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How to Build Credit After Bankruptcy
By Bianca Rodríguez Rojas MONEY RESEARCH COLLECTIVE
Bankruptcy allows people who are deeply in debt to discharge or restructure some of it and regain control of their financial well-being. But, filing for bankruptcy can have negative consequences — like lowering your credit score up to 200 points.
Having a low credit score can make it harder to get approved for new loans or credit cards. And even if you do get approved, you’ll get higher interest rates and lower credit limits compared to people with good credit scores.
When you consider that bankruptcies stay on your credit report for up to 10 years, it’s natural to worry about how this will affect you in the long term. However, there are steps you can take after bankruptcy to repair your credit.
Regularly check your credit report
The first step to get better credit is to check your report regularly. You can do this by requesting a credit report from the three major credit bureaus (Equifax, Experian and TransUnion).
You can request one free credit report every week from all three bureaus through AnnualCreditReport.com. Once you have your reports, check that all the debts discharged in the bankruptcy are listed as discharged and with a $0 balance.
You should also pay close attention to the personal information section. If you find inaccurate details or information that doesn’t belong to you, dispute it with the credit agencies to have it corrected or removed.
You can also consider signing up for a credit monitoring service that will alert you to any changes in your report.
Pay your remaining bills on time
Through bankruptcy, you can discharge or restructure most of your debt. However, there are some types of debts that can’t be eliminated. These may include car loans, student loans or mortgages.
Paying these bills late by 30 days or more can lower your credit score. That’s because your payment history is the most important credit scoring factor. Therefore, making on-time payments helps you rebuild and maintain a good credit score.
Do know that it’s possible to talk to your creditors to negotiate a payment plan if you’re struggling to make your payments. This could make your monthly payments more affordable while helping you avoid missing payments, which would impact your credit history.
You could also negotiate a deferred payment schedule, where your creditor or lender agrees to delay your payments until a later date. A deferred payment gives you time to manage your financial hardships without it affecting your credit.
Apply for a credit-builder loan or secured card
Applying for a credit-builder loan or a secured card is a great way to rebuild your credit.
Unlike personal loans, with a credit-builder loan, you don’t receive the funds immediately. Instead, you’ll get access to the funds once you pay the entire balance. In a way, this type of loan functions more like a savings account. However, your monthly payments are reported to the credit bureaus, so it helps you build a positive credit history.
Another credit-building method available is secured credit cards. Secure cards are a good option for people going through bankruptcy because they’re easier to qualify for than traditional credit cards. This is because issuers require a refundable deposit as collateral, which reduces their risk by guaranteeing they’ll be repaid even if you miss payments.
Similar to regular credit cards, secure card payments are reported to the major credit bureaus. Therefore, making on-time payments helps you establish a solid credit history.
Become an authorized user
Becoming an authorized user on someone’s credit card is another great way of rebuilding your credit, since their monthly payments will get reported on your credit reports.
If the primary account holder makes consistent on-time payments, the account will be in good standing, which will help you rebuild a positive credit history after bankruptcy.
How Long Does It Take To Build Credit After Bankruptcy
How long it takes to build credit after bankruptcy depends on the type of bankruptcy you filed.
Both Chapter 7 and Chapter 13 bankruptcy can impact your credit score significantly. People with scores in the 600s or lower before they filed for bankruptcy may lose at least 150 points, while those with a score of 700+ could lose over 200. This steep drop in credit score can make it harder for you to get approved for new credit accounts, to rent an apartment or to get affordable insurance premiums.
Where both types of bankruptcies differ is how long it will take before you can access new credit and start rebuilding your credit.
Chapter 7 bankruptcy allows you to discharge most types of debt, including credit card debt, medical bills and personal loans. It takes four to six months from when you file to when your case closes and your debts are discharged. You’ll be able to apply for new credit after that time period.
With Chapter 13, it takes between three to five years from when you file until you complete your debt repayment plan. You can apply for new credit during this time, but only if the court and/or bankruptcy trustee authorize it.
You should also keep in mind that Chapter 7 bankruptcies are reported for 10 years and Chapter 13 for seven.
How to Build Your Credit after Bankruptcy FAQ
How long does it take to rebuild my credit after Chapter 7 bankruptcy?
Chapter 7 bankruptcy stays on your credit report for 10 years after the proceedings are finalized. However, its impact on your credit score diminishes over time since recent information influences your credit standing more than older items.
How long does a bankruptcy stay on your credit report?
Chapter 7 bankruptcies stay on your report for 10 years, while Chapter 13 stay for seven years.