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) Clean up charge offs and collections. Even if your bankruptcy wiped out all your debt, it's not unusual for old accounts to stick around as derogatory items like charge offs and collections. Even if you don't owe much and the account is old, it can still do damage to your scores and make it harder to qualify for a mortgage. It's often possible to negotiate down the balances to pennies on the dollar, but be sure you get any agreement in writing before you put a check in the mail.
5) Keep revolving account balances below 30% of the credit limit. If you carry large balances on your credit cards, the credit bureaus may see you as "maxed out" and rate down your scores - even if you never miss a payment. It's essential to keep your balances below 30% of your available credit limits at all times.
6) Be sure your home equity line of credit (HELOC) is reported correctly. It's very common for mortgage lenders to report HELOCs as revolving accounts (since that's how they work) instead of mortgages. For the reason mentioned in the previous point, this can damage your scores if you're carrying a large balance on your HELOC.
7) Keep older credit card accounts open. If you still have older established accounts, don't be quick to close them out just because you don't use them anymore. Old accounts are helpful for your scores, so don't damage your credit history and scores by canceling 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.
One thing worth noting is that derogatory credit items such as charge offs and collections will stay on your credit for seven years even if they have a zero balance. But as time passes, the negative impact on your scores will decrease. Bankruptcies stay on your record for 10 years.
Let us also emphasize the importance of living within your means. Just because it's important to use credit so you can build up a credit history again doesn't mean it's a good idea to load up on a ton more debt. Don't borrow unless you really need to, and keep your level of borrowing well below that which you can easily afford to pay back quickly.
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) Clean up charge offs and collections. Even if your bankruptcy wiped out all your debt, it's not unusual for old accounts to stick around as derogatory items like charge offs and collections. Even if you don't owe much and the account is old, it can still do damage to your scores and make it harder to qualify for a mortgage. It's often possible to negotiate down the balances to pennies on the dollar, but be sure you get any agreement in writing before you put a check in the mail.
5) Keep revolving account balances below 30% of the credit limit. If you carry large balances on your credit cards, the credit bureaus may see you as "maxed out" and rate down your scores - even if you never miss a payment. It's essential to keep your balances below 30% of your available credit limits at all times.
6) Be sure your home equity line of credit (HELOC) is reported correctly. It's very common for mortgage lenders to report HELOCs as revolving accounts (since that's how they work) instead of mortgages. For the reason mentioned in the previous point, this can damage your scores if you're carrying a large balance on your HELOC.
7) Keep older credit card accounts open. If you still have older established accounts, don't be quick to close them out just because you don't use them anymore. Old accounts are helpful for your scores, so don't damage your credit history and scores by canceling 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.
One thing worth noting is that derogatory credit items such as charge offs and collections will stay on your credit for seven years even if they have a zero balance. But as time passes, the negative impact on your scores will decrease. Bankruptcies stay on your record for 10 years.
Let us also emphasize the importance of living within your means. Just because it's important to use credit so you can build up a credit history again doesn't mean it's a good idea to load up on a ton more debt. Don't borrow unless you really need to, and keep your level of borrowing well below that which you can easily afford to pay back quickly.
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.
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Had a bankruptcy or foreclosure? Find out when you can buy a house after bankruptcy and after foreclosure.
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