5 Necessary Steps to Repair Your Credit After Bankruptcy
Bankruptcy is a fair, legal solution for Canadians who are overburdened with debt and have no other way out. However, it also negatively impacts creditworthiness for years, making it difficult to regroup financially. There are some moves that savvy individuals can make to recover from bankruptcy quickly, rebuild their credit, and regain lenders’ trust.
1. Open a New Chequing and Savings Account
Opening new chequing and savings accounts can help recently-bankrupted individuals start off on the right foot, and begin sound, long-term financial planning. The right account(s) should minimize monthly banking fees and generate meaningful levels of interest on earnings.
A simple, practical chequing account that GreedyRates recommends is Scotiabank’s Basic Banking. It gives customers with nominal banking needs a way to pay bills automatically and engage in up to 12 teller transactions a month. Its monthly fee of $3.95 is low compared to other chequing account options.
Scotia has a practical savings account for post-bankruptcy customers, as well. The Momentum Plus Savings account incentivizes financial discipline while simultaneously building up savings. Interest rates between 0.7-1.6% are awarded to account-holders that refrain from withdrawals for 90, 180, 270 and 360-day periods.
2. Make a Habit of Paying All Bills on Time
Erasing debt through bankruptcy unfortunately won’t permanently stop bills from coming your way, and after filing for bankruptcy it becomes even more important to pay incoming bills promptly. By organizing and tracking all regular expenses like utilities, internet, and phone bills, customers can pay their obligations on time and rebuild credit. This will not reflect on a credit score immediately, but will gradually build a healthy credit history.
3. Get a Secured Credit Card
It’s estimated that bankruptcy can rip up to 240 points off credit scores, making it unrealistic to be approved for most regular, unsecured credit cards. But those who have recently filed for bankruptcy need to use credit cards in some form in order to rebuild credit, seemingly creating a Catch-22. Secured credit cards can be a godsend in this situation.
For a secured card issuer like Home Trust, weaker credit does not affect chances of approval. With the Secured Mastercard, cardholders can make a small deposit (min. $500) and obtain an equivalent credit limit. Responsible use (and repayment) within that credit limit is reported promptly to credit bureaus, repairing credit scores. The Home Trust Secured Visa Low-Rate card comes with a reasonable $59 annual fee and a 14.9% interest rate on purchases.
4. Make Affordable Purchases Only, No Exceptions
With access to credit cards and bank accounts, it might be tempting to fall into old habits. Splitting unnecessary or large purchases into multiple payments, using payday loans, or waiting until credit is maxed out before seeking help are risky financial practices. Use this fresh start as an opportunity to develop new, more responsible habits and to always keep them in mind when shopping.
5. Apply for New Credit Cards
After using a secured credit card, demonstrating new financial habits, and building up your credit score, the next step is to begin researching options for an unsecured card. When considering card options, keep in mind that the card issuers might have strict bankruptcy eligibility conditions, requiring card applicants to be bankruptcy-free for a certain number of years before approval. Not reading the fine print before applying for an unsecured card risks a denied application, which further hurts credit. However, take note that many modern lenders are surprisingly lenient with previous bankruptcies. American Express, for instance, previously required applicants to be bankruptcy-free for seven years prior to application. This policy has now been reduced to two years.
When applying for unsecured cards, focus on cards with low interest rates and annual fees, as well as flexibility for applicants on their road to financial recovery. We recommend the MBNA TrueLine MasterCard, which offers rates ranging from 5.99-14.99% (depending on your credit score) and no annual fee at all. Another excellent option is the Essential card from AmEx, with 8.99% interest and a balance transfer promotion for 1.99% over the first six months.
Those with a rocky financial history can wipe the slate clean by developing new financial habits, seeking out beneficial bank accounts, and accessing helpful tools like secured credit cards. While it may take years to erase a bankruptcy, it should never be considered a curse, but rather a fresh start.