Though bankruptcy can be the best way to get out from under a mountain of debt, it can wreak havoc on a filer's credit rating. While it does take an average of seven years for a bankruptcy filing to no longer appear on a credit report, many steps can be taken before then to start rebuilding good credit.
Why Worry About Rebuilding?
Credit ratings make the world go round. They affect nearly all aspects of modern life, influencing everything from home purchases to education expenses and car loans to job offers. High credit scores can open doors to lower interest rates and an increased likelihood that credit will be extended.
Low credit scores, on the other hand, can slam those same doors shut. People with low credit scores (below 500) will have a hard time convincing a lender to take a chance on them, costing them valuable housing, educational and business opportunities. A low credit score can even prevent an employer from extending a job offer to an applicant. It will also result in higher interest rates from those lenders willing to take a chance and extend credit; people with low credit ratings pay an average of 30 to 40 percent more per month in interest charges compared to those with higher credit ratings.
Steps to Rebuild
Rebuilding credit cannot happen in a vacuum. Before you can make changes to a credit report, you must know what is on it - get a copy of your credit report from a reputable credit rating agency like Equifax, TransUnion or Experian.
After receiving it, go through it with a fine-toothed comb, paying special attention to any negative entries. In today's digital society, identity theft is an increasingly serious issue, and oftentimes the first indication that a person's identity has been stolen is a mysterious entry on a credit report. There are also old-fashioned issues like people with similar names (i.e. "Jon Smith" instead of "John Smith") or transposed social security numbers resulting in incorrect information being reported to a credit rating agency. Having the improper information cleared can easily boost a credit score by dozens of points.
Contrary to popular belief, closing accounts is not helpful for your credit rating. In fact, that simple action can actually lower your score significantly because it sharply decreases the amount of credit you have at your disposal.
Paying bills - even monthly expenses like utilities - on time is crucial to maintaining a clean credit history. Payment history can make up as much as 35 percent of a person's credit rating, so any negative activity here can be extremely detrimental.
Other actions, like opening a secured line of credit and making several small payments a month instead of one big one on open credit accounts, can also go a long way toward repairing a credit rating deflated by bankruptcy. Only you can decide if the benefits of bankruptcy outweigh the potential negative effects it can have. If you are considering a bankruptcy filing, consider speaking with an experienced bankruptcy attorney in your area to learn more about your debt management options.