How To Rebuild Credit After Financial Hardship?

Hands holding credit card at computer

Several clients ask us how they can build up their credit score. Some want to increase their score because they recently filed for bankruptcy while others aim to increase their score because they were temporarily unemployed. Credit scores are important whenever an individual wishes to buy a house, car, or incur debt. A credit score is a number assigned to a person that indicates to lenders their capacity to repay a loan. Whatever the reason may be, it is possible and very important to improve your credit score.

What Is A Credit Score And Why Is It Important?

A credit score is a number that can range from 300-850 and is an indicator to lenders of how financially safe you are. A high credit score is important because banks, credit card companies, car dealerships and many others will look at your score to see if they want to lend you money and at what interest rate they are willing to offer. A credit score can also be important when you are applying for a new job or new apartment. The credit score tells these new landlords and employers how financially dependable you are. A better credit score will save you thousands of dollars in interest and will open the door to more financing options.

What Is A Good Credit Score?

When reviewing your credit score, the higher the number the better the score. The scores go as follows: A score from 300-579 is considered very poor; a score from 580-669 is considered fair; a score of 670-739 is considered good; a score of 740-799 is considered very good; and a score of 800-850 is considered exceptional. The higher the score the better rate you will get when applying for loans or any form of credit. A person with a credit score of 850 will get far better interest rates compared to a person who has a credit score of 400. Take a look at the example below to see how different credit scores affect your interest rate and how much you will pay over the life of a loan.

EXAMPLE: As an example, let's pretend we have two different people who are attempting to get a $10,000 loan at the same bank with a 5-year repayment plan. Let's pretend person "Y" has a credit score of 800 and person "X" has a credit score of 400. Person "Y" will likely be offered an interest rate between 3-5% while person "X" will likely be offered an interest rate between 12-17%. With an interest rate of 3%, person "Y" will pay roughly $800.00 in interest throughout the life of the loan. On the other hand with an interest rate of 15%, person "x" will pay roughly $4,300.00 in interest throughout the life of the loan. Even though person "X" and person "Y" are both only taking out the same $10,000 loan, person "X" is paying $3,500 more in interest just because their credit score is 400 vs 800. The question now is who would you rather be? This is the value of a good credit score. 

How Can I Fix My Credit?

The best way to rebuild your credit is by making good financial decisions. These good decisions include; getting a credit card and paying it off on time; paying your monthly bills like heating/electric/rent/etc on time; paying off loans and mortgages on time; avoiding maxing out credit cards; having a good debt to income ratio. The more often you pay your bills on time and the longer you do this, the higher your score will be. A credit score can be improved in as little as (12) twelve to (24) twenty-four months. Even if your credit score has dropped due to a recent bankruptcy, eventually the bankruptcy will start to fall off your credit report and all that the creditors will be able to see is your recent financial history. Make sure that your recent financial history is spotless. They will look to see if you pay your bills on time if you missed any payments, or what your debt to income ratio looks like. It is important for you to make sure that they see a reliable and low-risk option when they lend to you. It takes planning and discipline but it is possible to fix your credit and it will pay dividends.

Should I Avoid Credit Cards?

I had a client who once told me they have perfect credit because they have never taken out a credit card or any type of loan in their name. Unfortunately, I had to inform the client that they actually have ZERO credit instead of perfect credit. Sometimes having no credit at all can look worse to a lender than having an average credit score. This is why we suggest at the very least to get a low balance credit card to start building up your credit. Start to make the purchases you would have made with cash or debit with your new credit card. If you keep making monthly payments and pay off the principal balance you will have a decent credit score in no time. Some people find it useful to have your credit card pay all of your monthly subscription services like Netflix, Hulu, Spotify, etc. By doing you will be able to build good credit and you will easily know how much you will be charged each month because these services tend to be very consistent in their pricing. This will help you budget your finances to ensure you do not overextend your credit card balance.

Keep in mind that credit cards are a double-edged sword. If you use them properly and make sure that you pay off the principal balance before too much interest has accrued then they can be a great credit builder. If you know that you are the type of person who has a difficult time managing a credit card because of the temptations then you should avoid them.

What Is My Credit Score?

Knowing your credit score is very important and will give you a head start on what lending options are available to you. To get a free credit report go to This website is free and simple to use and will provide you with an idea of where your credit stands. The higher the number the better the score. If your credit score is less than you were expecting do not panic. Instead, make a conscious effort to improve your score and show those lenders how reliable you can be.  Lepant Law Office, PC, LLO is not affiliated with in any way.

Want to know more about bankruptcy in general? Click here.