Bankruptcy on Your Credit Report?
Lenders May Love It!
If you have a bankruptcy on your credit report, don't despair; you're certainly not alone. Over the last couple of decades, millions of people have declared bankruptcy for medical expenses; rising adjustable-rate mortgage payments; the effects that record foreclosures had on the value of their homes; and countless other reasons.
New bankruptcy laws have changed the process of securing loans after bankruptcy as well as the impact that a bankruptcy has on your credit score and credit history. But no matter how grim your financial situation may be after a bankruptcy, the business of life continues. One of your first priorities should be slowly rebuilding your credit score.
The impact of a bankruptcy on your credit report
As you might expect, a bankruptcy will have a negative effect on your credit score. If you apply for loans after bankruptcy, you can expect to pay a higher rate of interest, because you'll be viewed as a higher credit risk for a while. Also, unlike bankruptcies in the past, which discharged some types of debts, new bankruptcy laws stipulate that most debts will continue to count against your credit score until they've been reconciled. Depending on whether you filed a Chapter 7 or Chapter 13 bankruptcy, you can expect the bankruptcy to stay on your credit report for an average of seven to ten years.
There's good news, though: Prospective lenders tend to focus mostly on the last 12 to 24 months of a person's credit history. If your credit report shows that you've taken steps to rebuild your credit score and have managed your recent credit responsibly since your bankruptcy, it will eventually get easier to borrow money again at lower interest rates.
Secured loans can help you rebuild your credit after bankruptcy
Although you may be reluctant to take out a secured loan after bankruptcy, doing so is actually a good first step toward rebuilding a solid credit history. From a lender's perspective, a secured loan like a car loan or home loan will be easier to grant, since the lender will have collateral to collect in the event that you default.
Lenders are generally conservative by nature, so they'll offset the additional risk by charging you a higher interest rate. They'll earn a higher commission on the loan, a benefit for them; you can regard the additional expense as a necessary evil to help you rebuild and restore your credit history. After two or three years of steady and timely payments, you may be able to have your loan refinanced with more favorable terms.
Recovering from a bankruptcy on your credit report will take time, and you can expect to pay more to borrow money. However, if you make your payments on time and use your available credit responsibly, your credit report will show that you've taken steps to put your financial affairs in order. Measured efforts to fix your financial problems and practice better money management habits can help you turn a negative into a positive and rebuild your standing in the eyes of lenders.
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