Life After Bankruptcy
Credit After Bankruptcy
Many people who file for bankruptcy protection have an understandable aversion to credit when it's over. It might seem that if you stick to cash, you "can't get into trouble again", and in a sense that's a very reasonable position.
You definitely don't want to risk late payments and climbing credit card balances after bankruptcy for a number of reasons. The combination of bankruptcy and new delinquent items on your credit report will take a severe toll on your credit score. Further, you won't have the safety net of being able to discharge debts in bankruptcy again for quite some time, so your options are more limited if you do get into a financial bind.
However, having credit and having credit problems don't have to go hand in hand. Managing credit wisely is an important part of your financial recovery. Using cash for your day-to-day expenses is wise and will help keep things clear as you work out your new budget.
So Why are We Even Talking about Credit after Bankruptcy?
Good question. You already know that credit can be risky, and you've probably learned that you can expect to pay higher interest rates shortly after filing bankruptcy, so why would you want to apply for new credit at all?
The simple answer is that certain purchases in our society virtually require credit. It's unlikely, for example, that you will ever purchase a home with cash. Even a smaller purchase, like a new vehicle, may require financing. After bankruptcy, you may feel that that smart thing to do is avoid credit until you really need it, and to restrict your credit to the big-ticket items that really require it.
Unfortunately, lenders aren't likely to cooperate with your plan.
You Need Credit to Get Credit
If you're planning to go a couple of years without credit and then finance a house or a car when your finances have been stable for a while, you may be in for a surprise. The problem is, there won't be any record of your newly stable finances. If you want a loan from a reputable mortgage or auto finance company, the lender will want to see that you've demonstrated good financial management since your bankruptcy.
They'll look to your credit report, and if you haven't used credit since your bankruptcy, they won't see anything there except the bankruptcy! You might feel that you've proven yourself by living successfully on cash for two or three years, but by your lenders' standards those two or three years won't exist at all. Your credit score won't reflect anything except your bankruptcy.
In order to improve your credit score and make yourself a good candidate for a mortgage or car loan at a reasonable interest rate, you'll likely want to begin immediately to rebuild your credit.
Here are some tips on how to avoid common post-bankruptcy credit pitfalls.