If you have a recent bankruptcy, it's a pretty sure deal your credit scores have dropped quite a bit. Though time will gradually cancel out much of the damage, it's still critical that you begin working on cleaning up any remaining credit issues and reestablish a good payment history to get your credit rebuilt as quickly as possible. The following are a few simple steps that can help you rebuild your credit more quickly and make it easier to qualify for a mortgage in the future.
1) Make all payments on time. This is probably pretty apparent to most people already, but it's worth mentioning because it's super critical. If you went through bankruptcy, mortgage banks will want to see that you've developed good payment habits since then. Being late here or there could harm your ability to qualify for a new loan even if your credit profile is otherwise pretty good. Make sure you send in your payments well in advance of the due date so they are posted on time.
2) Apply for a secured credit card. If you've just gotten out of bankruptcy, you probably don't have an open charge card and lenders probably won't want to offer you one. Secured charge cards are excellent because they're straightforward to get and are backed by your own funds on deposit with the credit card issuer. They work just like a regular credit card and can be used to build a good payment history.
3) Check your report on a regular basis and clear up any errors right away. Federal law entitles you to a free credit report annually from AnnualCreditReport.com, but it's a good idea to check on a more regular basis. Be sure you get your credit report from all three major reporting agencies: TransUnion, Equifax, and Experian. If you find errors, contact the credit bureau reporting the erroneous tradeline to get it cleared up right away.
4) Clear up negative items like collections and charge offs. Even if the bankruptcy wiped out everything, it's common to see old accounts reporting as collections or charge-offs long after the discharge date. Even if the amount owed is small and the charges old, they can still drag down your credit scores and cause issues with mortgage qualifying. You may be able to negotiate the payoff down to pennies on the dollar, but be sure to get all agreements in writing before you drop your payment in the mail.
5) Keep revolving accounts below 30% of the limit. If you have high credit utilization, the credit bureaus may consider you "maxed out" and hit your scores even if you never miss a payment. Always keep your balances below 30% of your limits at all times.
6) Check if your HELOC is reporting as a mortgage debt. If your home equity line of credit is reporting as a revolving account and you owe a lot on it, it could hurt your scores for the reason mentioned in the previous point.
7) Keep older credit card accounts. If you still have a few older accounts open, it's a good idea to keep them open to help strengthen your scores. The reporting agencies like to see long credit histories, so don't chop your scores by chopping old accounts.
8) Avoid cosigning. Trying to cosign is probably pointless if you have a recent bankruptcy, but down the road when your credit starts getting better, avoid cosigning. All your hard work rebuilding your credit could be gone in an instant if the person you cosigned for fails to make their payments. And because you're legally obligated on the debt, the lender could come after you for any balance owed.
Note that any derogatory items such as collections and charge-offs will stick around for 7 years after they are first posted even if they have a zero balance. However, as time goes on, the impact of the derogatory items will lessen significantly. Bankruptcies will stay on your record for 10 years.
We also want to mention that it's super important that you live well within your means as you rebuild your credit. Yes, it's important to use debt to rebuild your scores, but be really conservative about doing it. Don't load up on a ton of new debt; borrow only when you have to and only borrow what you can easily afford and pay back in a short period of time.
These tips will help you rebuild your credit faster, but understand there's no quick fix. However, with some time and effort, you can rebuild after a bankruptcy and more easily qualify for a great mortgage.
1) Make all payments on time. This is probably pretty apparent to most people already, but it's worth mentioning because it's super critical. If you went through bankruptcy, mortgage banks will want to see that you've developed good payment habits since then. Being late here or there could harm your ability to qualify for a new loan even if your credit profile is otherwise pretty good. Make sure you send in your payments well in advance of the due date so they are posted on time.
2) Apply for a secured credit card. If you've just gotten out of bankruptcy, you probably don't have an open charge card and lenders probably won't want to offer you one. Secured charge cards are excellent because they're straightforward to get and are backed by your own funds on deposit with the credit card issuer. They work just like a regular credit card and can be used to build a good payment history.
3) Check your report on a regular basis and clear up any errors right away. Federal law entitles you to a free credit report annually from AnnualCreditReport.com, but it's a good idea to check on a more regular basis. Be sure you get your credit report from all three major reporting agencies: TransUnion, Equifax, and Experian. If you find errors, contact the credit bureau reporting the erroneous tradeline to get it cleared up right away.
4) Clear up negative items like collections and charge offs. Even if the bankruptcy wiped out everything, it's common to see old accounts reporting as collections or charge-offs long after the discharge date. Even if the amount owed is small and the charges old, they can still drag down your credit scores and cause issues with mortgage qualifying. You may be able to negotiate the payoff down to pennies on the dollar, but be sure to get all agreements in writing before you drop your payment in the mail.
5) Keep revolving accounts below 30% of the limit. If you have high credit utilization, the credit bureaus may consider you "maxed out" and hit your scores even if you never miss a payment. Always keep your balances below 30% of your limits at all times.
6) Check if your HELOC is reporting as a mortgage debt. If your home equity line of credit is reporting as a revolving account and you owe a lot on it, it could hurt your scores for the reason mentioned in the previous point.
7) Keep older credit card accounts. If you still have a few older accounts open, it's a good idea to keep them open to help strengthen your scores. The reporting agencies like to see long credit histories, so don't chop your scores by chopping old accounts.
8) Avoid cosigning. Trying to cosign is probably pointless if you have a recent bankruptcy, but down the road when your credit starts getting better, avoid cosigning. All your hard work rebuilding your credit could be gone in an instant if the person you cosigned for fails to make their payments. And because you're legally obligated on the debt, the lender could come after you for any balance owed.
Note that any derogatory items such as collections and charge-offs will stick around for 7 years after they are first posted even if they have a zero balance. However, as time goes on, the impact of the derogatory items will lessen significantly. Bankruptcies will stay on your record for 10 years.
We also want to mention that it's super important that you live well within your means as you rebuild your credit. Yes, it's important to use debt to rebuild your scores, but be really conservative about doing it. Don't load up on a ton of new debt; borrow only when you have to and only borrow what you can easily afford and pay back in a short period of time.
These tips will help you rebuild your credit faster, but understand there's no quick fix. However, with some time and effort, you can rebuild after a bankruptcy and more easily qualify for a great mortgage.
About the Author:
Have a bankruptcy or foreclosure on credit? Find out when you can purchase a home after bankruptcy and after foreclosure.