Knowledgeable Long Island Attorney Advises Clients on Rebuilding Credit After Bankruptcy
Prudent, patient steps can improve your credit score faster than you think
If you have declared personal bankruptcy, your credit score is going to be adversely affected. But as alarming as that may seem, your credit can rebound more quickly than you might expect. In fact, consumers who declare bankruptcy generally raise their credit score faster than those who remain mired in debt that they can never hope to pay off. At The Law Office of Andrew M. Doktofsky, P.C. in Huntington, I help Long Island clients overcome debt through Chapter 7 or Chapter 13 bankruptcy. While the bankruptcy process offers a fresh start, it is also essential that you take the steps necessary to rebuild your credit, so that you are starting over on a firm foundation.
The importance of reestablishing credit
Many people who file for bankruptcy are afraid to start using credit again — an understandable reaction given the circumstances that led to their debt problems in the first place. But, realistically, abstaining from the use of credit puts consumers at a financial disadvantage. A poor credit score hurts you when you apply for a job, look for an apartment, or try to buy a car. Basic necessities are either out of reach or more expensive for you than they are for the buyer with better credit. It may sound counterintuitive now, but credit is an important tool for paying less and saving more in the long run. To make credit work for you, you need to understand how it works and use it wisely.
The factors that make up your credit score
A FICO score, named for the company that developed it, is a credit rating that measures consumer creditworthiness based on five factors:
- Payment history — This counts for about 35 percent of your credit score. After bankruptcy, your payment history is negative because you have essentially defaulted on your debts. From this step forward, you need to make timely payments on all your bills.
- Current level of indebtedness — This second most important factor counts for about 30 percent of your score. If you filed Chapter 7, your dischargeable debts are gone, but you may still have student loans, past taxes and other nondischargeable debt to pay off. If you filed Chapter 13, you must complete your payment plan before the court discharges your debt. At that point, your score should reflect your lower level of indebtedness.
- Length of credit history — This measurement indicates you have shown yourself to be a good risk over a long period of time, but when you are emerging from bankruptcy, you are starting over at square one. This factor is worth 15 percent of your score.
- Types of credit used — Rating agencies like to see a mix of different sources, such as car loans, retail credit cards, bank credit cards, and mortgages. Your credit mix amounts to about 10 percent of your score.
- New credit accounts — Opening too many new accounts too quickly raises red flags for credit rating companies and lowers your score. This factor also counts for about 10 percent of your score.
When you know what credit rating agencies are looking at, you can develop a plan to build a creditworthy profile.
Steps you can take to rebuild credit after bankruptcy
When rebuilding credit, it is important to remember that it is a process of incremental growth over time. To see steady improvement in your score, you must:
- Pay all your bills on time — Mark your recurring bills on your calendar. Whenever possible, use automatic payments to meet deadlines. Not only will your score improve, but you will also avoid late fees.
- Develop a budget — Account for all your monthly expenses. Make sure you budget for savings, both for the long term and for emergencies.
- Open some new accounts — If you closed your checking and savings accounts, open new ones. As for borrowing, start small with a secured credit card from your bank. In time you can try getting a retail credit card.
- Use credit as an alternative to cash, not as a replacement — When you start using a credit card again, it is important to be disciplined and prudent. Avoid purchases that you could not cover if you had to with the cash you have at hand. Use your credit card for convenience, so you do not have to carry cash — rather than because you do not have the cash to begin with.
- Monitor your credit scores — You are entitled to receive free copies of your credit report annually from each of the three largest credit reporting agencies: TransUnion, Equifax and Experian. You can also request a report within 60 days of being denied credit. Check the data on your report to make sure it is accurate.
- Dispute errors on your credit score — Errors on your credit report can significantly hurt your credit. If you find an error, report it to the company immediately. If the company does not respond satisfactorily, consult an attorney regarding your rights under the Fair Credit Reporting Act.
As long as you develop a sound plan and stick to it, your credit score will improve. Sooner than you think, your credit will be good enough to buy a new car or even take out a mortgage on a new home.
Contact a knowledgeable Long Island bankruptcy lawyer for help rebuilding credit
The Law Office of Andrew M. Doktofsky, P.C. represents clients in Nassau and Suffolk counties, and New York City, in bankruptcy and debt relief matters. Please call 631-812-7020 or contact me online to schedule a free initial consultation at my Huntington office.