Credit Repair after Bankruptcy: Rebuilding your Finances
Bankruptcy can remain on your credit report for up to 10 years and it can do some serious damage in that time, reducing your chances of securing everything from a mortgage to an unsecured credit card.
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But while it might feel like the end of the road, that damage lessens over time and the longer you leave it, the less of an impact it will have on your credit rating. There are several things you can do to rebuild your credit while you wait for these effects to diminish, giving your credit report a boost, increasing your credit score, and enjoying some financial freedom during this difficult time.
How Long Does It Take to Rebuild Your Credit After Bankruptcy?
Bankruptcy may reduce your score to the mid-500s or less. At this point, you’ll struggle to get a mortgage or car loan and while credit card companies will inundate you with offers, the interest rates, and fees will be sky-high.
You can start rebuilding your credit right away, however, taking advantage of the clean slate to re-establish credit in a way that doesn’t lead to high debts and additional bankruptcies.
What is the Minimum Waiting Period?
It’s possible to apply for new credit as soon as the bankruptcy has been filed, but this is not something you should rush into. Creditors have been known to target individuals who have just gone through bankruptcy. They know those individuals can’t file again for a number of years and are desperate for some credit.
Many borrowers accept the first offer they receive, assuming it’s the best they can get. But just because your credit score is low doesn’t mean you have to take what you’re given. Do your comparisons, shop carefully, avoid hard inquiries, and only accept the credit that you know you can handle.
Why Does it Take Time to Rebuild my Credit?
All credit bureaus will report your bankruptcy, and this will remain on your account for up to 10 years. It’s a warning to other lenders, telling them that you may struggle to handle future debts and may rush into settlement and forgiveness options as soon as the opportunity presents.
Rebuilding your credit takes time because lenders may overlook you and your only options are to accept slow-building credit or high-interest credit. It should also be noted that the major credit bureaus update credit reports just once a month, which can feel like a slog if you’re trying to make some quick changes to your dwindling credit score.
How Soon will Your Credit Score Increase After Bankruptcy?
Credit scores are somewhat forgiving. All damage can be undone, all wrongs can be righted, and you don’t need to wait an eternity for those changes to occur. With bankruptcy, you won’t need to wait the full 7 or 10 years to start seeing a notable increase in your credit score, but you will need to give it at least 12 months.
Once that period has passed, your credit score will gradually improve, the bankruptcy’s impact will lessen, and you can start rebuilding credit and getting into that “Fair” range, at which point things become a lot easier.
Steps to Building Credit After Bankruptcy
As soon as your debts have been discharged or restructured it’s time to start rebuilding your credit report and improving your credit score. Here’s how you do it:
Free Credit Check
You can check your credit report for free at least once a year with all credit bureaus. This allows you to see your credit report as lenders see it. It will look a little unhealthy after bankruptcy, especially if you have lots of late payments and other derogatory marks, but it’s nothing that can’t be fixed.
Look for errors in this report, anything that doesn’t belong and was inserted by mistake or as a result of fraudulent activity. You may be suffering as a result of an action that wasn’t your fault, in which case you can dispute it and have it removed. Contact the credit bureau directly to do this.
Learn to Budget Properly
No one wants to be told they’re bad at managing money or they need assistance in something that should be very simple. But it’s not simple, which is why over 600,000 Americans file for bankruptcy every year.
It’s easy to get caught in a cycle of credit card debt and late monthly payments, but if you’ve been through bankruptcy you can’t afford this happening again.
Speak with credit counselors, talk to your family, be open about debt and credit, and learn to budget your money effectively. One of the best ways to do this is to calculate your debt-to-income ratio and then keep a close eye on it every time your income changes or you acquire new debt.
This will help you to build good credit and keep it.
The average monthly income in the United States is just over $3,500. Assuming you have bills of $1,000 (utility, food, insurance) and debt repayments of $1,000 (mortgage, car) that leaves $1,500. If we take $1,000 of this to cover additional expenses (clothes, restaurants, entertainment) that leaves $500. It’s a small amount when compared to your salary, but a huge amount for a savings account.
If you add this money to a savings account every month and get a 4% interest rate, you’ll have close to $34,000 in 5 years. If you find yourself heavily in debt during that period, you can simply cash your savings and use them to fund a debt settlement program or clear the debts outright.
A savings account is your emergency fund, your get-out-clause, because if you’ve recently filed for bankruptcy you won’t be able to file again for a number of years.
Get a Secured Credit Card
A secured credit card functions just like an unsecured card in that you can use it to make purchases online and offline. It’s secure, safe, and convenient, and because lenders report to the credit bureaus, it can also help you to improve your credit score.
To get a secured credit card you need to pay a security deposit. You will then be given a credit limit that’s the same size as this deposit. Should you fail to meet your minimum payment, the lender will simply use your deposit to cover their losses. This is one of the best ways to quickly build good credit and it’s available even to individuals with poor credit scores and a limited/damaged payment history.
If a secured credit card isn’t enough for your needs, you can also consider a store card. These offer lots of big rewards alongside smaller credit limits, and providers are more willing to accept individuals with poor credit. However, store cards often come with high-interest rates, annual fees, and penalty rates, so make sure you keep meeting those monthly payments.
If you know someone who has a relatively clean credit report and a high credit limit, ask if you can be added as an authorized user on their credit card. This will provide an instant boost to your score and will appear on your credit report as a positive account.
You can also get a loan or credit card by asking a friend or family member to become a co-signer. This means they assume responsibility for the debt if you can no longer pay. It’s a big thing to ask of anyone, however, and they will need to trust you.
Be Careful with Debt Relief
Debt relief is great if you’re struggling with masses of debt and need an escape route. However, options like debt management, debt consolidation, and debt settlement were designed as alternatives to bankruptcy, not something to be taken alongside or after.
There are also debt relief programs that claim to provide a service they simply can’t provide. These programs will either scam you outright (often by claiming to have access to special government grants or forgiveness schemes) or they will sell you an established tradeline, which is expensive and immoral, as well as a practice that credit bureaus are snuffing out.
There is no quick fix in the world of credit repair. It takes time to regain the trust of lenders, to establish a strong payment history and to start rebuilding your credit report.
How Loans Can Help to Rebuild Credit After Bankruptcy
Credit cards aren’t the only way to rebuild your credit following bankruptcy. Loans can play a big part in the credit repair process as well, but only if you find the right loan and use it in the right way.
What Loans are Available?
There are a couple of different loans offered to individuals struggling with poor credit scores and either empty or damaged credit reports. The first of these is known as a Credit-Building Loan or a Fresh Start Loan and is offered by credit unions with the sole purpose of helping the borrower build credit.
A credit union will deposit the money that you loan into a savings account and you can’t access it until you have repaid the loan in full. If you meet the monthly payments, your credit score will improve as lenders report all activity to the major credit bureaus.
Once the repayments have been made in full, you can collect the money in the savings account, by which time your credit score should have improved significantly.
Loans are also provided by lending circles and these work in a similar way. In this case, you join an online community of borrowers who basically lend money to one another.
In the first month, Person A gets a balance accumulated from payments made by the group, and the next month it goes to Person B. It’s literally a circle of lending and while it might seem pointless, every payment you make is reported to the credit agencies and can help to improve your score.
How Hard is it to Get a Loan?
It can be hard to get a low-interest personal loan, car loan, and home loan, especially if your score is languishing below the mid-500s. However, as discussed above, there are multiple options available for borrowers who have gone through bankruptcy. And once you get your score into a respectable range and a couple of years have passed, you shouldn’t have any issue acquiring a low-interest unsecured loan or a high sum secured loan.
Summary: The Beginning, Not the End
Personal bankruptcy has a sense of finality to it. It’s the end of your debt and, potentially, the end of your hopes of acquiring reasonable credit for years to come. But it should be seen as a positive, because while it is a costly and stressful struggle, it’s also one that wipes your slate clean and gives you a chance at a fresh start.
If you follow the tips outlined in this article, you can ensure you’re better equipped to deal with debt the second time around, thus building towards a successful, stress-free, financial future.