Post-Bankruptcy Credit Score Tips: Guide to Rebuilding
Bankruptcy is a last resort option for debtors who can’t afford to meet their monthly payments. It’s often seen as an easy way out, thanks in no small part to the many celebrities and businesses that seem to declare bankruptcy at will and never suffer the consequences. But the reality is that bankruptcy is an incredibly destructive force, one that can devastate your credit score and leave a derogatory mark that remains for years.
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How to Ensure Bankruptcy Goes Smoothly
There’s a lot to consider before you file for bankruptcy. It’s a massive decision and not one that you want to take lightly. Before we discuss the ways you can rebuild credit after a bankruptcy filing, let’s focus on the ways you can ensure the filing goes smoothly:
Don’t Rush In; Don’t Leave it Late
Timing is everything when filing for bankruptcy. It’s not something you should rush into, but at the same time, it’s not something you should spend too long deliberating over. Many bankruptcy filings follow years of struggle, increasing stress, decimating credit and creating a whole host of problems.
In these cases, an early bankruptcy filing will hasten the inevitable. And the sooner you do it, the sooner it will disappear off your credit report and allow you to rebuild.
See a bankruptcy attorney sooner rather than later and they’ll provide you with some advice regarding your next step. They will look at your credit history, credit limit, and monthly payments to determine if there is an alternative option or if filing for bankruptcy is the best outcome.
Millions of Americans find themselves trapped in the clutches of debt and feel great shame at being in that position. But there’s nothing to be ashamed of—it doesn’t mean you’re worthless or useless; it doesn’t mean you’re not a good provider. It means you’re human and have fallen into a trap that the vast majority of Americans fall into.
Keep this in mind as you speak with your bankruptcy attorney and remember to be completely honest and open with them. Forget about shame and don’t bury your head in the sand. They’ve heard it all before and are there to help, so be as open and honest as you can be.
You’ll need a lot of emotional support through this process, so make sure your friends and family know what you’re going through. Don’t try to hide it from them as doing so will just apply more pressure and make an already difficult situation worse. They can only help you if they know what you’re going through, so tell them.
How Bankruptcy Affects Credit Scores
Credit score bankruptcy doesn’t exist, which is to say that your credit score will not go the way of your finances and be completely liquidated and wiped clean. However, it can do some serious damage.
In our guides on Factors that Determine Your Credit Score and Minimum Credit Score for Buying a House, we looked at some of the direct ways that your actions can impact your score, including the 0 to 5 point drop you can suffer following a hard inquiry. We also noted that while it’s possible to provide a rough estimate for how much a score can drop as a result of a single derogatory mark, the exact figure will depend on how strong your score is, how extensive your credit history is, and more. It’s the same with bankruptcy.
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On average, your score can lose between 150 and 250 points, with the bigger hits delivered to those with higher scores. According to Experian, the average score is just above 700. A bankruptcy filing within this range could reduce your score by 200, which means you’ll go from “Good” and capable of securing a high-limit credit card, top-notch student loans, and a mortgage, right down to “Very Poor”, where your only reliable option is a secured credit card and the occasional high-interest loan.
Chapter 7, the most common form of bankruptcy in the United States, will disappear from your credit score in 7 years; Chapter 13 will disappear in 10.
Can Loans Help to Rebuild After a Bankruptcy?
A small loan can help, but it shouldn’t be your first option. Loans have high-interest rates and it’s easy to be tempted into borrowing more money than you can afford. If you’re struggling financially and have just spent years escaping debt then the last thing you need is a high-interest loan eating away at your disposable income.
And it will eat away at that income, because if you’re just escaping bankruptcy then your score will be low and loan companies will only accommodate you if you’re paying through the teeth.
How Soon Will Credit Score Improve After Bankruptcy?
If you’ve been through bankruptcy, then you already know how destructive it can be. You’ve struggled with debt, you’ve sought an escape, you’ve paid your dues… now what? What happens when all that time passes, when the derogatory marks disappear, and you’re left with somewhat of a clean slate?
First things first, once you file for bankruptcy and take the aforementioned credit score hit, the worst is pretty much over. Your score may suffer for a few more months, but the damage will lessen as time goes on.
You technically don’t owe all the debts that you used to owe, debts that may have accumulated late payments and other negative marks. After a bankruptcy filing, these clear, an initial hit is taken, and you’ll notice a steady improvement.
Derogatory marks will remain for 7 to 10 years and this also applies to bankruptcy. In fact, as long as your bankruptcy case remains on your credit report it will have an effect on your score. But that impact will greatly reduce over time and you’ll be ready to re-establish credit lines.
The first couple of years will be a struggle as credit will be hard to come by, but there are multiple options at your disposal and providing you don’t repeat the same mistakes you made the first time around, your score will continue on a steady ascent.
How to Build Credit After a Bankruptcy
There are a few ways that you can steadily and safely rebuild your credit after bankruptcy. The key thing to remember is that there’s no need to rush. Doing so will land you with high-interest rates, monthly payments you can’t afford and credit card debt that steadily destroys what little credit score you have.
Check Your Credit
Simply being aware of your credit report isn’t going to improve it, just like keeping a close eye on your credit score won’t stop it from falling. However, it’s no coincidence that the majority of bankruptcy filings are initiated by borrowers who didn’t monitor their finances, either because they were too scared at what they would discover or because they didn’t know how.
Check your credit report at least once a month to know what you’re doing right and wrong and to make sure your score is going in the right direction.
Get a Secured Credit Card
A secured credit card is one of the best ways to start building credit and this applies whether you’re fresh out of school or bankruptcy. A secured credit card works just like a normal card in that you can use it to make secure purchases online and offline. The key difference is that it’s “secured” against a cash sum, with no high-interest rates and exorbitant penalty fears.
Every time you use the card you improve your score. What’s more, once you build a respectable credit history and show your provider that you’re responsible, they will offer to upgrade you to an unsecured card.
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Secured cards are available with many credit card companies—look for one with a low annual fee and host of perks and try to keep your balance low.
Get a Store Card
Store cards have huge interest rates, but they also offer many perks and can be worth their weight in gold if you clear the balance every month. Not only can you secure a high credit limit, but you’ll also get many store points and perks and can watch your credit score gradually improve. These cards are frequently offered to users with bad credit.
Avoid using it too much, however, as those high-interest rates will destroy you if you let your balance tick over every month.
Use a Credit Builder
Credit building accounts and lending circles can help you diversify your credit report and improve your score. These are basically installment plans that are offered to borrowers with low credit scores, helping them to make retail purchases or get a cash lump sum, all while improving their score.
You can learn more about these options by reading our guide on lending circles and other options.
Always Meet Your Payment Obligations
It should go without saying, but it’s worth mentioning nonetheless: You need to prioritize your monthly payments and ensure you don’t miss a single one. Millions of Americans know so little about the credit reporting process that they willingly miss payments, assuming that a few days or weeks won’t make much of a difference.
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As you should know by now, it will make a massive difference and could undo all of your hard work, so don’t make that mistake again.
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Learn from Your Mistakes
While we’re on the subject of not making the same mistakes again, it’s important that you analyze your previous mistakes and try to understand where you went wrong.
The road to bankruptcy is long and often begins with a little overspending or overcommitting—a vacation you couldn’t afford here, a car you didn’t need there. It’s a snowball of chaos that culminates in catastrophic failure. Preventing it from happening again is not about finding a way to stop the snowball at its biggest, but to make sure it never starts rolling in the first place.
Save, Save, Save
You have a clean slate. No debt, no obligations, no interest rates hanging over your head. This is a great time to start squirreling some money away, creating a rainy-day fund that generates interest. Add a little money to this rainy-day fund every time you can and within a few years, you’ll have enough money to prevent the sort of tsunamic downpour that caused you so many issues the first time around.
The good thing about the bankruptcy process is that it makes individuals much more debt savvy than they were. They learn about the perils of debt, becoming more efficient at budgeting and avoiding high-interest rates, and discover how and when to start tightening their belts.
Summary: Bankruptcy and Your Credit Score
Bankruptcy is incredibly destructive and should be avoided if possible, but sometimes you just need to wipe the slate clean and start again. Life won’t be easy once from that point on and it will take years to recover, but if you budget carefully, avoid acquiring too much debt, and take things slowly, then you can emerge brighter, richer, and more capable of managing your money.