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Rebuilding Credit After Bankruptcy
August 4, 2020

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Rebuilding Credit After Bankruptcy

You give yourself a fresh financial start and file for personal bankruptcy. Immediately after declaring bankruptcy, your credit score will take a hit. The higher your score or the more debts you will need to discharge, the more your credit will suffer. No matter what your credit score was when you filed for Chapter 7 or Chapter 13, your score might fall to the mid 500’s – 600’s. Even if you had a perfect FICO credit score of 850, bankruptcy could leave a noticeable dent on your credit report for years after. Rebuilding credit after Chapter 7 discharge or during Chapter 13 can take a while, but the good news is that you can start rebuilding immediately.

This guide will help you navigate how to fix your credit after bankruptcy, the best options for you, and things to avoid on your new journey. These tips are useful in rebuilding credit during Chapter 13 or after filing Chapter 7.

Rebuilding Credit After Bankruptcy

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How Long Will Bankruptcy Affect Your Credit Score?

The rebuilding time period depends on the type of personal bankruptcy you filed. If you filed a Chapter 7 bankruptcy, it would reflect on your credit report for up to 10 years. If you filed for Chapter 13 bankruptcy instead, it would leave its mark for up to seven years. In addition to affecting your numerical score, filing bankruptcy also leaves a note on your credit report. Lenders won’t look into why your credit score is low but instead just read “Bankruptcy” on your credit history.

While filing bankruptcy will do severe damage to your credit in the short term, it will only reflect on your credit report for up to 10 years. Bankruptcy will not ruin your credit forever. However, you may want to rebuild your credit to a good score after taking such a hit. It may take some time before your score is where it was pre-bankruptcy, but you can consistently better it.

The best way to raise your credit score after bankruptcy is by ensuring all your payments are made on-time. However, you may not have access to your loan or credit card accounts after declaring bankruptcy. You’re now in a dilemma because you need to access your accounts to make payments to improve your credit score, but you need a good credit score to access your accounts. How will you solve this issue? Here is how to improve credit after bankruptcy:

Check Your Credit Reports for Accuracy

Everybody should check their credit report regularly but especially after filing for bankruptcy. While bankruptcy already damages your credit report, any other error can make the situation worse. It’s not uncommon for creditors to report negative account information after they’re meant to be cleared.

For example, overdue payments that were actually paid on time or an old bankruptcy filing lingering after seven (for chapter 13 bankruptcy) or ten years (for chapter 7 bankruptcy) have passed. The Federal Trade Commission (FTC) recently published a study where they found that one in five customers had an error on at least one of their three credit reports, making this a common issue.

You don’t need to pay exorbitant amounts to watch over your credit report – there are plenty of free credit reports. If you happen to find an error, send a dispute to the credit bureaus as soon as possible. Here are some things that should be accurate on your credit report:

  • Your personal information
  • Your employer information
  • Activity and statements
  • Payments due

After Chapter 7 Filing

After filing bankruptcy, you might be wondering how long to rebuild credit after Chapter 7? If you file a Chapter 7 bankruptcy, wait until your case is discharged and receive a letter from the court. Wait for 90 – 120 days after receiving this letter before checking your credit reports, so it has time to be updated with bankruptcy information.

After Chapter 13 Filing

Since your case will not be discharged until the end of your three to five year payment period, your waiting period is 90 – 120 days after your filing.

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How to Rebuild Your Credit After Bankruptcy

Follow these steps to get your credit score back up to where you need it after bankruptcy.

Keep Up With Non-Bankruptcy Payments

After filing bankruptcy, find out which accounts were not closed. This is because not all debts will be covered in your bankruptcy, such as student loan debt, alimony, and property tax liens. Paying these balances lowers your debt-to-income (DTI) ratio, boosting your credit score.

The best way to guarantee these payments are made on time is through a debt repayment program like ours at Debt Quest USA. We can help ease your burden and give you your time back to focus on rebuilding your finances.

Apply for New Credit Cards and Pay Them Off

Can you get a credit card after filing Chapter 7 or Chapter 13? Although it can be harder to get new credit after filing bankruptcy, it’s not impossible. Banks usually give you a more difficult time because you are too risky. An excellent way to mitigate risk is to provide them with collateral as something they can hold on to, on the low likelihood you default on payments.

You have two main kinds of after bankruptcy credit cards to choose from. Secured credit cards usually require you to provide a cash security deposit, so banks may be more likely to offer you one. Applying for and paying off retail credit cards can also help build credit. They are usually easier to get your hands on than traditional credit cards.

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Secured Credit Card

Secured credit cards may be easier to get approved for compared to unsecured credit cards because of the collateral you place behind it. Many lenders require at least $500 down, if not more, to approve you for a secured credit card. The amount you put down can act as both your collateral and credit limit.

To get the best possible score, you should pay your balance in full, on time, and aim to use less than 30% of your available credit (if your limit is $500, use less than $150 each billing cycle). Eventually, your lender may increase your credit limit or even offer a regular, unsecured credit card.

Retail or Gas Credit Card

Retail or gas credit cards are usually more consumer-friendly due to their laxer standards for approval. However, these cards regularly come with higher APRs and lower credit limits. While this is not ideal, the high APR should not affect you as long as payments are made in a timely manner. Each payment made on-time will result in positive points on your credit report, counterbalancing the negative effect of filing bankruptcy.

Credit Builder Loan

The primary purpose of this loan is to help build your credit score. It functions opposite to a regular loan because you pay the lender in installments before receiving the loan. During this time, the lender reports your payments to the credit bureaus monthly to help you build credit.

It’s similar to a series of savings deposits where you start and end with the same amount of money at different points in time, except you are rewarded with better credit standing

Secured Loans

You will need to put up collateral when applying for a secured personal loan. This can be your own property, such as a car or home, or even a savings account. Secured loans have similar benefits and drawbacks as a secured credit card, though you could lose your collateral if you default on a potentially more significant scale.

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Have a Cosigner

You can have someone close to you cosign your auto or mortgage loan or rental agreement. A cosigner can act as a legal, financial backer and help significantly improve your chances of loan approvals after bankruptcy. Asking someone to cosign on your mortgage application means that person guarantees they can make the payments if you are unable to – regular payments on the loan better your creditworthiness and your credit score.

Your cosigner can be someone you trust, perhaps a relative or very close friend, but they need to have a good enough credit score to make up for yours. By agreeing to be your cosigner, they should be aware that if you are unable to pay the loan, their credit score will also suffer.

Become an Authorized Account User

In contrast to getting a cosigner, you can apply to become an authorized account user on someone else’s credit card. You can do this by having a close friend or relative add you to their credit card account. During this time, you are not responsible for repaying any of the money charged to the account. This is because the primary cardholder (the person who owns the credit account) is responsible for the payments.

As an authorized account user, you can charge the account, but not make changes like the credit limit or adding authorized users. If the account is maintained responsibly, you can benefit from the primary card holder’s good credit habits through an increase in your credit report.

What to Avoid When Rebuilding Credit

Since your credit score is not where you want it to be, you may try everything you can to make it better. However, some things can negatively impact your score instead of better it. Here are some things to avoid as you rebuild your credit after bankruptcy:

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Credit Repair Scams

1 Many con artists will claim they can remove a bankruptcy from your credit report and charge a lump sum to do so. Don’t fall for it. While you control the credit repair after bankruptcy, no one can remove bankruptcy from a credit report before the allotted 7-10 years have ended.

Frequent Job Changes

2 While your state of employment does not directly affect your credit score, it can influence lenders. They want to know you have a stable income to be able to repay a loan. They consider your income level, job history for up to two years, and your credit score, amongst other factors. The details of your situation matter, especially if the job change comes with a difference in income level or industry.

High Account Balances

3 Low credit card balances show credit bureaus that you use your credit responsibly, especially if your credit utilization ratio is below 30%. Keeping a lower balance also lowers your DTI showing lenders you can repay what you borrow, improving your chance at better loans in the future. You can reduce your utilization ratio by increasing your credit limit or paying off any existing balances.

Applying for New Credit Too Often

4 Each time you fill out a new credit application, it prompts a hard inquiry into your credit report. Even a single application can negatively affect your score. If you apply for too many of these inquiries in a short time, lenders will consider this risky behavior, especially if you are frequently denied new credit cards. Having a few lines of credit open over a long period of time will increase your chances of being approved for credit cards in the future.

No Savings

5 Although this isn’t directly related to your credit score, placing some money into your savings account will help ensure you’re financially sound. When dealing with the consequences of bankruptcy, you may not have enough funds for surprise medical bills or unexpected circumstances. Moving a small amount of money weekly from your paycheck into your savings account can help when you need it most. You don’t need a lot in your savings account, perhaps three to six months’ worth of living expenses should be enough.

Life After Bankruptcy

Life after bankruptcy doesn’t need to be complicated. You already have so much to worry about; let us help you build your credit back to where you want it to be. Bankruptcy is a fresh financial start putting you in a better position now than you were immediately before filing. You’re moving in the right direction.

However, you will have to find a way to show FICO and the credit bureaus that you’re making smart financial decisions. The best way is by applying for low-risk forms of credit and ensuring your payments are on time every month amongst the other tips in this guide. As with any new journey, you may have questions.

Speaking to a debt relief agency can help clear up some questions you may have about your current situation and future outcomes. Counselors like those at DebtQuest USA can give you personalized advice on overcoming the struggles of those who are new to bankruptcy. You can stop wondering how to build credit after bankruptcy and talk to us today.

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