Avoid the Potholes on Your Road to Recovery
You’re on the road to recovery. You’ve declared bankruptcy. You’ve received your discharge of debt. You’re starting with a clean slate. You’re considering your options for new credit accounts post-bankruptcy. You’ve picked a few, and you’ve been approved and have your account information. What should you do now? Believe it or not, you’ve already done a fair amount of the legwork. You’re on the road and you’re pointed in the right direction. Now you simply have to keep going and avoid some of the potholes along the way.
Common “Potholes” in the Road to Recovery: Creating Good Credit After Bankruptcy
- You’ve Got Credit, But You’re Not USING it! One of the most common mistakes bankruptcy filers made after bankruptcy during their credit recovery period is NOT using credit once they get it. The intentions are good – they want to avoid ending up in a difficult situation, but the entire point of obtaining credit accounts post-bankruptcy is to create a positive history of use and on time payments that can then be reported to the credit reporting agencies and serve as a counter to the negative reports already reflecting against your credit. You have to show that you can rebuild and that you aren’t afraid to use credit again. Using credit is what will help you achieve the highest possible credit score. And in a worst-case scenario, the lender could even close the account due to non-use. Then the account would eventually drop off your credit report altogether and be no help whatsoever. The best practice is to use the accounts each month and then pay them off in full. This is the fastest way to reach the 720 credit score goal.
- Finance Companies: Avoid them – they are not your friends. Finance companies are typically the ones offering the high interest rate, high fee loans that you should be doing your best to avoid. Finance accounts are the only type of credit that will hurt your credit score. Instead, focus on obtaining credit through banks and credit unions.
- Cosigning: Avoid cosigning! Piggybacking your credit with someone else might seem like a good idea right after you’ve filed for bankruptcy, but you can build a positive credit history without the additional risk cosigning ALWAYS represents. The person you piggyback with may have better credit than you in the moment after you receive your discharge of debt through bankruptcy, but they could be fated for financial problems in the future. It’s always better to reestablish your credit without relying on someone else’s credit.
- Balance Transfer Shell Game: In the past, you may have played what we like to refer to as the “Balance Transfer Shell Game.” That’s the sometimes exciting activity of taking a balance from one card, transferring it to another existing card or opening a new line of credit and transferring the balance of an older account. Attempt to avoid this “game” in the future. Too often, one of the two lenders could lower your credit limit once the transaction is completed. This would impact your credit score because the balance-to-credit ratio would increase. In addition, opening up that new account to transfer a balance ends up hitting your credit twice, once as a new inquiry and a second time as a new tradeline with a short credit history.
- Debt Consolidation Loans: They sound good, but they often end up having a negative impact on your plan to recover your good credit post-bankruptcy. Consolidating debt frees up credit lines and often results simply…in more debt.
- Pre-approved Offers: You will get pre-approved offers. Consider them with caution. They are often deceptive. Confirm the terms and offers prior to allowing the lender to review your credit.
If you have other questions about life after bankruptcy or how to manage your bankruptcy, please get in touch with one of the experienced southern California bankruptcy attorneys at Westgate Law so we can assist you.