There is a lot of information out there about raising your credit score. However, only a small amount of that information focuses exclusively on how to raise your credit score after bankruptcy. Improving your credit score can save you thousands of dollars when it comes time for you to apply for a home loan. Regaining a healthy credit score after bankruptcy is a key variable in getting the best interest rate for your home loan. This article will focus on three sound tips (and a couple of things to avoid) to help you on your way to improving your credit score after Chapter 13 bankruptcy. There are three key actions that you can take to increase your credit score after Chapter 13 bankruptcy. Our team will outline these actions, and highlight some things to avoid doing.
Raise Your Credit Score After Bankruptcy by Reviewing Your Report for Inaccuracies
This is the most common problem we see for people completing their Chapter 13 bankruptcy. There are usually many accounts that have either been paid in full or stripped during the Chapter 13 plan that still show on clients’ accounts after their bankruptcy has been discharged. Unfortunately, often these accounts don’t just correct themselves. Also, if these accounts are disputed this can hinder getting a mortgage so it is often best to speak to a mortgage professional before disputing any inaccuracies.
Establishing Safe Credit Building Accounts
There are products out there now that will help get your credit back on track without even the possibility of being late. Secured credit cards can be a very powerful way to raise credit scores after bankruptcy. The client places the limit of the card in a secured account that can’t be drawn down while the card is open. If for some reason the client can’t make their payment then the account secures the card and the client doesn’t incur a late payment. If the client keeps the usage of the card to between 10% and 30% of the available balance their credit scores will improve quickly.
Staying on top of current obligations
It is vital to make at least the minimum monthly payment on all obligations on time. Any late payments even by one day can hurt your credit for years. It can make getting a mortgage after bankruptcy very difficult. Making your monthly payments on time over time will also help raise your credit score after bankruptcy. Don’t ignore those bills. Pay them if at all possible and try to get back on top of obligations in the future.
A couple of things to avoid:
Getting into a High Interest Car Loan
Many of our customers complete their Chapter 13 bankruptcy and immediately borrow money at high interest rates to buy a car. We know that it has been hard paying the Chapter 13 plan for 3-5 years without being able to buy a new vehicle but waiting just a few months could have huge benefits. First, if you want to refinance or buy a home after bankruptcy then getting into a high interest car payment can be disastrous. Mortgage qualifications are based on your total debt compared to your income or Debt-to-Income Ratio (DTI). If clients take on a large car payment then sometimes it can raise their DTI above acceptable limits. Therefore, we recommend that clients reach out for a mortgage before financing a new car. Second, if a little work is done to raise your credit score after bankruptcy, you can likely get a much lower rate on a car loan. By improving your credit score you can potentially save a large amount money over the life of your car loan.
Beware of Hard-Money Lenders for Mortgages
Many people coming out of Chapter 13 bankruptcy end up contacting hard-money lenders without realizing that they can qualify for lower cost, lower rate mortgages. There are several possible programs including USDA, VA, and FHA loans that can serve as a more viable option. Hard-money lenders often have high rates, and less favorable terms than government home loan programs. It is always best to contact a mortgage lender that has great options first to see if you qualify.