Rebuilding credit after bankruptcy

When you file for bankruptcy, your credit score takes a major hit. This can make obtaining competitive rates on loans and credit cards challenging. But while it will take some time to rebuild your credit score, it is possible. Here are some steps to take to get your credit score back on track.

How to rebuild your credit after bankruptcy

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

Keep up with payments on existing loans and credit cards

Instead of trying to get new financing right away, focus on making timely payments on existing loans or credit cards every month to help reestablish your credit. This can help improve your financial habits and your credit score.

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.

To help make sure you’re paying on time, set up reminders or set up autopay. Some credit cards can have a reminder sent to your phone or email before the due date.

Apply for a new line of credit

Adding a new line of credit and making on-time payments can 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.”

Too many hard inquiries will ding your credit score, so 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. There are some types of credit that may be better to consider when applying after filing bankruptcy.

• Credit builder loans. With a credit builder loan, the lender deposits the amount of the loan into a savings account. The money stays in that account while you pay 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.
• Secured credit cards. A secured credit card requires you to pay a security deposit before it’s issued. This deposit is usually the same amount as your credit limit, starting at $200. Should you miss a payment or are late, the credit card issuer will use your deposit to cover your bill.
• Being an authorized user on a credit card. You have permission to use a credit card when you’re added as an authorized user. The advantage of being an authorized user is that the primary account holder’s financial behaviors, such as making payments on the card, could help build your credit. However, if they miss or are late on payments it could harm your credit score.

Apply for a loan with a co-signer

Getting a well-qualified co-signer on a loan can help boost your chances of getting approved. This is because lenders will consider the co-signer’s credit score. When someone cosigns a loan, they don’t have access to the money, but they’re equally responsible for paying it back.

Explore the different options for establishing a new line of credit and see which ones you think might benefit you. You’ll want to consider 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 intact so you don’t fall into a deeper debt hole

Be cautious about job-hopping

Lenders often factor in your job history when approving a loan, so 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.

When researching lenders, see if employment history plays a part in acceptance. If you’re self-employed, be prepared to provide additional income verification.

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.

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.

“The reality is that there is nothing a credit repair firm can do for you that you cannot do yourself for free,” says Rod Griffin, Experian’s senior director of consumer education and advocacy. “You should also know your rights under the Credit Repair Organizations Act (CROA). Among other things, the law prohibits a credit repair firm from claiming it can remove accurate information and from taking any payment until it fulfills all the terms in a written contract.”

Improving your finances after bankruptcy

Rebuilding credit and assessing your budget after you’ve filed bankruptcy can help you reestablish your credit profile and put you in a better financial spot for the future.

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 and cutting back on nonessential costs you can avoid applying for more credit.

To effectively build an emergency fund make sure to create a budget based on your income and remaining expenses.

Stick to a budget

By keeping close watch on your spending habits, you can make sure you stay within your means and don’t overspend. Overspending leads to more debt than can reasonably be handled when it happens too frequently.

Within the realm of what you can control financially, money management is probably 90 percent of financial well-being, and other factors, such as income, are 10 percent. 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.

Explore money management apps that can make it easy to see where your money is going. Many banks also offer auto-saving options, 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 have to 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.

If you fell into the habit of missing payments, do whatever it takes to stay on top of your credit card payments. 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.

Can you get credit after bankruptcy?

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

• Car financing. Chern says that a Chapter 7 debtor can 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 it will take 18 to 24 months before a consumer with reestablished good credit can secure a mortgage loan after discharge from personal bankruptcy. Borrowers who are still rehabilitating their credit should prepare to pay interest rates that are two to three 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.

Bottom line

Filing bankruptcy can be the reset your finances need when you’re feeling overwhelmed or unable to keep up with debt payments. When you resort to bankruptcy, however, your credit score will be impacted.

The good news is that concrete actions help you rebuild your credit. Consistently making on-time payments on existing loans and credit cards is one of the easiest and most effective ways to get started. Being cautious about job hopping, keeping a close eye on your credit report and disputing any errors will also help get your credit score back in shape.

Frequently asked questions

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

  A bankruptcy stays on your credit report for 10 years. However, 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 in a year or two.

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

  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 more equipped to manage their money efficiently. In many cases, after 18 months of regular Chapter 13 payments, debtors can typically refinance out of a Chapter 13, especially if you have any equity in a home.