Ease Back Into Credit
If you file bankruptcy you may not qualify for a typical unsecured credit card. Still, youll want a credit card because a history of repayments among the fastest ways to improve your credit score after bankruptcy. So put a positive spin on your newfound financial reliability by applying for a secured credit card that is, a card secured by a cash deposit.
For example, if you want a card with a $500 spending limit, you must pony up $500 to the card company as a deposit guaranteeing your reliability.
Even with a deposit, however, many companies wont issue you a credit card immediately after bankruptcy is filed. Hang in there. They want you back, but typically after a cooling-off period.
Make A Habit Of Paying All Bills On Time
Erasing debt through bankruptcy unfortunately wont permanently stop bills from coming your way, and after filing for bankruptcy it becomes even more important to pay incoming bills promptly. By organizing and tracking all regular expenses like utilities, internet, and phone bills, customers can pay their obligations on time and rebuild credit. This will not reflect on a immediately, but will gradually build a healthy credit history.
Seek A Credit Product For Your Situation
Your pre-bankruptcy payment history will make you look like an extremely risky borrower to lenders. You can fix that problem by providing extra assurances that they wont lose money by lending to you.
Here are some credit products designed to do that as well as other ways to improve your financial profile:
Get a secured loan or credit-builder loan: This comes in two varieties, and most often is offered by credit unions or community banks. One kind of secured loan involves borrowing against money you already have on deposit. You wont be able to access that money while youre paying off your loan. The other kind can be made without cash upfront, though the money loaned to you is placed in a savings account and released to you only after you have made the necessary payments. In return, the financial institution agrees to send a report about your payment history to the credit bureaus.
Get a secured credit card: This kind of card is backed by a deposit you pay, and the credit limit typically is the amount you have on deposit. A secured card often has annual fees and may carry high interest rates, but you shouldnt need it for the long term. It can be used to mend your credit until you become eligible for a better, unsecured card.
This route wont lift a score by nearly as much as the other methods, because authorized users dont have ultimate responsibility for repaying debt. But this path wont hurt, so you may want to pursue it.
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Ways To Rebuild Your Credit After Bankruptcy
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Bankruptcy rates are increasing in the U.S., especially in Southeastern states and among the elderly. That means more Americans this year are in dire financial straits and in need of a last-resort solution.
Bankruptcy drags down consumers credit scores, which are essential for future borrowing. Such damage requires time and effort to repair. The good news is that there is plenty you can do to bring up your credit once it has been impaired by bankruptcy.
Have A Look At The Credit Report
Take a look at your credit report frequently. So that you can determine the factors that affect your credit scores. You can also request a free credit report from any of the credit bureaus.
Youll be able to spot any errors that put your score down- like incorrect account information or public records.
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Bankruptcy Debt Reliefs In Your Loan
The number of debts and the amounts you pay off will affect your bankruptcy credit score. By default, having multiple accounts with large balances has more effect than a small reduction in debt.
Your credit history can play a big role if you have both positive and negative accounts. The relationship between these accounts can have some impact on your score.
If your score was high before a bankruptcy, there will be a measurable decrease after you sign up. But after a while the effect will wear off.
How To Improve Your Credit Score After Bankruptcy
David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R& D, programmer analyst, and senior copy editor.
If you’ve filed bankruptcy, you know it’s not the end of the world. In fact, for many people, it’s the start of a brighter future that will help them finally reach their financial goals.
While bankruptcy is the first step in re-establishing good credit, you can’t just file a case and expect significant movement. You’ve got to work at it. The process will demand your attention, and it’s going to take time, but it can be done.
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Debt To Spending Ratio
In years past the most important thing you needed to remember about credit was paying it in full. The second most important thing to remember was to never pay the minimum. Minimum payments still cause interest payments. And if you get a new credit card that is a credit rebuilder, the interest could be 20%. We will talk about interest a little later.
Today, credit card companies review and judge the lifestyle rather than simply on-time bill payments. The way they do this is they look at whether or not you are living on the credit cards. You may be thinking, So what if I am? This sounds much like a value statement on their part but it still stands true as the way they will judge how you use the privilege of credit with their company.
Check Your Credit Reports
Until April 2021, you can check your reports weekly for free on AnnualCreditReport.com. Your credit scores are calculated using information in your , so any inaccurate negative information can make it even harder for you to dig out of debt. If you find mistakes, dispute credit report errors and get them corrected.
Of course, there will be negative information that is accurate. Bankruptcy wipes out or reorganizes debts, but it doesnt wipe your credit reports clean. Your reports will show a Chapter 7 bankruptcy for 10 years, or a Chapter 13 for 7 years. Late payments and debts that go to collection also remain on the reports until seven years after the delinquencies. You’ll just need to wait for that information to age off of your reports.
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Save Up For A Down Payment
Also, save up cash for a down payment to help offset the loan amount. Even if you qualify for the full loan amount, youll likely be charged a high interest rate. So paying a sizeable down payment helps lower your financial burden to avoid setting yourself up for another financial debt trap.
Its also helpful to realize that you dont need a brand new car. A reliable used car can be just as functional without the depreciation as you drive it off the lot.
Carefully Handle Reaffirmed Debts
If you left some debts out of the bankruptcy, youre in a favorable position, says Morgan. Youre ready to use them to your scoring advantage.
Instead of having to apply for and obtain new loans and credit cards, youve got what you need to add excellent information to your credit reports. Payment history is the most important credit scoring factor, so respect those due dates. And if you still have a credit card, charge only what you can and will repay in full when the bill comes in.
A Chapter 7 bankruptcy will stay on your credit reports for a total of ten years, but as you supply your credit reports with evidence of responsible credit usage, your scores will increase, especially as the bankruptcy ages.
Know That Not All Cards Are Created Equal
After a bankruptcy, you may be inclined to use a debit card so you don’t rack up any new debt. But Duguay emphasizes that, because activity on debit cards is not reported to the credit bureaus, responsible use wont help you rebuild your credit.
Cunningham recommends a retail or gas credit card, as these options are often the easiest to obtain.
You may also consider a secured credit card, which is a type of credit card that typically requires a cash deposit to open the account. Your deposit will often equal your credit limit, and the issuer holds your deposit as collateral. Your secured card activity is then regularly reported to the credit bureaus, so when you use a secured card responsibly, you can begin to rebuild a positive credit history. It is important to note that some issuers may require that a certain amount of time to have passed since a bankruptcy before they will extend credit.
Keep Up With Payments On Existing Loans And Credit Cards
Instead of trying to get funds right away, focus on making timely payments on existing loans or credit cards every month to help reestablish your credit. Payment history makes up 35 percent of your FICO score, so making on-time payments is one of the best ways to build your credit and show that you can be financially responsible.
Why this matters: Taking the proper steps to rebuild your credit after filing bankruptcy will not only improve your financial behaviors but show future lenders your creditworthiness.
How to get started: Work on making timely payments by signing up for autopay. At the least make the minimum payments. If possible, make extra payments.
To help make sure youre paying on time, set up reminders. Some credit cards have the option of having a reminder sent to your phone or email prior to the due date. And monitor your spending. You can set alerts if you use your credit card to pay for something over email, phone, or online or if youve spent over X amount.
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Make Your Monthly Payments On Time
Making your debt payments on time every month should be obvious. However, you will need to show at least 12 consecutive months of on-time payments and permission from the court to take on new debt.
Because your credit is so heavily affected by bankruptcy, you might also expect to see higher down payment requirements when you go to buy a house. An FHA loan, for example, typically allows for just a 3.5% down payment.
If your credit score is under 580, youll need to pay a full 10% of your homes purchase price as your down payment. Thats a huge difference. There are no official guidelines for a conventional loan. But, you can still expect to have a larger down payment on your future home.
Your credit score has a significant impact on how much youll pay for your home, both in terms of down payment and your interest rate. Thats why you must spend those seasoning periods rebuilding your credit as soon as your bankruptcy has been discharged. Youll also want to check your credit score and monitor your credit reports regularly to make sure everything is being reported accurately.
Pay Every Bill On Time
Paying bills on time shows that you budget your money wisely and prioritize your debts. The day that you receive a bill from your utility company, credit card company, cable company, or anyone else, pay the full amount online or by sending a check through the mail.
Do not miss a single bill. It could send you back to square one.
Get A Secured Credit Card
Reducing your dependence on credit cards can be an important step toward rebuilding credit after bankruptcy. However, the strategic use of secured credit cards can also help you begin to repair your trustworthiness in the eyes of lenders.
Taking out a secured credit card requires making a refundable security deposit and then borrowing against it. While these cards tend to come with high interest rates, if they report to all three credit bureaus, theyre a great option to show responsible credit behavior until youre better qualified for a traditional card with more competitive terms.
Some secured cards even allow you to graduate to an unsecured card after consistent on-time payments. This is a benefit since you wont have to apply for a new, unsecured card when your credit improves,
Keep in mind, however, that applying for a secured card doesnt guarantee acceptance, so take time to research the providers requirements before applying. If possible, choose a provider that offers prequalification so you can see whether youre likely to qualify before agreeing to a hard credit check that can further damage your score.
Tip No : Check Your Account Statuses Carefully
Each account on your has an account status associated with it. Once your bankruptcy is complete, every account included in your filing should say discharged or included in bankruptcy.
If you see anything else in the account status field for any of the accounts, then it is probably a mistake and it needs to be corrected. This includes statuses like, active, current, delinquent, or charged-off.
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Become An Authorized Account User
To become an authorized account user, have a close friend or relative add you to their credit card account. Youre not responsible for repaying any of the money charged to the account. If the account is maintained responsibly, you will get positive marks on your credit report.
On the flip side, if he or she racks up unpaid bills, your score will reflect that. So, choose someone you would trust to make good financial decisions.
Rebuilding Your Credit Score After Bankruptcy
After 12 months, once you have been discharged, you may begin to look for bankruptcy advice about how to rebuild your credit score. This might be because you want to take out a mortgage for a house, buy a car, or get a loan for another reason. Although it is important that you avoid serious debt obligations that you cannot afford, debt that you can afford to repay to fund your future is not inherently bad.
Remember: you might still have up to two years of repayments due, repayments for debts not included in the bankruptcy, and it will be five years before your bankruptcy is removed from your credit file, but the debts included in your bankruptcy debts should now be discharged and have a zero balance, giving you the beginning of a fresh start.
Are you struggling with debt?
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Your first step, therefore, may well be to look at your credit file and assess how much damage your problem debts and bankruptcy have had. It should cost you about £2 to ask a credit agency to give you your credit report, and you should use this chance to make sure it is as accurate as possible.
Tip: Asking for your credit score often can negatively impact your credit score as it can make you appear desperate or unstable, so only ask for it when it is absolutely necessary.
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Check Your Credit Report
If youre trying to repair your credit after bankruptcy, start by familiarizing yourself with your . All consumers can access a free copy of their credit report through AnnualCreditReport.com. Free reports are typically only available once a yearbut in the wake of the Covid-19 pandemic, consumers can access free weekly reports through April 20, 2022.
Understanding what makes up your credit score can make it easier to make targeted improvements and provide insight into why your score is or is not increasing. Youll also be able to spot any errors that are bringing your score downsuch as incorrect account information or inaccurate public records.
Reviewing your credit report can also help you confirm that your bankruptcy is removed from your report as soon as possibleafter seven years for a Chapter 13 bankruptcy and after 10 years for a Chapter 7.
Rebuilding Your Finances After Bankruptcy
After bankruptcy, potential lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.
Heres how to stay on top of your debt:
Create a budget. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, dont hesitate to seek help from a . All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.
Begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to high-cost loans or running up credit cards, which can start a new debt spiral. Any money you tuck away in a fund now can help you tackle those unexpected expenses.
Practice good credit habits. Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits less than 30% is typically advised, but less than 10% is even better.
About the author:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more
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