In the initial aftermath of being declared bankrupt, the chances are that existing lines of credit will be cut off and you will find it very difficult to get new credit as lenders will see you as high risk. Indeed, most lenders include a question on their lending application forms asking if applicants have ever been bankrupt and will significantly mark down anyone who ticks ‘yes’ to this question.
The advice offered to you will probably be to try to live without credit (at least for a while) but sometimes this isn’t practical. How then can you repair your credit-worthiness and convince a bank to allow you to have new borrowing?
The answer to this question lies with your checking account. Checking accounts (or current accounts as they’re called in the UK) are at the heart of a person’s relationship with their bank. When someone gets a checking account for the first time, the chances are that the bank will want to monitor how prudently they manage their account before considering offering them an overdraft facility. The same approach will apply for someone who has gone through a bankruptcy. In effect, you need to prove yourself all over again. The key to this will be to ensure that you don’t go overdrawn and that you don’t incur any penalty fees. If you can operate your account successfully for a period of time, then your bank may react favourably to a request for an overdraft.
An overdraft is a credit facility that is linked to your checking account. Normally, if your checking account balance drops below zero, you would incur banking charges. However an authorised overdraft grants you permission to take your balance below zero, up to an agreed limit. You will pay debtor interest on the overdrawn balance but won’t incur fees. It is a flexible facility in so far as there is no set time limit as to when you need to repay the money.
Once you have been granted an authorised overdraft, you are in a position to further improve your standing with your bank and your overall credit score. The bank will be looking for you to manage your account so that you don’t exceed your agreed overdraft limit. Going into an unauthorised overdraft position will not only see you incur fees but will also further damage your already tarnished credit record.
The good news, though, is that if you operate within your agreed limit, then the fact that you have been given a borrowing facility and have successfully been operating within its guidelines will positively contribute to your credit score. This is why overdrafts are often the starting point in repairing your credit score and can act to open the door to other borrowing facilities such as loans, mortgages and credit cards. You may need to be patient, however, especially in an economic environment where banks have been reigning in on their lending due to escalating bad debt. It will be important, during this period, to maintain an active and positive relationship with your bank through your local branch. Hopefully, it won’t be too long before you get the opportunity to have an overdraft and you can then demonstrate that you are able to operate within the parameters of that borrowing facility.