finance

Boosting your post-bankruptcy credit score

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
Why should I care about a bankruptcy on my credit report? Six years after being discharged, my credit score is 736. Does it still make a difference?
-- Sharon

a_v2.gifDear Sharon,
This is a great question. You may have "ghost credit," and I'll get more into that in a minute, but first things first: Congratulations! I have no doubt your improved credit score is the result of hard work. There is more you can do to improve your credit and I hope this article will give you, and everyone else in similar situations, a few ideas.

You should always care about every mark on your credit report. When a lender is deciding whether to give you access to their money, they rarely make a mistake by saying, "No." "No" is their default answer and anything that leads them down the path to saying "no" is worthy of concern.

However, once you've done everything you can do, let it go. Because bankruptcy information stays on your credit report for 10 years, you have four years to go before the bankruptcy mark can be removed.

During those 10 years, there are negative consequences to having this mark on your report.

Consequences of bankruptcy:
  • Some banks may refuse your credit card application or demand a higher rate.
  • Some credit underwriters may discriminate against you if you apply for a home mortgage or car loan.
  • Many unsecured credit card companies may not increase your credit limit as rapidly as you might like.
  • Prospective employers may discriminate against your employment application.

Now, let's talk about "ghost credit." You may have it and there's not much you can do about it, but you should at least know what it is. Four years from now, Sharon, your credit report will be squeaky clean, but it won't go back before your bankruptcy. In other words, your credit history will only be 10 years old. Negative but accurate information comes off credit reports, but positive accurate information stays on forever, so people who have not declared bankruptcy have credit reports that look different than yours.

Underwriters looking at your loan application may take into account your "ghost credit." That is, the underwriters will ask themselves, "what happened to Sharon before these 10 years?" Of course, it's none of their business, and in the scheme of things, it's not nearly as important as what has happened recently (which is reflected in your credit score). However, underwriters are careful people and they would prefer a positive credit history of long standing over a positive credit history of comparatively short standings and ghost credit. This is not something to worry about, because you cannot go back in time, but it is worth understanding.

Here are some ideas for how you can accelerate the restoration of your credit and squeeze some extra advantages out of the system:

If you haven't already done so, make sure you have accounts with major banks. Many times after bankruptcy, people must get credit cards and loans from less well know financial institutions. Once you've held some of these cards for a while, if possible, switch over to accounts with big banks. The reason is when they say "yes," their affirmations carry more weight.

If you have a car loan, consider refinancing it. If you bought a car with a four- to six-year payment plan and your credit score has improved at all, you could qualify for interest rate and payment decreases.

If you haven't asked for an increase of your credit limit in a while, do so. The formula for determining your credit score depends on how much credit you have available. For example, you may be eligible to have your credit limit extended from $3,000 to $8,000. That extra $5,000 increases your credit availability, and that could help your credit score.

If you know how, take a look at your report at least once a year or work with someone who can. Improving and maintaining your credit is a lifelong endeavor and every detail counts.

To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "bankruptcy" as the topic.

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