Rebuilding credit after bankruptcy

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Veles Studio/ShutterstockIf you’ve recently filed for bankruptcy, you’ll likely be faced with higher rates on loans and credit cards due to a subprime credit score. However, while it will be hard to improve your credit score initially, it’s never too early to start rebuilding your credit.

How to rebuild your credit after bankruptcy

If you are currently going through or have recently gone through a bankruptcy, there are a few things to keep in mind when rebuilding your credit.

Here are a few rules of thumb to build credit after bankruptcy:

Beyond these, there are other strategies that can help.

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 you’re 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 you’ve spent over X amount.

Apply for a new line of credit

Adding a new line of credit can demonstrate that you can responsibly make on-time payments. In turn, it’ll help your credit score. However, when you apply for new lines of credit, the lender will do a hard pull on your credit. “Every time you apply for new credit, your prospective lender accesses your credit report,” says April Parks-Lewis, director of education and corporate communications at Consolidated Credit. “Those inquiries can drag down your credit score.”

As too many hard inquiries will ding your credit score, try to apply for credit lines you know you can qualify for. You can also apply to get prequalified, which results in a soft pull of your credit. When you’re trying to build your credit after bankruptcy, here are some types of credit for you to consider:

  • Credit builder loans. With a credit builder loan, you deposit money into an account. The lender keeps that money while you make payments on the principal and interest on the loan. These payments are reported to the consumer credit bureaus. After you pay back the loan, the money is released to you. Credit builder loans are typically offered by regional banks and community banks, and the loan amounts are small.
  • Secured credit cards. A secured credit card requires you to dole out a security deposit before it’s issued to you. This deposit is usually the same amount as your credit limit, and the amount starts at $200 and can go up to $2,500. Should you miss a payment or are late, the credit card issuer will use your deposit to cover your bill. If you showcase financial responsibility and make on-time payments, you’ll get your money back over time. Because secured credit cards are considered low risk, it’s a good option to rebuild credit.
  • Being an authorized user on a credit card. When you’re added as an authorized user on someone else’s credit card, you have permission to use it. As you’re not the primary account holder, you’re not responsible for making payments on the card. The advantage of being an authorized user is the primary account holder’s financial behaviors, such as making payments on the card, could potentially help build your credit. However, if they miss or are late on payments, it could harm your credit file.

Why this matters: A new line of credit can help you build your creditworthiness.

How to get started: Choose one of the options from above that fits your situation best and work on keeping that line of credit in good condition.

Apply for a loan with a co-signer

Should you apply for a loan on your own, lenders might deem you risky because of your credit past. Getting a co-signer on a loan can help boost your chances of getting approved. That’s because lenders will take into account the co-signers credit score, which would up your creditworthiness. When someone cosigns a loan, they don’t have access to the money. However, they are on the hook for repayment should you be unable to keep up with your payments.

Why this matters: Rebuilding credit after you’ve filed bankruptcy can help you re-establish your credit profile. By understanding the different options, you’ll learn how these different forms of credit might help you boost your credit after it’s been on shaky ground.

How to get started: Explore the different options for establishing a new line of credit and see which ones you think might be beneficial for you. You’ll want to take into consideration whether a hard pull or soft pull on your credit is required, what you would use that line of credit for,  setting limits on a line of credit, and having a repayment plan in tact so you don’t fall into a deeper debt hole.

Be cautious about job-hopping

As lenders often factor in your job history when approving a loan, holding down a stable job and having consistent income can boost your chances of getting a loan. That’s because stable employment can make lenders look more favorably on your ability to pay your loans.

While switching jobs might be okay, having gaps in income might make you seem more like a risk to lenders.

Why this matters: When you’re trying to land financing after bankruptcy, because your credit is shaky, you’ll want to make sure as many financial ducks are in a row as possible. Having consistent income and not job-hopping too much can help you look more favorable to lenders.

How to get started: When researching lenders, see if employment history plays a part in the decision-making process. If you’re self-employed or side hustle, be prepared to provide additional income verification. The more documentation you can provide that shows your income is consistent, and better.

Keep a close eye on your credit reports and credit scores

Every year, you are entitled to one free copy of your credit report from each of the three major credit-reporting institutions: Equifax, Experian and TransUnion. Take advantage of this and regularly examine your reports for errors or missing information. If you find any inaccuracies, such as a delinquent account that doesn’t belong to you, you can report it to the appropriate credit-reporting agency. When the negative mark is removed, your credit score will likely rise.

Why this matters: Inaccurate information on your credit reports can cause a low credit score.

How to get started: Use AnnualCreditReport.com to access each of your credit reports for free. Through April 2021, you can access each of your reports once a week. Many credit card companies also provide you regular updates of your credit score to monitor.

Think twice about working with credit repair agencies

Instead of paying a credit repair agency, consider using that money to increase your emergency fund and savings. Focus your efforts on the habits and circumstances that led to your bankruptcy and how you can change them.

“There are many unscrupulous agencies out there that will claim they can remove a bankruptcy or fix a credit report,” says Samah Haggag, a senior marketing manager for Experian. “There is nothing a credit repair organization can do that you cannot do yourself.”

Why this matters: Credit repair agencies take the heavy lifting out of credit-building, but they charge fees. If you’re willing to put in the work of checking your credit reports and disputing errors, you can save that money and use it to continue paying down existing debt.

How to get started: Take a look at your budget and request copies of your credit report yourself before looking into credit repair agencies.

Factors to consider

How long does it take to rebuild credit after Chapter 7?

A bankruptcy stays on your credit report for 10 years. However, former bankruptcy attorney Kevin Chern says that when a person files Chapter 7 liquidation bankruptcy, the debtor immediately and dramatically reduces their debt-to-income ratio, which could set the stage for a rising credit score a year or two down the line.

“You also eliminate your ability to qualify for Chapter 7 for another eight years,” says Chern, who is the CEO of Help Path, a resource for individuals to receive a free consultation from a bankruptcy attorney. “In the eyes of a potential lender, you may actually appear to be a better risk immediately.”

How long does it take to rebuild credit after Chapter 13?

Chern also says that most Chapter 13 petitioners will see a reduction in debt-to-income ratio, but this won’t occur as quickly.

“After three to five years of living on a strict budget, Chapter 13 debtors should be much more equipped to manage their money efficiently,” he says. “In many cases, after 18 months of regular Chapter 13 payments, a debtor can refinance out of a Chapter 13, especially if the debtor has any equity in a home.”

Can you get credit after bankruptcy?

Although it may be harder to find a lender willing to offer you a competitive product, there are still ways to get credit after bankruptcy. Some types of credit you could receive include:

  • Car financing. Chern says that it’s possible for a Chapter 7 debtor to finance a car the day after filing. Additionally, “a Chapter 13 debtor may be able to finance a car while the repayment plan is still in effect, although the trustee’s permission is required after showing that the car is necessary to complete the debt repayment.”
  • Conventional mortgage. Most experts say that it will take 18 to 24 months before a consumer with re-established good credit can secure a mortgage loan after personal bankruptcy discharge. Credit-impaired borrowers should prepare to pay interest rates that are 2 points to 3 points over conventional rates.
  • FHA-insured mortgage. Chapter 13 filers can get an FHA-insured mortgage if they’ve made timely payments for one year and the debtor has received the court’s permission. Debtors with a Chapter 7 bankruptcy discharge must wait at least two years after discharge and establish a history of good credit.

Improving your finances after bankruptcy

Build an emergency fund

Because much of your debt will likely be eliminated following a bankruptcy, it’s an ideal time to start building up your savings. By putting a portion of your income into a savings account or cutting back on nonessential subscription services or memberships, you avoid having to apply for loans — which could put you back into debt if you’re unable to keep up with the high interest rates that come along with bad credit.

Why this matters: Without an emergency reserve, it can be easy to fall into the same debt pitfalls that caused the bankruptcy.

How to get started: After your debt payments are removed as part of the bankruptcy process, make sure to create a budget based on your income and remaining expenses. Include building an emergency fund as part of your new budget.

Stick to a budget

Chances are you dug a deep debt hole and found yourself in financial straits partly because you weren’t managing your money properly. By keeping close watch on your spending habits, you can make sure you stay within your means and don’t overspend. When you overspend, you might rack up more debt than you can reasonably handle.

Why this matters: Within the realm of what you can control financially, money management is probably 90% of financial well-being, whereas other factors such as income is 10%. Sticking to a budget and seeing where your money is going versus how much is coming in can help you stay under budget. In turn, you can avoid accruing too much debt.

How to get started: Explore money management apps that can make it easy for you to see where your money is going. Many banks also offer the option to auto-save, which can help you save for a rainy day.

If you’re old school, you can track your spending by jotting down your purchases in a journal. Make a point to check your bank balance daily, and check in at least once a month on your budget. During your monthly budget check-ins, you can make tweaks accordingly.

Be mindful of your credit habits

A good rule of thumb when rebuilding your credit is that whatever you did to ding your credit, you must do the reserve to rebuild your credit. For instance, if you hurt your credit score by having too high a debt-to-income ratio, then make a point to keep your DTI low. You’ll want to keep your credit usage to 30 percent or under.

If you fell into the habit of missing payments, then do whatever it takes to stay on top of your credit card payments. Remember: your payment history makes up 35 of your credit score. If you tend to rack up a huge credit card bill over the holidays, and experience holiday debt hangover, avoid it at all costs this holiday season.

Why this matters: Your credit habits play a big part of keeping your credit score in tip-top shape. And when you’re rebuilding your credit after bankruptcy, it is particularly important to show to lenders that you’re financially responsible.

How to get started: Start by making on-time payments, monitoring your financial habits around using credit. It might also help you to sign up for a free credit monitoring service, which can show you how much progress you’ve made on building your credit back up.

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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Student loans editor