By Lyle Solomon
Bankruptcy takes its toll on credit scores and stays on a credit report for seven to 10 years. However, having bankruptcy on your record doesn’t mean you can’t build a new financial home. In this article, we will discuss how to rebuild credit after bankruptcy.
Tips to rebuild credit after bankruptcy
1. Check your credit report
Find out the outstanding debts in your credit reports. Even after you settle your debts, it can take up to 60 days to receive the updated version of your credit report. Pay special attention to the status of your debts. Check if the credit bureaus have updated your account status as ‘discharged’.
Check for errors 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 usually get back to you within 30 days.
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2. Release your existing debts
Plan a budget based on your monthly income. Cut your expenses and set aside money to gradually pay off your outstanding debts.
3. Become an authorized credit card user
Try to become an authorized credit card user with a good payment history. Ask a family member to add you as an authorized user of his or her credit card. This can help add a positive payment history to your credit report.
Use new credit cards wisely
Once you start using a new credit card after filing for bankruptcy, don’t start to get out of hand with spending or you could build up debt again. Only charge your cards for the amount you can afford to refund, then make sure to pay your outstanding balance in full. Also pay your bill within the grace period to avoid paying interest. Timely payments improve your payment history; it accounts for 35% of your credit score.
Finally, don’t maximize your credit cards. Hold you credit utilization ratio—The percentage of credit you use of your credit limit – less than 30% to improve your credit score.
Apply for a secured credit card
You don’t need a particular credit score to apply for a secured credit card. You have to pay a security deposit to the credit card company that they keep if you don’t pay back. Your credit limit is determined by the amount of your security deposit.
There are many secured credit cards, including:
- BankAmericard secured credit card
- Citi Secure Mastercard
- Discover the Secured Credit Card
But before you go for a card, look at the annual percentage (APR) and annual cost to choose the best card.
6. Build an emergency fund to protect your credit
Having an emergency fund will help you deal with unexpected expenses. If you can’t make payments, you can use your emergency fund. Set aside a certain amount each 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 using a loan or lender account
With the help of a co-signer, you can opt for a small personal loan as a way to rebuild credit. The co-signer acts as legal, financial support for you, and by having a co-signer, lenders can quickly approve your loan application. You can use the loan to renovate your home, repair your car or build a passive investment portfolio. And once you start paying on time, it increases your score.
You can also create a lender loan. This is a secured installment loan where a bank keeps your money in an account until the loan is paid off. You can choose to have the term of the loan between 12 or 24 months, and you may be eligible for this loan even if you have bad or no credit. As you make timely payments every month, your credit will improve.
How soon can you start rebuilding your credit score after bankruptcy?
You can try your creditworthiness 12 to 18 months after bankruptcy, and by using the right strategies, you can see some positive changes after a year. However, getting a good (670-739), very good (740-799), or excellent (800-850) credit score can take longer.
What you should pay attention to:
- Your credit score will not improve if there are other negative items on your credit report.
- The effect of bankruptcy on your credit score can diminish after a few years.
- If you already have a bad credit score (less than 579), you may see very little change.
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7 common misconceptions about your creditworthiness after bankruptcy
Misconception # 1: Bankruptcy has an equal impact on the credit of all consumers. It does not take into account the amount of the debt or the number of debts stated.
Fact: It depends on the amount of debt that has been forgiven, as well as the number of negative to positive bills on your credit report.
Misconception 2: If your credit report is clean before it goes out of business, you will be satisfied. After bankruptcy, you have a higher credit score than others.
Fact: The presence of a positive history and the absence of negative items make little difference. It’s about how long the bankruptcy is on the credit report.
Misconception # 3: Bankruptcy resolves all debts and increases your creditworthiness.
Fact: Bankruptcy does not solve all debts. You cannot cancel debt from child support, spousal assistance, student loan debt, most tax liabilities, etc.
Misconception # 4: Bankruptcy will destroy your credit forever.
Fact: You can rebuild credit over time.
Misconception # 5: You will be dealing with poor credit as long as the bankruptcy information remains on your credit report.
Fact: After bankruptcy, you can immediately start rebuilding your credit by:
- Add new credit
- Remove negative items
- Disputing mistakes
- Stay within your credit limit
- Make timely payments
Misconception # 6: You cannot get a new credit card or loan to build credit after bankruptcy.
Fact: Secured credit cards allow you to build credit just like traditional cards. You can also opt for a passbook, CD or lender. These loans are secured with a down payment or collateral and help you build credit.
Misconception # 7: Your bankruptcy will also hurt your spouse’s credit.
Fact: Filing for bankruptcy will not affect your spouse. It will not show up on your partner’s credit report.
One final misconception is to believe that credit repair companies can quickly increase your credit score. However, that is not the case. You still need 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 at a price, and those solutions can be risky. It is best to rebuild your credit yourself.