If you've been through a major financial storm like bankruptcy, it's pretty likely your credit scores have taken a beating. Though time will "heal" a lot of the damage on its own, there's still a lot you can do to help things along. The following are some simple steps you can take to help rebuild your credit faster and make it much easier to qualify for a new mortgage sooner.
1) Make all payments on time. This is a pretty obvious one, but it's worth mentioning because it's so important. If you went through bankruptcy, mortgage lenders will want to see that you've developed good habits since then. Even missing a payment here or there could jeopardize your ability to qualify for a new loan even if your credit profile is otherwise pretty good. Make sure you send in your payments well before the due date so they are posted on time.
2) Apply for a secured credit card. If you've just gotten out of bankruptcy, you probably don't have an open credit card and lenders probably won't want to give you one. Secured credit cards are great because they're easy to get and are backed by your own money on deposit with the credit card issuer. They work just like a regular credit card and can be used to build a good payment history.
3) Check your report on a regular basis and clear up any mistakes or inaccuracies promptly. Federal law entitles you to a free credit report annually from AnnualCreditReport.com, but it's a good idea to check your credit on a more regular basis. Be sure you pull data from all three major reporting agencies: TransUnion, Equifax, and Experian. If you find errors, be sure to contact the credit bureau reporting the offending account to get it cleared up as soon as possible.
4) Clear up any collections and charge offs. Even if all your debt was wiped out in the bankruptcy, it's not uncommon for derogatory accounts to hang around long afterwards in the form of collections and charge offs. Even if very little is owed, they can still damage your credit scores and make it tough to get a mortgage. You often can negotiate the balances for pennies on the dollar, but be sure to get any agreement in writing before sending in the payment.
5) Keep revolving account balances below 30% of the credit limit. If you carry large balances on your credit cards, the credit bureaus may see you as "maxed out" and rate down your scores, even if you never miss a payment. It's important to keep your balances below 30% of your available credit limits at all times.
6) Make your HELOC is reporting as a mortgage debt. If your home equity loan is reporting as a revolving debt and you have a high balance, it could be damaging your scores for the reason mentioned in the previous point.
7) Keep open a few older credit cards. If you still have a few old credit card accounts, keep them open and use them occasionally. The reporting agencies like to see long credit histories, so don't damage your scores by needlessly getting rid of old accounts.
8) Do not cosign. We'll say that again: do not cosign. Trying to cosign right after bankruptcy is probably an exercise in futility anyway, but down the road when your scores are rebounding, one bad cosigning decision can ruin years of hard work rebuilding credit. And don't forget that you're legally obligated on cosigned debts, so the lender can come after you for any outstanding balance.
One thing worth noting is that derogatory credit items such as charge offs and collections will stay on your credit for seven years even if they have a zero balance. But as time passes, the negative impact on your scores will decrease. Bankruptcies stay on your record for 10 years.
We also want to note the importance of living well within your means as you rebuild your credit. Sure, you need to use debt to rebuild your payment history, but use it wisely. Don't borrow unless you really need to, and don't borrow any more than you can repay easily and in a short period of time.
Though the above tips will help speed things along, it's important to understand that there is no quick fix. However, with a little effort and a little time, you can get your credit back to where it needs to be and more easily qualify for a great mortgage.
1) Make all payments on time. This is a pretty obvious one, but it's worth mentioning because it's so important. If you went through bankruptcy, mortgage lenders will want to see that you've developed good habits since then. Even missing a payment here or there could jeopardize your ability to qualify for a new loan even if your credit profile is otherwise pretty good. Make sure you send in your payments well before the due date so they are posted on time.
2) Apply for a secured credit card. If you've just gotten out of bankruptcy, you probably don't have an open credit card and lenders probably won't want to give you one. Secured credit cards are great because they're easy to get and are backed by your own money on deposit with the credit card issuer. They work just like a regular credit card and can be used to build a good payment history.
3) Check your report on a regular basis and clear up any mistakes or inaccuracies promptly. Federal law entitles you to a free credit report annually from AnnualCreditReport.com, but it's a good idea to check your credit on a more regular basis. Be sure you pull data from all three major reporting agencies: TransUnion, Equifax, and Experian. If you find errors, be sure to contact the credit bureau reporting the offending account to get it cleared up as soon as possible.
4) Clear up any collections and charge offs. Even if all your debt was wiped out in the bankruptcy, it's not uncommon for derogatory accounts to hang around long afterwards in the form of collections and charge offs. Even if very little is owed, they can still damage your credit scores and make it tough to get a mortgage. You often can negotiate the balances for pennies on the dollar, but be sure to get any agreement in writing before sending in the payment.
5) Keep revolving account balances below 30% of the credit limit. If you carry large balances on your credit cards, the credit bureaus may see you as "maxed out" and rate down your scores, even if you never miss a payment. It's important to keep your balances below 30% of your available credit limits at all times.
6) Make your HELOC is reporting as a mortgage debt. If your home equity loan is reporting as a revolving debt and you have a high balance, it could be damaging your scores for the reason mentioned in the previous point.
7) Keep open a few older credit cards. If you still have a few old credit card accounts, keep them open and use them occasionally. The reporting agencies like to see long credit histories, so don't damage your scores by needlessly getting rid of old accounts.
8) Do not cosign. We'll say that again: do not cosign. Trying to cosign right after bankruptcy is probably an exercise in futility anyway, but down the road when your scores are rebounding, one bad cosigning decision can ruin years of hard work rebuilding credit. And don't forget that you're legally obligated on cosigned debts, so the lender can come after you for any outstanding balance.
One thing worth noting is that derogatory credit items such as charge offs and collections will stay on your credit for seven years even if they have a zero balance. But as time passes, the negative impact on your scores will decrease. Bankruptcies stay on your record for 10 years.
We also want to note the importance of living well within your means as you rebuild your credit. Sure, you need to use debt to rebuild your payment history, but use it wisely. Don't borrow unless you really need to, and don't borrow any more than you can repay easily and in a short period of time.
Though the above tips will help speed things along, it's important to understand that there is no quick fix. However, with a little effort and a little time, you can get your credit back to where it needs to be and more easily qualify for a great mortgage.
About the Author:
Have a recent foreclosure or bankruptcy? Wanting to buy a house or refinance? Find out how soon you can get a new mortgage after bankruptcy or foreclosure.
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