Bankruptcy takes a toll on credit scores and will stay on a credit report for seven to 10 years. However, having a bankruptcy on your record does not mean you cannot construct a new financial house. In this article, we will discuss how to rebuild credit after bankruptcy.
Tips for rebuilding credit after bankruptcy
1. Check your credit report
Find out the unresolved debts on your credit reports. Even after you have discharged your debts, it may take 60 days to get the updated version of your credit report. Give special attention to the status of your debts. Check if the credit bureaus have updated your account status as “discharged.”
Find out if there are mistakes in your credit report and file disputes with the credit bureaus. Credit reporting companies are required by law to investigate the items in question and get back to you usually within 30 days.
To learn how to access your credit report, visit the FTC website for more information.
2. Clear your existing debts
Plan a budget based on your monthly income. Reduce your expenses and set aside money to pay off your unresolved debts gradually.
3. Become an authorized user of a credit card
Try to become an authorized user of a credit card with good payment history. Ask a family member to add you as an authorized user of his or her credit card. This can help add positive payment history to your credit report.
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4. Use new credit cards wisely
Once you start using a new credit card after filing bankruptcy, don’t start spending out of control, or you could rack up debt once again. Charge your cards for only the amount that you can afford to repay, and then make sure to pay off your outstanding balance amount in full. Also, pay your bill within the grace period to avoid having to make interest payments. On-time payments will improve your payment history; it accounts for 35% of your credit score.
Finally, do not max out your credit cards. Keep your credit utilization ratio—the percentage of how much credit of your credit limit you are using—below 30% to improve your credit score.
5. Apply for a secured credit card
You don’t need a particular credit score to apply for a secured credit card. You will have to pay a security deposit to the credit card company that they will keep if you fail to repay. Your credit limit is determined by the amount of your security deposit.
There are many secured credit cards, including:
- BankAmericard Secured Credit Card
- Citi Secured Mastercard
- Discover it Secured credit card
But before you opt for a card, review the annual percentage rate (APR), and annual fees to choose the best card.
6. Build an emergency fund to protect your credit
Having an emergency fund helps you deal with any unexpected expenses. If you are unable to make any payments, you can use your emergency fund. Set aside a specific amount every month and then make a budget. Most financial experts suggest saving five to six months of your expenses in your emergency fund.
7. Build credit with the help of a loan or credit-builder account
With a cosigner’s help, you can opt for a small personal loan as a way to rebuild credit. The cosigner will act as legal, financial support to you, and by having a cosigner, lenders may approve your loan application quickly. You may use the loan to renovate your home, repair your car, or create a passive investment portfolio. And once you start making on-time payments, it will boost your score.
You can also secure a credit-builder loan. This is a secured installment loan in which a bank holds your money in an account until the loan is paid off. You may choose the loan tenure to be between 12 or 24 months, and you may qualify for this loan even if you have poor or zero credit. As you make on-time payments every month, your credit score will improve.
How soon can you start work on rebuilding your credit score after bankruptcy?
You can try to rebuild your credit score 12 to 18 months after bankruptcy, and by using proper strategies, you may see some positive changes after one year. However, achieving a good (670-739), very good (740-799), or an excellent (800-850) credit score may take longer.
What you should keep in mind:
- Your credit score will not improve if there are other negative items on your credit report.
- The effect of bankruptcy on your credit score may decrease after a few years.
- If you already have a poor credit score (less than 579), you may see very little change.
Misconception #1: Bankruptcy affects all consumers’ credit equally. It does not consider the amount of debt or the number of debts listed.
Fact: It depends on the amount of debt discharged, as well as the number of negative to positive accounts on your credit report.
Misconception #2: If your credit report is clean before bankruptcy, you will be happy. After bankruptcy, you will have a higher credit score than others.
Fact: The presence of positive history and absence of negative items make little difference. What matters is how long the bankruptcy is on the credit report.
Misconception #3: Bankruptcy discharges all debts and boosts your credit.
Fact: Bankruptcy does not discharge all debts. You cannot discharge debt from child support, spousal support, student loan debt, most tax debts, etc.
Misconception #4: Bankruptcy kills your credit forever.
Fact: You can rebuild credit over time.
Misconception #5: You will face poor credit as long as the bankruptcy information stays on your credit report.
Fact: After bankruptcy, you can immediately begin to rebuild your credit by:
- Adding new credit
- Removing negative items
- Disputing errors
- Staying within your credit limit
- Making on-time payments
Misconception #6: You can’t get a new credit card or loan after bankruptcy to build credit.
Fact: With secured credit cards, you can build credit just like traditional cards. You can also opt for a passbook, CD, or credit-builder loan. These loans are secured with a deposit or collateral and help you build credit.
Misconception #7: Your bankruptcy will also hurt your spouse’s credit.
Fact: When you file for bankruptcy, your spouse will not be affected. It will not appear on your partner’s credit report.
One final misconception is believing that credit repair companies can boost your credit score fast. That, however, is not the case. You still have to build a positive payment history, lower your credit utilization ratio, and so on. Plus, the solutions you get from a credit repair company come with a price tag, and those solutions can be risky. It is best to rebuild your credit on your own.
