Bankruptcy cripples you on several fronts. Not only does it harm your financial position, it also affects your confidence. But post bankruptcy, you must learn to move on. Unfortunately, it is hard to move out of the mental abyss that one recedes into after a bankruptcy. However, what a person needs is a well-planned approach in such a situation.
Need to Improve the Credit Rating
The reasons to improve the credit rating or score quickly are two-fold. Firstly, a bankruptcy hammers the credit score, which reduces your chances of availing credit in the future. Hence, unless you bring it up to an acceptable level, the chances of you getting the credit you need to rebuild your life are quite low. Secondly, it is well-known that people with a better score can get a loan at a lower interest rate. Hence, when you improve your score, not only you become eligible for a loan again, but you can get it at a lower interest as well.
Ways to Improve it
It may be pertinent to understand the factors that determine your FICO credit score and their individual weightage. Here are the factors which determine it.
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit -10%
- Types of Credit Used – 10%
It can be seen that the bulk of emphasis is on the payment history and the amounts you currently owe others. Also, the longer you are in the credit market, the more established your ratings will be. It should be noted that, a large number of new accounts will negatively affect the score, while the competency you display in effectively sorting out different forms of credit, will be viewed positively. Here are some more tips to improve the rating.
Pay Off Debts
Simple and straightforward. Pay off all the money you owe to banks, credit card companies, and other assorted lenders. The faster you reduce your debts, the quicker your score will improve. After all, a lot hinges on your accounts payable. 30% to be precise.
Paying off debts is alright, but where will the money come from? You could avail some bad credit loans or request a credit card company to give you a credit card. Systematically availing and paying off credit will help improve the score. Since, it also takes into account the types of credit you use, this approach may benefit. Also ensure to pay the mortgages/bills regularly.
Strategically Reduce Debt
It is very important to plan out a debt strategy. How? Get a short term loan or a loan with a negotiable rate of interest. This way, if you keep paying off your bills, your rating will improve and you will be applicable for credit at a lower rate of interest. You can use credit financing to reduce the debt by paying it off. You could also use a credit card instead of a loan.
Do not Shut Zero Balance Accounts
If there are accounts or cards whose balance you’ve successfully paid off, do not shut them. It is always good to display the clean record. This step has a three-fold benefit. First, it looks like you have been paying off your debts. Second, it displays your competency in paying off more types of credit and thirdly, it shows a longer credit history.
Build Assets not Liabilities
This may not be explicitly mentioned anywhere, but it is just a good sense. By increasing the assets you increase the dependability. If you have enough assets, you will be able to mortgage them to avail the credit. Hence, lenders will give you credit as they get a good collateral in return of their risk. Avoid building liabilities like credit card bills as they will affect your rating negatively.
Keep In Touch With Lenders
Always be truthful about your financial situation and be in the good ‘books’ of your lenders. Always keep in touch with them and express your inability to pay, if that is the case, and see if you can make an arrangement in some way. After all, they want their money and not your ratings to plummet.
Keep an Eye on Credit Reports
There are chances that there may be some error in the credit report. If you feel so, contact the credit rating agency immediately and get it reevaluated.
Bankruptcy is an experience that no one would want to go through. However, with a good plan and guidance, you will be able to weather it.