Below I am going to discuss guaranteed ways to rebuild credit for free after bankruptcy. When I say free, I specifically mean that you can rebuild credit while paying 0% interest. It is widely believed that the way you improve bad credit it to borrow money and pay it back without missing a payment.
The problem with this idea is that you are using a loan to rebuild credit instead of rebuilding credit first. You put the cart before the horse so you pay extremely high interest rates – think 18% – 22%. In another post I gave an example of how much you would pay on on a $15,500 vehicle financed for 22.99% interest at 60 months. You’ll have to click the link to see how much but you will be shocked.
Read this next sentence as many times as it takes: Do NOT finance a vehicle to build a good credit score. If you need to finance a car because you have no choice – fine. But you will be paying thousands of dollars to raise your credit and it will take years.
Your credit score is a mix of five ingredients
Payment history is the first and largest component of your credit score. It makes up about 35% of your total score. Your score will suffer if you make payments late, skip payments or have accounts in collection. Filing bankruptcy will also hurt your credit score.
Debt utilization is the second largest factor when calculating your credit score (about 30%). Often expressed as a percentage of your level of indebtedness versus your available credit. The key is to stay on top of your spending and keep your balances below 30% of your available credit limit. For example, if you have a credit limit of $2,000, try to keep your balance under $600. A low credit utilization percentage indicates to lenders that you will repay what you borrow.
The third component of your credit score is the age of your credit (about 15%). To have a good credit history you have to have a track record of responsible borrowing. You can’t fix this overnight because it is based on time. But you can follow my advice below and get the clock ticking in your favor.
The fourth major component of your credit score is credit mix (10%). A good credit mix has both installment and revolving credit. Installment credit generally has a scheduled monthly payment for a fixed amount. The most common are car loans, student loans and mortgages. Revolving credit is a line of credit the borrow has access to when needed. The credit revolves, or renews as the debt is paid. The most common are credit cards.
The fifth and final component of your credit score is New Credit, or recently opened accounts (10%). Your score will suffer if you open several accounts in a short amount of time.
The first thing you should do after filing bankruptcy is arm yourself with knowledge. Set up a free account with Credit Karma or with TransUnion, Experian or Equifax. My favorite place to get a free credit report for all three bureaus is AnnualCreditReport.com. I also really like Credit Karma because of the convenience and you can check your TransUnion and Equifax credit reports for both score and account updates as often as you want for free.
It is extremely important to use that credit card for no other accounts. You can also use this trick on other bills that have a fixed monthly amount.
This is a common myth – that you must carry a balance, and thus pay interest to build credit. This myth arises from the idea that if you pay off your credit card every month it will look like an unused account. It is true that not using a credit card will show $0 and do nothing to improve credit.
When you use a credit card, you are taking a loan out with the credit card company. Actively using the account, and paying it off on or prior to the due date to avoid interest shows you are trustworthy. Your credit report will show a balance of $0, BUT, your payment will also be reported in the payment history.
So, if your cell phone is $50 per month, your credit report will show a monthly payment of $50 per month and a balance of ZERO. You will quickly rebuild your credit score and be eligible for the best interest rates available.
If you have questions about Guaranteed Ways To Rebuild Credit For Free After Bankruptcy, please give us a call at 785-379-3600 for a FREE Consultation over the phone, in person or you can email us now.