When the Sasser Law Firm works with individuals and businesses who seek bankruptcy protection, the goal is for the client to emerge from bankruptcy in stronger financial health. In addition to discharging some debt, you need to reestablish your ability to handle credit responsibly. Your credit score will take a hit when you file for bankruptcy. Paying your bills on time can help rebuild your credit score.
A good credit score can help you obtain lower interest rates on large loans such as a mortgage or car loan and save thousands of dollars over the life of a loan. Your credit score also may determine the size of an initial deposit necessary to obtain such necessities as utilities, telephone service, cable television or a deposit on an apartment.
Here are five steps for improving your credit score:
Get Your Credit Score Report and Know What It Means
The three major credit reporting agencies in the U.S. — Experian, Equifax and TransUnion — develop credit reports for each American consumer. The agencies’ reports differ slightly. But they control how creditors see you as a credit risk.
Under the Fair Credit Reporting Act, you can get one free copy of your report each year from each credit bureau. Get all three now if you haven’t already this year and, starting next year, put a schedule on your calendar to get one of them every four months.
Each agency scores credit ratings a bit differently, but they are all based on the FICO score system, which considers payment history, accounts owed, length of credit history, newly obtained credit and credit mix. Scores range from 850 to 300, with relative values of:
- Excellent: 750 and above
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Bad: 550 and below.
In general, a score below 650 will adversely affect your interest rates or your ability to obtain credit.
Review your reports, and if you find a mistake, contact the appropriate bureau to dispute the error. If the error is on multiple reports, you’ll have to contact each bureau to make sure your credit score is correct.
Pay Your Bills on Time
If paying your bills was not a problem, you wouldn’t need bankruptcy protection. For your credit to improve, you will need to establish a history of paying your debts on a regular basis.
Paying debt is what appeals to creditors most of all. Six months of on-time payments is required to see a noticeable difference in your credit score. This includes all accounts: loans, credit cards and recurring expenses such as utilities. Set up automatic bill payments with your bank if possible.
If you cannot make your required payments, contact creditors and ask about lowering monthly payments. This will cost you more in the long run, but right now the objective is establishing a track record of making on-time payments. If you miss a payment, call the creditor immediately to explain and make things right.
Pay Down Credit Cards
Having multiple credit cards with large balances is a credit score killer. Concentrate on paying down this debt. You must pay more than the minimum to get ahead.
If you cannot pay off each balance, you want to reduce the debt on each card to 30 percent or less of the available credit limit. Consolidate high-interest debt by transferring it to a single credit card that has better terms.
Pay off any credit card you can as soon as you can. Then, target the card with the highest balance and make an extra effort to reduce or eliminate that debt.
Once you pay off a card, do not close the account. Closing accounts does not help your credit score and can actually damage it.
Diversify and Strengthen Your Credit History
Having different types of credit and new credit accounts helps raise your credit score, as long as you make payments on time. A good mix includes credit cards and installment loans, such as mortgages, car loans and student loans, as well as utility accounts.
If you have never had a credit card, you need to open a credit card account. Use it to run up small balances you know you can pay off each month, such as something you regularly buy with a bank debit card. The credit charges and your prompt payments will be reported to the credit bureaus and make you look good.
Instantly Increase Your Credit Age
Becoming an authorized user on an established credit card account allows you to benefit from another cardholder’s good credit history. Of course, it requires cooperation by someone with a good credit history who will add you as an authorized user on a credit card, usually a family member. Meanwhile, your credit history has no effect on the cardholder’s.
Becoming an authorized user on a credit card that has been used in good standing for at least five years could increase the official record of:
- The number of years you have held credit.
- The average age of credit cards you use.
- Your credit utilization, or the amount of credit available to you.
Each factor will have a positive impact on your credit score.
The downside of this arrangement is that if the cardholder has a bad credit history, yours will be damaged further. If either one of you, or your combined spending, runs up the balance to the point that the cardholder begins to miss payments, this will hurt both of your credit scores.
Sasser Law Bankruptcy Lawyers Can Help
The North Carolina bankruptcy attorneys at the Sasser Law Firm are all board-certified specialists in bankruptcy law. We work with people confronting financial difficulties in Cary, Apex, Raleigh, and throughout the Triangle to help them take the steps necessary to get back on firm financial footing. If you have financial problems that could lead to bankruptcy, contact the Sasser Law Firm today for a free consultation.