Filing for bankruptcy is one of the hardest financial decisions someone can make, and it can have a massive impact on your credit. Filing for Chapter 7 and particularly Chapter 13 can drastically limit your borrowing options with lenders and creditors and put you in a financial hole that can be challenging to dig out from.
While building credit after bankruptcy can be very difficult, there are several steps you can take to alleviate the situation right from the start.
How to Build Credit After Bankruptcy
Bankruptcies can remain on your credit report for up to seven, or in some cases, ten years. Even though their effect will slowly fade over time, here are some tips on how to reduce their impact and start building your credit right away.
Track your credit score
For fairly obvious reasons, constantly keeping track of your credit score is essential when repairing credit after bankruptcy. You want to track your progress, and checking your credit score on a monthly basis can show you whether or not the steps you are taking to build your credit are working or not.
Please note that hard inquiries will reduce your credit score by up to five points, so avoid making them to keep track. On the other hand, several US credit card issuing companies offer free credit score updates, so try to utilize those instead.
If you notice a sudden dip in your credit score while rebuilding your credit after bankruptcy, this could indicate that you are doing something you shouldn’t be doing. Or in some cases, negative items that shouldn’t be on your credit report in the first place are bringing your credit down.
Which brings us to our next point.
Examine your credit reports
Learning how to read and fully understand your credit reports is one of the most important things you will need to do to build credit after bankruptcy. Everyone can fix their credit by themselves if they put in the time and effort to learn a few elementary credit repair techniques.
All consumers are protected by a federal law called the Fair Credit Reporting Act, which gives them the right to one free credit report per year. Additionally, the FCRA mandates that most negative items can only stay on credit reports for up to seven years, except for Chapter 7 bankruptcy which can stay for up to 10. Finally, the FCRA also gives consumers the right to dispute inaccurate information found on their credit reports and ask for their removal.
By understanding your credit reports, you can start fixing credit after bankruptcy by disputing and:
- Removing repossessions
- Removing charge-offs
- Removing inquiries
- Removing late payments
- Removing collections
and other negative items that drag your credit score down but have no business being on your credit report.
The latest credit repair statistics reveal that more than a third of consumers who checked their credit reports found at least one error, which means that credit bureaus are not perfect. It’s up to you to repair your credit after bankruptcy and build it from a stronger foundation.
Only rely on secured credit cards
While your instinct may be telling you to avoid credit cards at all costs after bankruptcy, it may only be partially right. After all, the only way to rebuild credit after bankruptcy is to have open credit accounts and pay them on time.
Therefore, getting a secured credit card is arguably the best way to build credit after bankruptcy, or at least to get you started.
Secured credit cards are low-risk and don’t require good credit to get qualified. However, they do require a deposit that will be used to cover your debt in case you are unable to pay it. In addition, secured credit cards tend to have higher interest and APRs than unsecured ones, so be sure to pick your options.
Some secured credit card providers allow their clients to prove their creditworthiness and, after several consecutive timely payments, give them a chance to apply for an unsecured credit card. In the meantime, the same on-time payments will have a substantial impact on your credit score and kickstart the re-establishment of your credit after your bankruptcy.
As a final note, even though the qualification requirements are not that high, there is still a chance your secured credit card application will get rejected. To avoid making multiple hard inquiries that hurt your credit score, try to find providers that can give you a prequalification and tell you how likely are you to get the card before you actually apply.
Consider alternatives
Secured credit cards are great for establishing credit after bankruptcy, but you will need multiple open accounts to achieve results quicker.
Credit-builder loans are created specifically for people looking to repair and build credit, which means their qualification requirements are low. Moreover, they are backed up with the borrower’s funds, making them very low risk, and when used strategically, they can significantly boost your credit score.
The options for borrowing and building credit after Chapter 13 bankruptcy can be quite limited, though, almost everyone can qualify for a credit-builder loan. Additionally, other alternatives with high approval rates to consider are retail credit cards.
Get your rent payments reported to credit bureaus
Building credit after bankruptcy is a challenging task, and you will need to ask for all the help you can get to make a significant difference quickly. For starters, if you don’t own the house you live in, why not ask your landlord to report your rent payments to the credit bureaus?
Of course, this assumes that you pay your rent in full and on time every month, and your rent payments will be added as a new positive in your credit report.
Generally, not all landlords report their tenants’ payments to the credit bureau, but if you can convince them to do it, your credit will get a boost for something you have already been doing. Explain to your landlord that reporting your rent payments will be positive for them, too, as it will incentivize tenants to always pay their rent on time.
The only downside is, if you’re late with your rent, it will be negatively reported on your credit report. But if you are a responsible tenant, it can be another source of positive points on your score that your credit after bankruptcy desperately needs.
Ask to become an authorized user
Another way you can build credit after bankruptcy with the help of someone else is by getting someone with excellent credit to add you as an authorized user of their credit card. All positive items generated from that credit card will be reported in your credit report and help you heal your credit. In credit repair, this is what is known as credit piggybacking.
By adding you as an authorized user, your credit will benefit from their good credit behavior, immaculate payment history, timely payments, low credit utilization rate, and high credit limit.
On the other hand, your bad credit will have no effect whatsoever on their excellent credit score, so there are absolutely no drawbacks for them. In fact, for credit piggybacking to work, they don’t even need to let you use their credit card at all, or even give you their account number to rebuild your credit after bankruptcy. They just need to keep practicing their good credit habits.
The risk with credit piggybacking is that the owner’s credit behavior may suddenly worsen due to an unexpected situation, and getting off someone’s credit card can take a few days.
Furthermore, just because someone can help you doesn’t necessarily mean that they are willing to do it. Ultimately, adding you as an authorized user does give you the right to use their credit card, which isn’t a small favor to ask for. Apart from your relatives and close friends, chances are, most people will not go through with it.
Try to find a co-signer
Rebuilding credit after Chapter 7 bankruptcy can be very difficult, particularly with the limited borrowing options you get with your devastated credit, but there is another way your close ones can help you out. Besides letting you become an authorized user, a person with great credit willing to help can agree to be your co-signer, providing you with more loaning opportunities.
However, please note that not everyone can get an opportunity to rebuild their credit after Chapter 7 using this method, as this is even riskier for the one helping you out than credit piggybacking.
While it can be very beneficial for you, the person who agrees to be your co-signer will legally owe your debt if you are unable to pay it off. Unless you have an immediate family member in a great financial situation, it is hard to imagine someone accepting to be your co-signer.
Avoid job hopping
Repairing credit after bankruptcy means doing everything in your power to convince lenders and credit bureaus that you are working on fixing your credit. Now in every other situation, your employment may not play too big of a role, but when coming out of bankruptcy, creditors will not take kindly to job hopping.
The best way to build credit after bankruptcy is by keeping a stable job with a steady income which lenders will take as a positive and give you better loaning opportunities. You will need to open multiple accounts with them, so their opinion matters. Even if it means you have to stay at a job longer than you may want to, try to earn their favor, at least until your credit improves more notably.
Practice good credit habits
Rebuilding and establishing good credit after bankruptcy ultimately boils down to practicing good credit habits. The tips in this article can help you hit the ground running, but they won’t be enough to get you to the finish line. Good old money management and sticking to a budget should be the fundamentals you build these practices on.
Here are the top five credit habits for fixing credit after bankruptcy, building credit, and maintaining a high credit score.
Pay everything on time
Timely payments are essential, not only when rebuilding credit after bankruptcy but always. Out of all possible factors, your payment history plays the biggest role in determining your credit score, so you can’t build good credit with late payments. Do what you need, set reminders, enable autopay, or pay the bills as soon as you get them, but always pay on time.
And not just your debt, pay your utility bills and other expenses on time to avoid going into collections which can have a devastating effect on your credit.
Use your credit card less
More precisely, only use your credit card when you must. One of the credit repair after bankruptcy tips was to get a secured credit card, but this doesn’t mean you should use it for everyday purchases. Using your credit more than you have to won’t improve your credit. In fact, keeping a low credit card balance will do you more good.
Lower your credit utilization ratio
Right after your payment history, your credit utilization ratio is the second most impactful item on your credit report, making it vital for rebuilding credit after bankruptcy. It’s calculated by dividing the total available credit by the credit you are actually using, and generally, keeping it under 30% can have a positive effect.
This goes in line with the previous two practices. Using your credit card less frequently will keep your credit card balances low, which will allow you to pay them off, in full, every month.
Start an emergency fund
Building an emergency fund while building credit after Chapter 7 may seem impossible, but do your best to at least get it started. Over time, you can start contributing more and more as your situation improves. Having an emergency fund can help you deal with unexpected situations and avoid going into another bankruptcy.
Don’t rush into decisions
You may be tempted to make some risky decisions when repairing credit after bankruptcy which is why you must exercise caution and be patient. Getting out of bankruptcy may take longer than you expect. Take this time to develop good credit habits that will continue being useful for you even after you get back up on your feet, and make the best out of a bad situation.
The Bottom Line
As you can see, building credit after bankruptcy is far from an easy task, and one that will take loads of financial discipline and endurance to achieve. Unfortunately, there are no shortcuts that will take you to good credit overnight, but with the right steps, you can accelerate the process.
Removing the errors from your credit report, opening a few new secured lines of credit, keeping their balances low, and always paying them on time should be enough to get you started. Along with the other tips in our article, it shouldn’t take more than two years to fully heal your credit.
FAQ
How long does it take to rebuild credit after Chapter 7?
Chapter 7 bankruptcies can stay on credit reports for up to 10 years, but their effect diminishes over time. Moreover, filing for bankruptcy significantly reduces your debt-to-income ratio, allowing for notable improvements to take place after one or two years. Of course, you can take action to fix your credit before this time.
How long does it take to rebuild credit after Chapter 13?
Chapter 13 bankruptcies can only stay on credit reports for up to seven years, but you can start improving your credit after 18 months, when the bankruptcy will be discharged.
How soon will my credit score improve after bankruptcy?
Credit repair after bankruptcy entirely depends on what actions you take to improve your credit. That being said, it is not unheard of for consumers to go from bad to fair credit in 12 to 18 months.
