial decisions.

Here are some important points along the roadway to re-establishing credit.

  • Credit report. A couple of months after your debts are discharged, order copies of your credit report. You are entitled to a free credit report once a year from each of the three consumer credit bureaus. It’s important to get copies from each bureau, since they do not all contain the same information. Contact annualcreditreport.com. Before you look at them, brace yourself. Your score will have plummeted. But remember, it can be temporary if you are diligent.
  • Avoid “easy money lenders.” Even before the ink is dry on your bankruptcy you may be solicited by predatory lenders like payday loans, pawn shops, and rent-to-own establishments. If you take them up on their offers and you fall behind, you could end up in court. Avoid them if possible.
  • Pursue traditional credit, later. A better plan is to wait till your debts have been discharged, then begin to look for traditional credit to get your feet back under you. Getting a secured card (which is a low limit card that will generally require you to make a deposit with the card issuer) will give you a way to demonstrate that you can handle credit and make timely payments.
  • Pay on time or sooner. Making timely payments is a key factor. Not just for the credit cards, but on everything you pay, mortgage, rent, utilities, etc. Your payment record actually accounts for more than 1/3 of your total credit score, so don’t fail to make payments on or before the due date.
  • Keep credit balances low. Maxing out your credit or even using too high a percentage will harm your credit score. It gives the appearance that you can’t handle finances. Also, you should know that it is not necessary to carry a balance in order to build credit. If you are able, pay off the bill every month and you should still be able to establish a good foundation.
  • Other loans. Once you’ve been toeing the line for a couple of years, credit experts recommend that you get a line of credit or an auto loan. If it’s an auto loan, be sure to choose something you can easily manage so you can develop a timely payment record and show yourself to be a good risk.
  • Avoid credit repair services. First of all, don’t believe the claims that a credit repair service can overcome negative credit information that is accurate. These claims are bogus. Only time will correct accurate bad marks on your records. Many credit repair services are legitimate but the truth is they can’t do anything you can’t do yourself, for free. Make timely payments and keep your overall credit use low and do this without fail every month, and you will accomplish the same thing a credit repair service will charge you for.

Don’t close existing credit accounts. This may seem counter-intuitive. But closing accounts, especially the accounts that you’ve had the longest, can damage your credit score in two ways. It shortens your credit history, since it goes by the oldest credit account you have open. And by eliminating available credit, it appears that you are much closer to maxing out your credit even if you have not spent another penny. Unless you absolutely cannot resist the temptation to spend, you’re better off hiding the cards and leaving the accounts open.

If you are doing all this, be patient. Building good credit takes time, and even more so after a bankruptcy. But it is doable. Most of all, if you are struggling don’t let embarrassment keep you from filing if you have a genuine need. You’re not alone.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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