Whether you lost your job, suffered a serious illness or just overspent because you were young and dumb, the end result is the same: your credit is trashed. Filing for bankruptcy can relieve you of much, if not all of your credit burden, but in exchange, you will have a huge black mark on your credit report for the next ten years. Even without filing for bankruptcy, if you have a foreclosure, charged-off credit cards or other serious delinquencies, you’re still in bad shape – for now.
Although you may believe that you will never have good or even decent credit again, time is on your side. Lenders and creditors care more about how you handle credit now than how you mishandled it in the past. By taking proactive measures and handling your finances responsibly going forward, you can begin to restore your credit within a year or so.
Secured and Unsecured Loans
Obtaining credit when your credit is bad can be a Catch-22. One way out of the dilemma is to take a small loan from your bank or credit union. Repaying the loan will begin to establish a positive credit history. If you have been a good customer for several years, you may be able to persuade your bank or credit union to make the loan based on your past business dealings. However, if not, all is not lost. Purchase a CD from the bank or credit union, and then apply for a loan using the CD as collateral for the loan. You’ll receive a double benefit – repaying the loan will improve your credit, plus you’ll earn money on the funds in your CD.
Secured Versus Unsecured Credit Cards
An ironic aspect of declaring bankruptcy is that you may start receiving offers in the mail for car loans and even credit cards soon after you obtain a discharge for your case. While it’s understandable that you want to re-establish your financial standing as soon as possible, it’s not a good idea to jump back into debt. If you need a new car, shop around for the most favorable financing, which probably won’t be from one of those offers you received in the mail, which often feature high interest rates and may be loaded with fees.
The same cautions also apply to credit cards. Avoid unsecured credit cards with sky-high interest rates, steep monthly charges and hefty application fees that can leave you with little or no available credit. Secured cards that report to the three major credit reporting agencies (Experian, Equifax and TransUnion) are a much better choice. Read the fine print to ensure that your secured funds are placed in a bank account in your name in an institution backed by the FDIC. The best secured cards offer the option of obtaining credit limit increases without making additional deposits after you have handled the account responsibly for six months or so.
Start Slowly, Build Steadily
More than likely, your credit has been on a downhill slide for awhile. You will also need to exercise patience while you rebuild your credit. However, by acquiring credit prudently and handling your accounts responsibly, your financial picture will eventually improve, and you will be able to obtain credit on favorable terms once more.
Photo: EJP Photo
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.