New Beginnings: Start Working to Improve Your Credit Report As Soon As You Become Bankrupt

Once you are bankrupt, there is a line through your past and it’s time to start thinking about the future. You need to work on the little things to improve your financial fortunes.

Bankruptcy will be recorded on your credit report and stays there for five years. You need to think about what happens to your credit report after your bankruptcy has been recorded because you are now in control.

In a year’s time the bankruptcy entry will be one year down the track, in three years the bankruptcy entry will be three years down the track and in six years’ time there will be no mention of bankruptcy on your credit report.

The great thing about bankruptcy is that it protects your wages to ensure you have enough money to live on and pay your bills. Take advantage of this.

As soon as you become bankrupt, start building your credit report to demonstrate responsible behaviour to future lenders. We recommend you think about and set financial goals for where you want to be in five years’ time.

For example, do you want the security of savings? To be driving a better car? Saving a deposit for a housing loan, or to have better furniture, or for retirement? Whatever your goal, a good credit report is an asset.

The best way to start is to make sure you pay your utility bills on time. Applications for connection of services such as electricity, gas, telephone, mobile phone plans, pay TV and broadband products are all recorded on your credit report – as are any defaults if you don’t pay on time. Every time you pay a bill when it falls due, you are improving your credit report.

Bankruptcy offers a significant advantage over personal insolvency agreements (PIA) and debt agreements that is often overlooked. Bankruptcy ensures your income is protected so you have money to pay your bills and rebuild your credit report.

As a separate issue, we have difficulty with people going into debt agreements. That arrangement means they have little money to live on, often pay their bills late and continue to have a poor credit report.

Once you have declared bankruptcy, we recommend you choose the bank or lending institution you wish to deal with in the future and organise a meeting. Talk to them about your plans and find out what they will need from you to consider any future loan applications.

For example, if you want to buy a car worth $20,000 once you are discharged from bankruptcy, they may need you to save $10,000 of that purchase price with them, which will demonstrate your ability and discipline to save.

If you talk about a housing loan, they may say they would require you to save a 20 per cent deposit with them, again showing your ability to save and also that you have the ability to meet the monthly loan repayments.

This approach of creating communication with a lender of your choice will pay dividends. You will know what they need to have in place to consider a loan application from you, so when you do make that application it should be approved.

This also helps to improve your credit report because if you make a lot of loan applications, you will lower your credit score. Too many applications on your credit record suggests you are a high-risk borrower because you cannot get a loan from your banker.

You may be thinking it’s a good move to apply for loans with all the banks to see which one will give you the best deal, but this will destroy your credit report and most likely ensure you won’t be able to get a loan.

Likewise, if your credit report shows you are applying to lower tier lenders, you will do yourself more damage. Payday borrowers are seen as the highest risk.

Here are some examples of the types of financial activity that may be recorded on your credit file:

  • Loan applications for houses and cars,
  • Applications for connection of utility services such as electricity, gas, telephone, mobile phone, pay TV etc, and
  • Applications for store cards, credit cards and personal loans.

Actions you can take which should not be recorded or impact your credit record include:

  • Applying for a debit card
  • Applying to open a new bank account, and
  • Applying for a pre-paid mobile phone.

From little things big things grow. Plan for the future, pay your bills on time, form a relationship with your preferred lender and grow a healthy credit report.

If you would like to know more about bankruptcy and your credit report, please call Nicholls & Co on 1300 060 122 or email helpdesk@nichollsco.com.au

Alan Nicholls’ no obligation help desk

Nicholls & Co provide a free, no obligation ‘help desk’ for people considering bankruptcy – we discuss and explain bankruptcy and answer questions for anyone who is considering bankruptcy. The Nicholls & Co help desk can be accessed by phone (1300 060 122) or helpdesk@nichollsco.com.au . Alan Nicholls, Registered Trustee in Bankruptcy is also available to answer your questions to enable you to decide if bankruptcy is right for you.