As a society we often view bankruptcy as sort of a Scarlet letter that individuals must carry around like a shameful mark of failure. But it shouldn’t be that way. Bankruptcy can be viewed in a positive light – a clean slate or renewed purpose in one’s life. It’s an opportunity to start fresh and chart the course of your financial life in the right direction, like rebuilding your credit rating.
It’s empowering to have control over your finances again, post-bankruptcy. Now, you can begin the journey back to financial health with the kind of credit you need to secure loans and make other big purchases and decisions. We’re going to take you through the post-bankruptcy process of rebuilding your credit and how you can get back on track for a loan approval.
Bankruptcy can limit your credit opportunities
Although you’ve made the positive step in declaring bankruptcy, giving yourself a fresh start and a new beginning, your immediate access to credit after bankruptcy will be limited. There is nothing restricting you from applying for loans and credit cards, but be prepared for a high possibility of rejection. And don’t think about concealing your bankruptcy – you are required by law to disclose it; not to mention it will be on your credit rating report.
Starting from the bottom – your credit report after bankruptcy
The first step towards rebuilding your credit after bankruptcy is obtaining a copy of your credit report and carefully reviewing it. Your credit report is available for FREE from Borrowell. This is the credit report that potential loan lenders look at, so you need to make sure this information is accurate.
If you’re not already in the know, you need to become extremely familiar with credit. Learn about the criteria that is used to calculate your credit score, and understand the behaviours that can hurt and raise your credit score. A little education will ensure you take the fastest route back to a good financial standing.
Believe it or not, having a bankruptcy on your credit report is preferable to having outstanding and delinquent balances, which damage your credit reputation. Just make sure your credit report shows $0 balances for those debts and accounts that have been discharged through your bankruptcy.
Your bankruptcy will appear on your credit report for six years after the date you complete your bankruptcy. If you declare bankruptcy more than once, it will appear for 14 years on your credit report.
How to repair your credit after bankruptcy
The unfair reality of bankruptcy is banks are going to look at you with suspicion. You made mistakes in the past, now the bank must consider the potential you will make them again.
Now’s the time to start proving them wrong!
- Open new savings and chequing accounts to show that you’re fully capable of managing your money. If you are still making payments to a trustee after bankruptcy, make them through your own savings account.
- Look for banks that offer accounts specific to your situation. Financial institutions like Scotiabank offer post-bankruptcy customer savings accounts designed to incentivize financial discipline. For example, you can earn higher interest on a balance when you refrain from withdrawals over a duration of time. This is an ideal scenario because you are rehabbing your financial portfolio, practicing healthy habits, saving for a rainy day, and earning decent interest all at the same time.
- You can also repair credit by becoming an authorized user on a trusted friend’s credit card account. Your credit profile will get a boost from their responsible behaviour. Furthermore, your not-so-stellar credit history won’t hurt them. Just make sure that their positive behaviour remains consistent though, because any bad decisions on their part will hurt your credit rating.
Building the right habits
Speaking of good habits, leaving your money untouched in a savings account is just one piece of the puzzle. Strong financial habits are best exemplified by the ability to repay debts – something you may have struggled with in the past.
Keep on top of your monthly bill payments either with some organizational help or auto-repayment systems. Most banks offer automatic bill payments to help you keep track of phone, internet, utilities, and whatever else is coming out of your monthly income. This should reduce some stress and help you stay disciplined with prompt payments.
Open an RRSP or TFSA to rebuild to credit
While we suggest plugging money into a savings account, if you have extra cash consider an RRSP or TFSA. Contributions to an RRSP (Registered Retirement Saving Plan) will mean a higher tax return at the end of the year. When you get that bigger tax return, put it towards any small debts and clear it off. A paid off loan on your credit report is a key indicator to banks and lenders that you’re trustworthy and capable of a bigger loan. And at the end of the day, you have money invested in your RRSP, which will help you even further down the road. A TFSA (tax free savings account) is a more flexible savings vehicle you can use, but it will not earn you a higher tax return at year’s end.
Credit builder loans vs. secured credit cards
Depending on the individual, it can be somewhat stressful to re-enter the world of credit cards. Their convenience makes them a constant temptation and a slippery slope to the debt hole you don’t want to slip back into. Unfortunately, for some, it’s also one of the best methods to rebuild your credit rating.
Secured credit cards are a recommended re-entry point to handling credit cards. They are usually easier to qualify for than traditional credit cards because you are required to pay a security deposit. They also come with higher interest rates and more restrictions, but if you keep usage low and payments prompt, you’ll be heading to credit respectability soon enough. Issuers like Capital One Credit Card Solutions offer applicants various options to get their credit back on track.
Unlike secured credit cards, credit builder loans do not require a security deposit. That’s the good news. The bad news, however, is that you can’t get access to the loan until you finish paying it off. Sounds backwards right? Once you have paid off the loan in full, you not only have access to the money, but you also have an improved credit score. You can then take that big chunk of change and deposit it into a savings vehicle.
So what’s right for you – a credit builder loan or a secured credit card? Depends on your goals. But remember: you can start a credit builder loan with nothing and it’ll help you build savings, whereas a secured credit card requires a deposit upfront to get started.
Get approved for an unsecured loan after bankruptcy: apply with a cosigner
We all need a little help from our friends and family once in a while. You might qualify for unsecured loans and even credit cards if you have a willing family member or friend to cosign your application. This will help you establish a better credit rating in a shorter amount of time. This can be risky for the co-signer because if you default or miss payments, both of you will take the hit on your credit reports. If you enter this arrangement be prepared to be on your best behaviour, otherwise there will be tears.
Walk before you run
You’re eager to repair your credit score and put the past behind you. It’s understandable. But as most credit experts suggest, you should tread cautiously and avoid making mistakes that set back your credit rehab progress. Take it one payment at a time, do not overextend yourself, and be judicious with any new credit undertakings. You’ll get to where you want to be sooner than you think.
Fresh Start Finance serves Canadians facing all types of credit situations with practical advice and credit-building solutions. We also offer quick-and-easy secured and unsecured installment loans to help you take those first steps to a better financial future. Apply today to see how we can help!