When you claim bankruptcy, your credit takes a nosedive. This is just a simple, albeit very hard, truth. Since your credit represents your level of risk to lenders, an R9 rating on your credit report (the rating given if bankruptcy is filed) signals to lenders that you are high risk. This can make it very difficult to obtain certain funding, particularly mortgage financing.
Rebuilding credit after a bankruptcy to buy a home is not the same as simply rebuilding to obtain credit like a credit card for example. While there are lenders who will extend credit to even undischarged bankrupts, you will likely find that you can only buy a home after 2 years of being discharged from bankruptcy and with 2 years of re-established credit.
If you are currently in bankruptcy but hope to buy a home in the future, here are some things that you can do to make it easier once you are discharged.
As soon as you file for bankruptcy, you should be looking to rebuild your credit – there are lenders who will lend to an undischarged bankrupt. Rebuilding credit means demonstrating that you can you repay installment credit, such as a mortgage.
Choose credit products that report to your credit, otherwise they hold no value. For example, avoid payday loans. These are the worst credit products out there. Not only do payday lenders charge astronomical fees, they don’t report to your credit report.
A secured credit card is helpful if it has a meaningful limit – $2000 or higher. Small limits don’t really let you demonstrate much as far as risk and credit behaviour, so try to get a limit that is higher. Make sure to pay the balance (or as much as possible) on time, and do not max out the card.
What about vehicle financing? A car lease is less relevant as far as rebuilding credit because, although it involves installment payments, you don’t own the car. Instead, a car loan is a better option because it is installment credit and you own the car so there is an asset to balance against the debt.
A personal loan is another really good way to rebuild credit because, if paid on time, it demonstrates the ability to make installment credit. This is viewed as positive credit behaviour and goes a long way towards helping you rebuild.
A secured GIC loan is also a good way to rebuild credit because it involves repaying installment credit and builds assets.
After bankruptcy you cannot afford to slip up – one mistake (such as a missed payment) will send all of those months of hard work down the drain. You must pay all bills on time and demonstrate character and responsibility. This is the only way that you will be able to eventually obtain mortgage financing.
At Prudent, we understand the need to rebuild credit. Want to find out about the various options available, even if you’re an undischarged bankrupt?
Call us today at 1-888-852-7647.