Although filing for bankruptcy may cause you to worry about whether you will ever have good credit again, it may not be as bad as you think. Bankruptcy offers a clean financial slate and if you follow the recommended steps, you will be able to rebuild your credit in no time. Credit repair does not happen overnight, but once you begin making wise choices and learning from your past mistakes that led you to file for bankruptcy, your credit score may be higher than it was before filing for bankruptcy. Instead of fighting a hopeless battle where you can no longer manage or pay off your debt, you may start focusing on rebuilding credit. It is true that bankruptcy remains on your credit report for approximately 10 years, but the good news is that its impact on your credit score decreases with time. Before you filed for Chapter 7 or Chapter 13 bankruptcy, your credit score was probably already damaged enough. There are strategies you can implement to repair your credit score right away in order to counteract negative information on your credit report. Although having a clean financial slate may appear to be the same as that of someone who is new to building credit, the situation is not the same as creditors have all this negative information from your credit reports, but the more smart choices you make to rebuild your credit, the higher your score will become and may change the way creditors perceive you in terms of loans and credit cards. Below are a few ways to start repairing your credit after bankruptcy:
Review your credit reports
Checking your credit reports is important to ensure that your information is accurate and you can do it for free on AnnualCreditReport.com. Your credit score is determined by using the information found on your credit reports and if the negative information is inaccurate, it will be much harder to get out of debt. Dispute any errors you come across so they can be corrected.
Although bankruptcy removes debt, it does not erase accurate negative information on your credit reports. Whenever someone files for bankruptcy, it gets reported to the three main credit bureaus- Transunion, Equifax and Experian. Chapter 7 bankruptcy remains on your credit reports for 10 years while Chapter 13 bankruptcy remains for 7 years. Late payments and debts that were sent to collections also stay on your credit reports for 7 years from the time they became delinquent. Once the appropriate time passes, they will eventually fall off your credit reports.
Maintain payments with non-bankruptcy accounts
Although most debt is discharged after filing for bankruptcy, some debt such as student loans, alimony or child support is not. Keeping up on your payments will help to rebuild your credit by lowering your debt-to-income ratio. Paying more than the minimum each month will boost your credit score even more and will show potential lenders that you are serious about rebuilding your credit score.
Apply for a secured credit card
Your payment history before filing for bankruptcy will probably paint a picture of a very risky borrower to lenders, but the good news is that this can be reversed. Applying for a secured credit card is one way to fix this problem as it improves your financial profile and also provides extra assurances to hesitant lenders showing them that you are capable of managing credit responsibly after bankruptcy. Instead of borrowing from lenders, a secured credit card allows you to borrow money from yourself. The amount that you deposit is usually your credit limit and any time you make a purchase using this card, you need to make a payment to yourself to cover the expense. It is worth noting that secured credit cards typically have annual fees and high interest rates, but they are not necessary for a long time. Over a short period of time a secured credit card will rebuild your credit until you qualify for a better unsecured credit card.
Make sure you review the requirements before applying for a secured card because even though it is technically not a credit card, you may still be denied it. It is better to be certain that you will be approved as each credit inquiry will cause your credit score to decrease even though it is only temporary. This drop in your credit score will be worth it once you are approved for a card and begin to manage it responsibly by making small purchases with on time payments.
Apply for a secured loan or credit-builder loan
Credit unions or community banks offer two types of loans- a secured loan and a credit-builder loan. A secured loan consists of putting down a security deposit that is inaccessible until you pay off the loan and borrowing the amount equal to your deposit. A credit-builder loan does not involve providing cash upfront but instead the money that you borrow is put in a savings account and delivered to you once you make the requested payments. This particular loan helps to build your credit as the lender reports your payment history to the credit bureaus.
Request someone to cosign a loan or credit card application
If you have someone you can trust who can cosign a credit card or loan application and maintains a good credit history, it would be beneficial in rebuilding your credit score as you would be approved for credit under your own name. A family member or a friend may cosign auto loans, rental agreements and mortgages. It is worth noting though that this is a huge risk to someone’s credit reputation as your cosigner would ultimately be the one responsible for paying off any debt if you do not make payments. Make sure to review the terms together and pay as agreed so there are no misunderstandings later on.
Request to become an authorized user
Cosigning a credit card or loan application may be too risky for someone to accept. If that is the case, it might be best to request to become an authorized user on someone’s credit card instead. Before you become an authorized user, make sure to inquire whether payment activity by authorized users is actually disclosed to the credit bureaus, otherwise this will not rebuild your credit score. Moreover, if you do become an authorized user and your payment activity is reported, be aware that this method will not increase your credit score significantly as the other methods as authorized users are not held accountable for the repayment of debt. That responsibility lies primarily on the account holder; however, it is still something worth trying if all else fails.
Avoid changing jobs frequently
Although this does not directly affect your credit score, it does influence potential lenders’ decisions on whether you demonstrate creditworthiness. Frequent job changes are a red flag for lenders as this does not show that someone is reliable with a stable job that provides consistent income as lenders need reassurance that you will pay off a loan. Apart from your credit score, lenders also consider your income and job history that shows you can hold a job for at least 24 months.
Rebuild your finances
Rebuilding your finances is just as important as rebuilding your credit after bankruptcy. Having sufficient funds to cover all expenses and current debt demonstrates to potential lenders that you are capable of managing credit responsibly. This fundamental tactic will increase your chances of getting approved for different types of loans and will open doors to new opportunities. Staying on top of your debt and making regular, consistent payments will eventually pay off. To manage your debt, it is a good idea to utilize these following strategies:
Create a budget
A budget is a great way to manage your finances as it allows you to spend only what you have and sets your priorities straight. It is a good idea to divide your expenses into categories and set spending limits for each category, making sure not to go over the limit in any category. Not only does this method save you money, but it teaches you discipline and may even change the way you spend your money.
Start an emergency fund
Unexpected expenses, such as buying a new tire due to a flat tire or pet emergencies, happen so it is best to be prepared and start an emergency fund even if you are only able to set aside $250 in savings. An emergency fund may protect you from falling into a debt spiral again by preventing you from maxing out your credit cards or requesting high interest loans to cover unexpected expenses. This will help you save money on interest.
Maintain good credit habits
It is important to maintain good credit habits, such as making on time payments or maintaining a credit utilization rate below 30% or better yet below 10%. Stay on top of your debt and lenders will be more than willing to extend credit to you even after bankruptcy.
