How to Build Credit After Bankruptcy
Completing the bankruptcy process is hard, especially if your financial problems stem from medical bills, divorce or death of a loved one. Healing financially will help you get back on track.
Choose Your Debt Amount
If your debts have been discharged through bankruptcy and you are employed, you should have room in your monthly budget to contribute to a savings account.
Set aside three months of living expenses in a savings account. These savings should be able to cover the cost of food, mortgage/rent, transportation, and utilities in the event of a job loss or other unexpected issue.
Remember, you cannot file bankruptcy again for several years and credit may be hard to acquire. Savings is going to be your best option for emergency monies.
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What Will My Credit Score Be After Bankruptcy?
After bankruptcy, your credit score will take a hit. The higher your score, the harder the blow. There are other factors that matter, as well. The more debts you need to discharge the more your credit will suffer for it.
You are a much greater risk to a lender by defaulting on a $50,000 debt than a $500 debt. So, expect the consequences to reflect that.
If your credit score is 680, you will lose an average of 150-180 points. Good credit scores – 780 or higher – will lose 200-240 points. This means even if you have a perfect FICO credit score of 850, bankruptcy will leave still a noticeable dent on your credit report for years to come.
This sounds harsh, but it follows the logic of lenders perfectly. If you had to be forgiven a large amount of debt, that sends signals to lenders that doing business with you may cost more than it’s worth.
How Long Does Bankruptcy Hurt Your Credit Score
This depends on what type of bankruptcy you filed. If you filed for Chapter 7 bankruptcy, it will smear your credit report for up to 10 years. If you filed for Chapter 13 bankruptcy, it will leave its mark for up to seven years.
When you go through bankruptcy it not only tanks your numerical score, it also leaves a note on your credit report. Lenders won’t have to wonder why your credit score is 580, they’ll just read “Bankruptcy” on your credit history.
Repairing Your Credit after Bankruptcy
If you want to buy a home or car, you need either a lot of cash or a large loan. It’s been that way forever and things won’t change just because you have filed for bankruptcy.
The problem is that after bankruptcy the sight of your credit report will repel lenders. If you want to get a mortgage after bankruptcy, you need to restore your credit score to a respectable value. A FICO score of 680 is considered good and would net you fair rates at most financial institutions.
Your recent actions have a bigger impact on your credit score than negative events in the past, so you want to make sure that you are feeding your credit report positive data in the years following bankruptcy to build up from a low score.
The best way to improve your credit score is to make on-time payments. Credit bureaus track the payments made to your open accounts, like loans or credit cards. However, you may not have any of these accounts open after bankruptcy.
This traps you in a ridiculous dilemma: you need an open account to improve your credit score, but you need an improved credit score to open an account. It will take some persistence, but there are ways to get around this pesky catch-22.
Here is a list of things you can do to improve your credit score after bankruptcy:
- Monitor credit report for accuracy
- Make on-time payments on debts not included in your bankruptcy
- Build credit with a secured or retail credit card
- Have someone cosign for a new credit card or loan
- Become an authorized account user
- Credit builder or secured loans
Monitor Credit Reports for Accuracy
Everybody should regularly review their credit report, especially after filing for bankruptcy. This is your shot to clear your debts, so if your credit report continues to show discharged accounts as being overdue, your score will suffer more than it should. You may wonder how anybody could overlook something as important as your credit report, but according to a study done by the Federal Trade Commission (FTC), one in five people have an error on at least one of their credit reports.
You don’t need to pay anything to keep tabs on your credit report. You’re entitled by law to a free, yearly credit report from each of the major credit bureaus: Experian, Equifax and, TransUnion.
Here are some things to look for to ensure your credit report is accurate:
- Accurate personal information
- Up-to-date employer information
- Updated ‘accounts’ section
- Discharged balances should be marked as such
To report errors on your credit report, contact the credit bureau, and file an official dispute.
Make On-Time Payments on Debts Not Included in Your Bankruptcy
Not all debts will be included in your bankruptcy. For instance, student loan debt can’t be erased by bankruptcy. Alimony and tax liens will remain on your tab, as well. You need to keep paying these if you don’t want your credit score to plummet even more.
If you have federal student loans, you can look into joining a repayment program fitted to your situation, like an income-driven repayment plan. This can help ease the burden while you focus on rebuilding your finances.
Build Credit with a Secured or Retail Card
Banks won’t want to deal with you after bankruptcy and they’ll be loath to offer you a loan or credit card. However, that’s mainly because you are too risky. A good way to mitigate risk is to hand them collateral. Something they can hold on to, on the off chance you go bankrupt again.
Secured credit cards usually are backed by your money, so banks may be more likely to offer you one. Paying back retail credit cards can also help build credit and they tend to be easier to get your hands on than traditional credit cards.
Secured Credit Card
Lenders may be more willing to approve you for a secured credit card because the collateral you put behind it makes it less risky. A lot of lenders will want at least $500 down to approve you for a secured credit card. This can act as both your collateral and credit limit. For the best possible score, you want to use only 30% of your available credit (if your limit is $500, never use more than $150 each billing cycle). Always pay your balance in full and on time when you get your bill.
Retail Credit Card
Retail credit cards may have laxer standards for approval, but they also tend to come with higher APRs and lower credit limits, the opposite of ideal, but if you make your payments on-time every month the high APR won’t affect you.
Every time you pay your secured or retail credit card on-time, you will receive positive points on your credit report that will help counterbalance the negative effect of the bankruptcy.
Have Someone Cosign for a New Credit Card or Loan
Another idea is to have someone close to you cosign your loan. By making regular payments on the loan, you can nudge your credit score back up and into shape.
Your cosigner may be a relative or very close friend, but he or she should have a good enough credit score to make up for yours. They should also be aware that if you don’t pay the loan, their credit score will suffer for it.
If you are unsure of your ability to repay the loan, it’s probably not worth it to risk dragging someone you care about into the mud with you. Cosigners will work best for those of you with steady incomes, who, if not for a poor credit score, would have little trouble securing and repaying a loan on their own.
Become an Authorized Account User
To become an authorized account user, have a close friend or relative add you to their credit card account. You’re 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.
Credit Builder or Secured Loans
These are loans banks may be more willing to offer borrowers after bankruptcy. In both these cases, the bank keeps a form of collateral to make the transaction less risky. Notice a trend? Once again, by offering banks something of value to hold on to, they may be more willing to work with you.
Credit Builder Loan
Here’s how a credit builder loan works: The borrower stores money in a savings account until it reaches the agreed upon loan amount. Once this happens, the borrower gets the loan.
It’s not much different from stashing money on your own, say in your closet, except that each installment you make towards your credit builder loan works to lift your credit score. The same cannot be said about the money you keep in your closet
A secured loan is backed by collateral. This can be a car, home, or savings account. Thus, mortgages and car loans are considered secured loans. This has similar benefits and drawbacks as the secured credit card, though on a potentially greater scale.
The bank is willing to extend you money if you mitigate the risk with your property, but if you fail to repay the loan, you forfeit your collateral and your credit score plummets even deeper.
Other Tips to Help Fix Your Credit After Bankruptcy
Here’s some more advice on how to revive your credit score after bankruptcy:
- Avoid credit repair scams: Don’t fall for con artists who claim they can remove a bankruptcy from your credit report. Nobody can remove bankruptcy from a credit report before the allotted 7-10 years have ended.
- Avoid frequent job changes, if possible: Your state of employment has no direct effect on your credit score, but lenders may put less faith in borrowers drifting from job to job.
- Keep account balances low: From where the credit bureaus stand, maxed out credit cards are a sign of strained finances. Aim to keep your credit utilization ratio below 30%. Also, keeping your balances low will lower your debt-to-income ratio (DTI), which in turn will amplify your shot at landing a low-cost loan.
- Not applying for new credit often: Lenders and credit bureaus take note when borrowers rapidly apply for credit. It’s not a good look. It makes you look desperate, which makes you look risky. Remember, lenders abhor risk.
- Saving money: This one is less about restoring your credit score and more about making sure you’re financially sound. If you’re dealing with the consequences of bankruptcy, you’re probably not in the best financial shape to handle surprise medical bills or unforeseen car troubles. Saving a little money from your paycheck every week can bridge the gap when you need it most. It doesn’t take a fortune to mitigate misfortune. Three to six months’ worth of living expenses should do the trick.
Life After Bankruptcy
Life after bankruptcy doesn’t need to be a nightmare. Speaking to a credit counselor can help clear up some questions you may have related to your current condition and outlook. Counselors like those at InCharge Debt Solutions can give you tips and advice on how to overcome the struggles that are bound to boggle consumers new to bankruptcy.
Bankruptcy is a shot at a fresh start. Keep in mind, you’re in a much better position now than you were immediately before filing. You’re moving in the right direction.
You do, however, have to find a way to show FICO and the credit bureaus that you’re making smart moves with your money. You can do this best by applying for low-risk forms of credit and paying your bills on time every month.
About The Author
Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.
- Fiano, L. (2019, February 5) Common errors people find on their credit report - and how to get them fixed. Retrieved from https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/
- McGurren, B. (2019, April 29) Everything You Need to Know About Credit Builder Loans. Retrieved from https://www.experian.com/blogs/ask-experian/what-is-a-credit-builder-loan/
- N.A. (ND) What Are the Different Types of Bankruptcy and How Is Each Considered by My FICO®Score? Retrieved from https://www.myfico.com/credit-education/faq/negative-reasons/bankruptcy-types