Depending on the type of bankruptcy you file for, bankruptcy can stay on your credit score for 7 to 10 years. This factor can affect your ability to take out loans for big-ticket items such as a car or a home. Although bankruptcy can affect our credit scores for some time, many people don’t file for bankruptcy when it’s necessary, fearing it will ruin their credit forever. The good news is that you can rebuild your credit after filing for bankruptcy, and it may be easier than you think.
What Happens to Your Credit Score After Bankruptcy?
The type of bankruptcy you file for and how much debt you have will affect your credit score differently, but because it is on public record, it will affect your score for years. For example, if you had a relatively healthy credit score before you filed for bankruptcy, your score may drop significantly compared to someone that didn’t have a healthy credit score beforehand. Even if you repay your debts during bankruptcy, it will still appear on your reports and impact your score. Fortunately, this effect doesn’t mean that you’ll have a poor credit score the whole time. Additionally, there are things you can do to improve your score, as we’ll review here.
Why You Shouldn’t Avoid Using Credit
For many, the thought of ever using credit again after filing for bankruptcy sounds like a nightmare, and some swear never to use it again. Avoiding credit is a mistake, as your first goal should be to rebuild your credit as soon as possible, and the only way to do so is to use credit strategically. Additionally, showing lenders that you’re capable of obtaining and paying off debt on your own makes it much easier to get loans in the future. Let’s review how to build back your credit to help you use credit wisely and improve your score.
Check and Monitor Your Credit Reports
You may have some trauma when it comes to reviewing your credit reports, but it is incredibly important to consistently review your report to make sure there are no errors. While it doesn’t happen all the time, mistakes are possible, and the last thing you need is for something that you didn’t do to impact your score negatively. It’s also an effective way to spot early signs of identity theft, such as unrecognized credit transactions and unfamiliar inquiries in your report.
Make On-Time Payments
This may go without saying, but making sure you pay your bills on time and in full is the most important part of rebuilding your score. Before you decide to take on any form of new credit, you need to make sure the added costs are within your budget. Any late payments can hurt your credit score even more. You may want to set up automatic payments so that you never miss a due date.
Ensure Payments Are Reported
The creditors and lenders you work with after bankruptcy aren’t always obligated to file positive activity to the credit bureaus. It’s important to ask them if they do, and if they don’t, you may want to consider working with someone else. When you work with creditors and lenders that report your activity to the bureaus, it’s an easy way to boost your credit score without having to do any extra work. When institutions report positive activity to the credit bureaus, your credit score will improve.
Build a Budget and Emergency Savings
In order to rebuild your credit score, you have to practice healthy spending habits, which means your first job is to craft a solid budget and stick to it. For one to three months, record every single expenditure and use those resulting figures to understand what you need and don’t need to spend. This measure helps you break down your income and allot it appropriately so that you can make a more realistic budget. Put anything you save into an emergency fund so that you can recover from unexpected expenses without having to take on high-interest debt.
Make Payments to Non-Bankrupt Accounts
While bankruptcy should clear away most of your debt, this doesn’t automatically mean that every single account clears. You don’t want to assume that everything is like new, only for you to realize that an outstanding debt has been affecting your score right under your nose. Most people still have some form of debt, such as student loans, alimony, child support, or medical bills. See if any accounts remain open, and be sure to make any remaining payments in full.
Get a Secure Credit Card
Remember, you don’t want to avoid using credit altogether. Using a secured credit card can help you rebuild your credit until you become eligible for an unsecured card. A secured credit card works the same as an unsecured credit card. In this instance, you put down an up-front cash payment on the credit line. However, not everyone is eligible for a secured credit card, and it often requires a security deposit as well.
Apply for a Credit Builder Loan
Applying for a credit loan is an excellent thing to do in tandem with applying for a secured credit card. However, even if you aren’t eligible for a secured credit card, you should still consider applying for a credit builder loan regardless. Essentially, you go to your bank or a credit union, and instead of putting a loan in your checking account, they put it in a savings account. You pay off that loan in allotted increments, and when you’re done, that money stays in your account, typically with a decent interest rate. These types of loans are an extremely low-risk way to boost your credit score.
Become an Authorized User
If you can’t get your own credit card or an unsecured credit card, you can apply to become an authorized user. Essentially, you would request to become a co-user under someone else’s credit. You can make purchases with the card and make payments, but you cannot modify the account. However, before you become an authorized user, you should make sure that the primary cardholder is reliable. If they don’t make their payments on time, it can hurt your credit score more than it ends up helping it.
Fortunately, it is possible to rebuild your credit score after bankruptcy. If you’re still having trouble protecting your assets, or need legal advice regarding debt management, let Northern Legal help. Contact us today, and we’ll put you in touch with one of our dedicated Chapter 7 bankruptcy attorneys so that you can get the advice and representation you deserve.