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Rebuilding Credit After a Fall

After hitting rock bottom with your finances, it’s easy to abandon all hope of recovering a healthy credit score. Don’t despair – you can improve it. Follow these tips to rebuild your credit after a financial disaster like entering bankruptcy.

Bankruptcy’s effects on credit scores
A credit score is one of the most important grades that you get in life. It affects your eligibility for car and home loans, and can even affect job opportunities. If you bomb a test in school, your overall grade for the class does not automatically fall to an F. Credit works the same way; one bad mark doesn’t mean you can’t improve the score.

If you seek court protection, you’ll either file a Chapter 7 or a Chapter 13 bankruptcy petition. A Chapter 7 process, or liquidation, wipes out most debts in full and stains your credit report for a decade. A Chapter 13 filing lets you keep your property, but requires modified payments for three to five years on debts and stays on your record for seven years.

Five ways to boost your credit
A credit score rates your riskiness as a borrower based on several factors. It reflects your actions, for better or worse. While your rating might take a hit immediately after a bankruptcy, you can improve your score with these five steps:

1. Build credit with a card
Apply for a secured credit card, which requires putting money up front in a savings account to back any charges you make. The amount usually acts as your credit limit.

2. Pay on time
The best way to improve your credit is to consistently make at least the minimum payments on any debts – credit cards, loans, mortgages – on time. After establishing and maintaining a good track record for six to nine months, you may see a few extra points added to your score.

3. Stay under the limit
Use less than 30% of your credit limit. Maxing out a card or coming close to the limit you can use makes creditors worry that you are in a financial bind.

4. Keep accounts open
Keeping your card and other revolving accounts open adds to the age of your credit lines, which can help demonstrate financial maturity to the ratings bureaus. But don’t open too many new accounts in quick succession, as that can suggest you’re running into financial difficulties and lower your score.

5. Diversify credit
Different types of credit, such as installment loans including monthly car payments and revolving credit such as a card, can boost your score.

Remember to check your credit scores annually to ensure there are no mistakes tanking your risk rating. You are entitled to one free report from each reporting bureau – TransUnion, Equifax and Experian – once a year.

Finally, don’t overlook your lender. Financial institutions like Harris County Federal Credit Union often provide ways to help members improve poor credit histories or overcome difficulties.

Cait Klein, NerdWallet

Making the Most of Credit Union Membership

Credit unions are a great option when it comes to banking. Their status as not-for-profit organizations sets them apart from other lenders, as they strive to serve their members rather than produce earnings for private owners. Joining one and opening a share account buys into the community, where excess revenue is funneled back into the operation to deliver better rates and lower fees to members. Here are five ways to make the most of your membership.

  1. Plan for a rainy day

Experts recommend saving between three and six months’ worth of living expenses to cover a job loss, a medical emergency or any other unexpected financial bind. Although keeping that fund in a regular savings account is probably the best approach, a longer-term savings plan can make use of share certificates, which often pay more interest than a standard account. The tradeoff with a certificate is giving up free access to your funds for its duration, often from one to three years. Also, there’s often a minimum amount required, which can be as much as $2,500.

      1. Save for retirement

Credit unions tend to offer better loan rates than big banks and might charge lower fees on things such as overdrafts. While some pay interest on certain checking accounts, you’ll generally get a higher return from certificates, which can be especially useful for retirement savings plans.

        1. Buy something big

Credit unions don’t have to charge hefty fees or interest just to turn a profit. So they often offer lower rates on car, motorcycle and other types of loans. If you’re looking to make a major investment such as a remodeling project, a share-secured loan backed by personal savings might provide less costly financing than other options. If you’ve been making mortgage payments for a while, you might have enough equity in the property to use it for financing. And both home equity loans and lines of credit can provide tax advantages, too.

          1. Refinance

If rates have improved since you bought a home or car, refinancing could be a good idea. Using a new loan to pay off an old one could cut interest costs and may provide a way to eliminate other high-cost forms of debt. But new borrowing can come with costs, especially when it involves a home. So check with a loan officer to determine what’s best for your situation.

            1. Capitalize on rewards

Some credit unions offer saving incentives to particular demographic groups, including youths under 18. For many adults, a decent credit score is the ultimate reward. Using a share-secured loan can help a borrower re-establish a healthy credit history after a financial blunder.

Personalized service

Credit unions are first on the friendly front, repeatedly rated the highest in overall customer service, including providing online resources and transition help for those ready to abandon a big bank. If you’re considering joining one or already belong, your credit union’s personalized service can give you a hand in finding the right tools to reach your financial objectives.

Cait Klein, NerdWallet