Credit Rating Recovery After Debt Consolidation

When your finances have got out of hand and you've decided to restructure them with a debt consolidation loan, it's usually recommended that you subsequently cancel all of your paid-off credit cards and close off your other lines of credit that have been repaid as part of the consolidation process. The reasoning behind this is that you need to remove the temptation to build up new unsecured debts on top of your new consolidation loan, leaving you in a worse position than ever.

This is indeed good advice in general, but you may be surprised to hear that in certain circumstances this might not be the ideal way to proceed. If, before consolidation, your finances were in such a state that your credit record became littered with missed and late payments, then closing off your credit lines will actually increase the length of time it takes to recover your previously high level of creditworthiness.

The reason for this is simple: under the UK credit reference system, whenever you close an account, its details are frozen on your file for a period of six years before being deleted. This means that the damage done by your late payments will still impact on your credit rating for all that time, even though you've completely satisfied the debt and seemingly put things right.

In contrast, open accounts record their data on a rolling system, where entries which reach the age of three years drop off your file, It's plain to see that keeping your account open will halve the time it takes for your adverse credit information to be removed from your record, and so your credit rating will be restored correspondingly more rapidly than if you'd followed conventional wisdom and closed off your unused credit lines.

Of course, as with all things financial, things aren't as simple as that. If your credit file shows that you already have access to a large amount of unused credit, this is in itself usually taken as a warning sign by potential lenders, and may reduce your ability to get credit - for example, you might find it more difficult to negotiate a new mortgage at a good rate during the three years it takes to restore your rating fully.

It really is a balancing act, but if you're happy to sit out the three year period, this is the quickest way to restore your credit rating, so long as all defaults have been satisfied and other black marks removed whenever possible.

In any event, the spirit of the conventional advice still holds: there's little point in going through the debt consolidation process if you then immediately start racking up new debts on your old cards and overdrafts etcetera. Even if you decide to keep your accounts open in the interests of speedier credit repair, then at least make it as difficult as possible for you to succumb to temptation. Physically destroy your credit cards so that you can't use them, and store your account details in a safe place where it will take some effort to retrieve them so that you can't use them on impulse without at least taking a moment's pause for thought.

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Can Credit Cards Help you Establish Credit After Bankruptcy?

The short and simple answer is yes and no. The detailed answer is that it depends on how you use the credit card and which credit card you choose to use. If your credit card is over two years old this article may not apply to you. Most credit card companies will issue fair credit - credit cards to people outside of bankruptcy for more than two years. You may want to avoid applying to the same companies you included in your bankruptcy though.

If you are trying to establish credit after bankruptcy within two years a credit card can be a great way to begin. Before we talk about specifics let's begin with a general understanding about your situation. You have just recently filed bankruptcy on a number of creditors, and in any new creditor's eyes your represent a high credit risk. For this reason, it's logical to expect that you will have to pay the highest interest rates. So our goal should be to re-build our credit with the least amount of cost out of our pocket.

There are unsecured credit cards available that will issue you credit almost immediately after a bankruptcy. In my opinion these types of credit cards are a rip-off and probably a poor step to better credit after bankruptcy. Most of these cards will only start you off with a $300 credit limit and charge you $150 worth of fees on it with your first bill. You are well of 35% of your credit limit on your first bill! You might as well have applied for a secured credit card with a third of the fees.

In my opinion a secured credit card is the way to go. I know you have to send in $300 bucks to get started but the benefits far out-weigh the unsecured cards. Secured credit cards like the Bank of America Secured Visa® Platinum Card offer low annual fees and full credit card benefits from day one. The only downside is that you do have to send in your credit limit. Keep in mind, our goal is to re-build our credit with the least amount of money and this card is the answer.

One common misconception is that you have to make charges and on your new credit card and pay them off to build up your credit. This simply is not true. Credit bureaus actually devalue your credit score once you exceed 35% of your credit limit. When future creditors look at your credit bureau they will see how long you have had the card, your credit balance and if you have been late. The credit bureau does not reference your charges in the past, only your current balance. For this reason I suggest that you open up the credit card after bankruptcy and leave it alone.

Another advantage secured credit cards after bankruptcy is the ability to raise your limit by making additional deposits. When creditors see a credit card balance of $300 bucks it's pretty apparent what kind of credit card it is. Other than that they have no idea that it is a secured credit card. So if you treat your secured credit card as a savings account and send funds in to raise your credit limit you can accomplish a number of goals.

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