How To Rebuild Your Credit After Filing Bankruptcy in Athens, Georgia

Many households with heavy debt delay the decision to file bankruptcy because they fear it will be difficult to rebuild their credit rating. Concerns about rebuilding credit should not be the overarching consideration when contemplating bankruptcy. The top consideration should always be whether a reasonable path to solvency exists without declaring bankruptcy.

 

When it’s clear that solvency has become impossible, there is little reason to delay filing. In most cases, the high debts relative to income have already thrashed the debtor’s credit score and ability to obtain financing. When this happens, bankruptcy often becomes the surest and fastest way to rebuild credit.

But the process is far from an overnight one. It takes several years to reestablish credit and obtain a FICO score that qualifies you for prime credit. However, some forms of credit are available while the bankruptcy is proceeding or soon after its discharge. These subprime borrowing opportunities serve as stepping stones to higher credit limits, lower interest rates, and, eventually, eligibility for prime lending.

 

The following steps will help you rebuild your credit after an Athens, Georgia, bankruptcy.

Obtain A Secured Credit Card

Rebuilding your credit history requires establishing new tradelines. A tradeline is an account listed on your credit report. They include credit cards, vehicle loans, personal loans, and secured credit cards.

 

Bankruptcy wipes out some or all of your tradelines. As a result, your credit report shows all accounts included in the bankruptcy as closed. As a result, you may need more active tradelines. You must create new ones to substantially enhance your credit profile.

 

Secured credit cards are available to people with no credit history, bad credit, or recent bankruptcies. Because they require the cardholder to deposit the amount of the credit limit, lenders are willing to grant them to individuals with damaged or non-existent credit. The issuer reports the account and its activity to the major credit bureaus, just like an unsecured credit card.

 

As a result, your credit report reflects the credit line, your payment history, and your revolving balance. Typically, secured credit cards offer credit lines between $300 and $2,000. It is advantageous if you can afford a higher deposit because it gives you a higher credit line. A higher limit makes you more attractive to unsecured credit card issuers in the future, provided you keep all or most of the credit line open.

 

Secured credit cards work just like unsecured revolving accounts. You can use them at stores or for online purchases. Some offer a cash advance option, though it may be for less than the total available credit. Each time you use the card, you build a balance. When you pay off that balance at the end of the month, you create a positive credit history. As more on-time payments hit your credit report, your score improves.

 

It’s essential to keep in mind that secured credit cards come with high-interest rates, late payment penalties, and over-the-limit fees. As a result, to avoid these exorbitant fees, pay off the entire balance each month. Interest rates will likely be just as high with a secured credit card than with an unsecured, subprime revolving account. Since bankruptcy aims to eliminate debt, it’s best to keep to a secured credit limit you can afford to pay off each month.

 

To receive the credit rebuilding benefits of a secured credit card, ensure the issuer reports to all three major credit bureaus, Experian, Equifax, and Transunion. When you apply for credit in the future, potential lenders may use any one or a combination of the three major credit bureaus, so you want your positive credit history reflected by each.

Become An Authorized User

When you become an authorized user of another individual’s credit card, you receive credit for the positive history. The older the account, the more significant boost to your credit score. In addition, you receive credit for the limit, making you more attractive to lenders.

Apply for Subprime Credit Cards

Once you establish a post-bankruptcy payment history with a secured credit card, you will likely receive solicitors for unsecured credit cards. However, these are not the prime- or near-prime credit cards you may have enjoyed before bankruptcy. Instead, these are low limit, high fee, high-interest credit cards.

 

Because subprime credit cards offer varying levels and fee structures, you’ll want to do comparison shopping before signing up for one. Some cards offer reasonable limits, low fees, and less punishing interest rates. These are usually worth taking.

 

But some subprime credit cards have meager limits with start-up fees that take up most of the credit line. For example, some subprime cards have a $300 credit limit but immediately add a $200 initiation fee to the balance, leaving only $100 available credit. You must pay the $200 to receive the full credit line, and unlike a secured card, you receive no refund for deposited money. Some of these cards also add hefty monthly and annual fees.

 

On the other hand, some subprime cards offer credit lines of $500 or $1,000 to start without an initiation fee, giving you immediate access to the total credit line. Many of these cards offer low annual fees, no annual fees, and lower interest rates than other credit cards.

 

Because subprime credit cards have varying degrees of terms, it’s advisable to do your homework before selecting an issuer.

 

Some of the features you can expect from subprime credit cards include the following:

Easy Approval

Many subprime credit cards specialize in issuing credit to those with recent bankruptcies and bad credit, especially if you have created a positive history through a secured card. 

High-Interest Rates

As with all lenders, subprime credit card issuers balance the increased risk of lending to those with poor credit by charging high-interest rates. You can expect interest rates of over 20%, and some may charge above 30%. Because of this, paying them off each month is the best strategy for reestablishing credit with minimal expense.

Lower Credit Limits

While this may seem like a disadvantage when you consider the ruinous interest rates these subprime issuers charge, a lower credit limit is a good thing. Should you plan to pay off the card each month and suffer some stumbling blocks, at least the interest rate damage is minimized.

Fees

Some fee structures make subprime credit card offers not worth taking. When the application-, initiation, monthly, and annual fees take up most of the line, you are not so much establishing a credit line as buying a better credit history by paying these fees.

 

By shopping around, you may find some credit opportunities with low or no- initial fees.

Limited Rewards

Many subprime cards offer no rewards, such as cashback or airline miles. Those who do offer small rewards, such as 1% cash back.

 

Apply for Prime Credit Cards

Prime credit cards are those available to individuals with good credit. Once you have established a few years of post-bankruptcy positive credit history, you will likely receive offers for these credit cards. Congratulations! This means your FICO score has risen enough for you to receive mainstream credit offers.

 

With prime credit cards, you will enjoy lower interest rates and fees. Also, higher credit limits will help you establish even better credit. Additionally, you may be eligible for generous cashback and other rewards.

 

Higher credit lines help you improve your credit score in several ways. Firstly, they increase your available revolving balance. If you keep your balances low, you have a lower ratio of revolving debt to your revolving credit line, which boosts your FICO.

 

Also, the higher credit lines on your credit bureaus qualify you for higher limits with other lenders. So now you are positioned to continue building your credit by obtaining loans for higher amounts with better terms.

Apply for a Vehicle Loan

While opening trade lines through credit cards boost low FICOs into the good range, to fully rebuild your credit and earn an excellent rating, you need various types of credit. Credit cards establish revolving credit, while auto loans establish installment credit.

 

For an installment loan, the lender disburses a lump sum to the borrower. The borrower then repays the loan in agreed installments, usually monthly. 

 

Here’s how car loans help rebuild credit after bankruptcy:

Diversification of Credit Mix

Credit scoring models are programmed to reward those with various credit types. For example, adding a car loan to a history of on-time credit card payments enhances FICOs. Ultimately, this diversification helps you qualify for a home loan.

Payment History

The additional history boosts your score if you make your vehicle note payments. About 35% of a FICO score consists of payment history, so the impact on your score is substantial.

Increase Length of Credit History 

FICO scores give more credit to older accounts. The logic is simple: The older accounts demonstrate a long history. Most vehicle loans range from 36 months to 72 months. Once fully rapid, you earn credit for a paid-off loan.

Apply for a Mortgage

You can further diversify your credit history through a mortgage. To qualify for a mortgage, you must establish trade lines post-bankruptcy, such as opening credit card accounts and taking out an auto loan. 

 

Additionally, mainstream mortgage loans require seasoning, or a waiting period, after a bankruptcy discharge. For instance, FHA and VA loans stipulate a two-year waiting period, while USDA loans mandate three. Conventional mortgage loan applicants need four years of seasoning.

 

Though bankruptcy causes a temporary decline in credit scores, you can rebuild your credit and return to a good or excellent rating within a few years. The key resides in building revolving credit through ever-increasing limits and diversifying your credit profile through installment loans or even a mortgage. Once you boost your FICO score into the good range and have sufficient post-bankruptcy seasoning, you can obtain a conventional mortgage loan and prime rates.

 

Morgan & Morgan provides expert bankruptcy advice and service. When your debt is overwhelming your life, contact Morgan & Morgan to discover if bankruptcy offers a solution.

 

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