How Long Does It Take to Build Good Credit After Bankruptcy?
While plenty of Canadians are in need of credit repair after bankruptcy, many have no idea what to do. There are services available to help you, for a fee. Some are better than others. Instead, it’s best to manage your own finances and get your credit back on track, instead of relying on someone else.
The big question you probably have is how many months it will take to build good credit after a bankruptcy. That’s a good thing to ask since it shows you’re thinking and planning ahead.
Sadly, as is the case so often in life, reality isn’t always straightforward when it comes to credit repair. The fact is it’s not for certain just how long it will take you to build good credit after a bankruptcy. This is in part because everyone’s situation is different.
For example, you might have more financial means than another person coming out of bankruptcy. This could be through a promotion at work, help from family, or other life situations. While having more money to spend certainly can help, it’s not everything. Doing the most with what you have is the true key to building good credit.
What You Can Do
There are many things you can do to start building good credit after a bankruptcy. Just how much each one will affect your credit score really depends on several factors, since credit scores are fairly complex.
The best thing to do is concentrate on doing one thing at a time. Figure out what item you can do first. If you’re freshly out of bankruptcy, some of the following items might not be an option yet. Don’t let that discourage you. Instead, figure you what you can be doing now, even if it’s getting ready to take a step.
Apply for a Secured Credit Card
One of the easiest and surest ways to establish good credit after a bankruptcy is to get a secured credit card. These are like regular credit cards. You can take them to the store and buy items, or shop online, but there is a catch. It’s a good credit repair strategy.
Instead of the lender extending you credit without collateral, a secured credit card is actually obtained by you putting down a deposit. The amount of money you need to give the lender is equal to the credit card’s spending limit. This is a precaution so if you don’t pay the card balance off completely each month, the lender can just keep the money you turned over and cancel the card.
The great thing about a secured credit card is that they’re easy to get when your credit doesn’t look so good. As you use the card and pay the balance off each month, the lender reports positively to the credit bureaus. That builds good items on your report, increasing your credit score over time.
Get a Low Balance Credit Card
Your credit might be to the point that you can get an unsecured credit card, which is great for credit repair. Sometimes lenders hold special promotions for people who recently went through a bankruptcy, which is a nice thing to find. This means you don’t have to put down money on a deposit.
As you use the credit card and pay on it each month, you can start building positive credit. They key is to manage the card properly.
Get a Car Loan
You already need a car to get around, so you might as well use a car loan for credit repair purposes. Just like with a credit card, as you pay on the loan on time each month, you’re building positive credit for your file. As time goes on and you keep paying on the loan, your credit can reach a higher level.
It might be a challenge to find a good car loan situation after bankruptcy. Some lenders won’t extend credit to you, while others will at a high interest rate. Just keep in mind that after you establish good credit and your score rises to a certain level, you can get a car loan at a much more reasonable interest rate.
Get Other Forms of Credit
Any kind of positive credit items you can establish will help you push toward having good credit again. Of course, some options won’t help with credit repair if the lender doesn’t report to the credit bureaus, so check on that before you move forward with the option.
These can include some short term loans, cell phone plans, and retailer credit lines. Any positive credit will assist with your credit repair efforts.
Pay All Bills On Time
After you start getting back on your feet, it’s absolutely essential that you keep your credit as spotless as possible. By demonstrating responsible credit usage after a bankruptcy, you can help lenders feel more at ease with extending credit to you now and in the not-too-distant future.
A big part of proving you can handle credit is paying all your bills on time. This is especially true for any bill which reports on your credit. Things like credit cards, car payments, etc. should be top priorities. Even if you pay your bills but you do it late, that can create a negative mark on your credit report. Each time someone pulls your credit file to approve you for a loan, they’ll see that late payment. If you have more than one that looks even worse. Ideally, you don’t have any late or slow payments showing on your credit after a bankruptcy.
Make And Follow a Budget
A good way to ensure you pay your bills on time and otherwise properly manage your finances is to make a budget and follow it. Canadians often struggle with this part of the lives because budgeting isn’t an intuitive process. What you learned from parents, peers, and others might be actually hurting you to properly manage your money each month.
What most people do is sit down and write out their major bills, then decide what they should be spending each month on everything else. That’s a good start for budgeting, but it’s just a start. If you then throw that sheet of paper in a drawer, it’s not going to do any good. Just as likely, you’ll try following that budget for a month or two, realize you’re way off, get frustrated and discouraged, then stop using that budget because it’s not working.
Instead, you should sit down at the end of each month and take a close look at everything you spent money on. Break it down into categories and be as specific as you would like. It’s not a fun process because the work is tedious, and it can be stressful. Doing this will quickly show you where your money is actually going, instead of you just making up an ideal budget and then never following it.
By measuring how you’re actually managing your money, you can better determine what to do with your budget. It likely will need some changes so it’s more realistic. You might also realize that some of your spending habits are downright wasteful and irresponsible. Use your budget to set new spending and savings goals, then sit down the next month and see how you did.
Budgeting isn’t a thing you do once and that’s it. You should be going over your budget at least once a month, even after you’re done with credit repair. While the process is stressful at first, before long you’ll become used to it and see the value in all that hard work.
Avoid Excessive Debt
With a good, functional budget, avoiding getting into excessive debt will be more manageable. This should be avoided because it’s how you got into a bad financial situation before, leading to your bankruptcy.
Excessive debt means you struggle to keep up, or you can’t manage the debt at all. That’s serious, because you can quickly start racking up late payments, missed payments, and worse. This will hurt your credit in a hurry.
You should only be taking on a single line of credit at a time, like one credit card or a car loan. Before you agree to anything, your budget will help you figure out if you can easily manage making the payments month after month.
In the case of a revolving line of credit, like a credit card, your budget will indicate how much you can easily pay on the card.
Keep Credit Card Usage Low
Ideally, you never use the credit limit on your cards or anywhere near that amount. Instead, you should only be using 20 to 30 percent of your card’s maximum credit limit. This will help improve your credit, instead of hurting it. More than that and you risk your credit score suffering.
This doesn’t mean you just put your credit card in a drawer and never use it. While having a credit card will help improve your credit standing, it’s even better if you use it responsibly. Choose something you already buy each month, put it on the credit card, then pay it off immediately. Many people do this with fuel or a trip to the grocery store.
Don’t Depend On Overdrafts
Too often, people think it’s a good idea to spend up to the limit of what’s in their bank account. This is a dangerous practice, because you might have forgotten about a charge for your account that’s been lingering for a little bit. Or it might be that you have a subscription to Netflix or another service which will automatically be charged to your bank account.
Also, emergencies do happen. If you don’t have much money in your account, the temptation is to use the overdraft protection as a way to manage these types of situations. Some Canadians become almost addicted to this practice, as if they’re somehow getting more money by doing it.
The reality is you’re paying dearly to borrow money for the short term. Each overdraft charges a fee. That’s also true with a non-sufficient funds charge. It’s better to just manage your money properly through strict budgeting and limit spending.
One thing that will keep you from moving forward on establishing good credit is waiting for your bankruptcy to discharge. With few exceptions, lenders won’t want to approve you for anything until the discharge date since there’s the chance you could include their loan in the bankruptcy.
It’s worth pushing for the shortest time possible for your bankruptcy discharge. Canadian law allows you to get an automatic discharge if you’ve never declared bankruptcy before. That means from the time of filing, your discharge takes only nine months.
Also, keep in mind that a bankruptcy will stay on your credit report for years, hurting you score to an extent, although that damage diminishes over time. The sooner you get it discharged, the sooner that damage stops.
Monitoring Your Credit
You should be keeping track of what’s going on with your credit. There are free services online that allow you to do this from month to month, plus paid services which promises even more. Whichever you use, tracking your credit is a wise idea. It will allow you to see how what you’re doing is helping your score. You’ll also know when something incorrect has been reported to the bureaus, allowing you to dispute the item immediately.