Worried About Rebuilding Credit After Bankruptcy?
If you plan to file bankruptcy, you will likely wonder how to rebuild credit after bankruptcy. Careful planning before bankruptcy is a must, but you should also have a game plan for repairing your credit afterward. Bankruptcy can drop your credit score significantly, so it’s important to understand how to mitigate this drop as much as possible. Rebuilding credit doesn’t have to take years as many people believe. With the right strategy, you can quickly rebuild your credit, and even achieve a better score than when you filed.
At O’Bryan Law Offices, we have extensive experience not only in helping people file for bankruptcy, but also in teaching them about good credit habits. Working with one of our skilled Kentucky bankruptcy lawyers is crucial to ensuring your bankruptcy filing goes as smoothly as possible. If you’re struggling with debt, our compassionate team is here to help before, during, and after the bankruptcy process. To schedule a free consultation with us, please call our office at 502-339-0222 today.
9 Best Ways to Rebuild Credit After Bankruptcy
Rebuilding your credit doesn’t have to be difficult or time-consuming, and you don’t have to wait to start. Working toward improving your credit scores can start immediately. Potential lenders and creditors already have plenty of information about you through your credit report. However, that doesn’t mean you can’t prove your creditworthiness after bankruptcy.
Below, we outline the best steps to rebuild your credit after filing for bankruptcy.
1. Carefully Monitor Your Credit Reports
Monitoring your credit reports is essential for rebuilding your credit. Each credit report contains information that is used to calculate your credit score. If any inaccurate negative information remains on your report, this could drag your score down. Any mistakes you find should be disputed with the credit bureaus as soon as you discover them.
However, not all negative information is inaccurate. For example, your bankruptcy filing will remain on your credit report for up to 10 years depending on the chapter you filed. If you have bankruptcy filings, delinquencies, or debts sent to collections on your report, you must wait for them to age off. Late payments, Chapter 13, collections, and others will age off after 7 years. Chapter 7 filings age off after 10 years.
2. Track Your Credit Score
Just as you should monitor your credit report, you should monitor your credit score. You could track all your credit scores at once, but this can make it difficult to see your progress. We recommend picking one credit score to check at least once a month, if not more often. This will help you learn if your credit strategies are paying off or if you need to switch gears.
3. Seek a New Credit Product
You may hesitate to take out a new line of credit after filing bankruptcy, but it is actually an effective strategy for boosting your credit score. Many lenders will not extend credit to recent bankruptcy filers, but several types of credit exist specifically for risky borrowers. Any of the following credit products can help you improve your credit score.
Credit-Builder Loans and Secured Loans
A credit-builder loan or secured loan is a great option for building your credit, as these loans are designed for that purpose. You can usually seek these loans from community banks or credit unions. One form of secured loan allows you to borrow against the money you already have deposited. Until you pay off the loan, you cannot access that money.
Another form involves taking out money that is placed into a savings account. Again, you cannot access this money until you have made all the required payments. Then, the lender sends reports about your good payment history to the consumer credit bureaus. This should raise your credit scores, as timely payments are positive actions.
Secured Credit Cards
You can also get a secured credit card. Secured credit cards are unique in that before you can use the credit, you must pay a deposit. However much you pay for the deposit each month is what your credit limit will be. Although these cards tend to have higher interest rates or annual fees, they are not intended as a long-term solution. Many people opt for a secured card to build their credit until they qualify for an unsecured card.
Remember, however, that you may be rejected for a secured credit card. To avoid this, we recommend reading the requirements carefully before you apply for a secured card. If you apply before ensuring you qualify, you risk not only rejection for the secured credit card, but also a small drop in your score. This is because the credit inquiry performed when you apply often causes a temporary drop.
Only apply for a secured card if you qualify and are confident you can make on-time payments.
Get a Co-Signer
If you can’t quite meet the requirements for a credit card or loan on your own, you can ask someone to cosign for you. However, this is a big favor to ask of someone. Most people will ask family members or close friends, as the co-signer must be willing to stake their own credit reputation for you.
A co-signer must have a good credit history, and they must be willing to pay the full amount of your debts if you cannot. They may also face problems borrowing credit for themselves because of their debt obligations as a co-signer. If you are confident in your ability to make monthly payments, having a co-signer is a good option.
Become an Authorized User
If finding a co-signer is too difficult, consider asking to become an authorized user on a credit card. For example, you could ask your parents to list you as an authorized user on their unsecured credit card. Make sure that the card reports the credit card payments to the major credit bureaus before choosing this route. Otherwise, your score won’t change.
Although this isn’t the quickest way to build your credit, it can help you build your credit history simultaneously. This is particularly useful if you have very little credit history and want to gradually raise your credit score.
4. Keep Up With Your Payments
Maybe you don’t want to procure new credit products to build credit. If so, you can shift your focus to making timely payments on your existing lines of credit. Making on-time payments is essential for building credit scores, as payment history accounts for 35% of your score. This route will also show future lenders that you are responsible.
To make this step easier, you can either set up an autopay schedule or set up reminders for yourself. Many credit cards have the option to send reminders to you when your payment date is approaching.
5. Avoid Job-Hopping
Many lenders look at more than just your credit score and payment history. They may also look at your job history. Having a stable job with consistent income is always preferable over frequently switching jobs. Any gaps in your income may be a red flag for potential lenders, and may lead to a denial of your credit application.
6. Avoid Credit Repair Agencies
Unfortunately, many so-called “credit repair agencies” have no intention of helping you rebuild your credit. They may make claims about removing bankruptcies and late payments from your credit reports, but this simply isn’t possible. Save your money and put it toward your savings or emergency fund instead of paying high fees to a credit repair company. Everything they can do, you can do better – and cheaper!
7. Practice Good Credit Habits
Good credit habits are always helpful, especially when you’re working on rebuilding your credit score. These good habits take many forms, including the following.
- Make your debt payments on time
- Pay all your bills on time
- Save up for emergencies
- Avoid quick fixes
- Try not to carry credit card balances
- Monitor your credit report and score regularly
8. Ask Creditors to Report Your Payments
Not every creditor or lender will automatically report your payments to the credit bureaus. You should ask your creditors if they report payment activities and specifically ask them to do so. You can also ask them to report payments you make that are not related to credit, such as utility or rent payments. Making timely payments such as these will reflect responsible credit behavior for future lenders and build your score in the process.
9. Keep Credit Balances Low
Ideally, you should use no more than 30% of your allotted credit limit. Keeping your credit utilization ratio below 30% is a great way to show lenders that you will likely repay your debts. A low credit utilization ratio will also help you maintain careful control of your finances.
How to Improve Your Finances After Bankruptcy
Once you make progress on your credit score, it’s important to avoid incurring future debt that you can’t afford. Aim for a light debt burden that you know you can handle and practice good credit habits. To improve your finances and stay on top of your debt, consider taking the following steps.
Create an Emergency Fund
Unexpected expenses, such as medical bills, can quickly lead to trouble for struggling families. Having savings put away in an emergency fund will help you avoid taking out loans or running up your credit cards on unexpected bills. Try to put a little toward an emergency fund each month just in case something comes up in the future.
Develop and Stick to a Budget
Budgeting is a good idea for everyone, regardless of their income, current debts, and other factors. When you file bankruptcy, you will go through a credit counseling program that should teach you how to budget your money appropriately. If you need extra help, our attorneys are happy to provide useful advice about budgeting and building your savings.
Practice Good Credit Habits
When you take out a new line of credit, remain vigilant about your payments. Good credit habits are essential at every stage of your life, and they can save you from repeating past mistakes. Examples of these positive habits include maintaining a low credit utilization ratio, paying your bills on time, watching your credit scores, and checking your credit report information. Practice makes perfect, so it’s important to be very strict about these practices.
Frequently Asked Questions
Can You Apply for Credit After Bankruptcy?
Yes. However, you will likely have more limited credit options. Once you receive your bankruptcy discharge, you can take out new credit. These forms of credit will be more limited, so you may have to settle for a secured savings account or secured cards over unsecured credit. You may also have to take extra steps to take out a traditional loan, such as finding a co-signer. Unless you know you can handle new credit, it may be a good idea to wait until your financial situation is more secure.
How Long Does It Take to Rebuild Credit After Chapter 7?
So, how long does it take to build credit after bankruptcy? It depends. Your Chapter 7 bankruptcy will stay on your credit report for 10 years. However, when you file for Chapter 7, your debt-to-income ratio will decrease significantly. This may make it easier to build credit over the next year or two. Most consumers will see a notable improvement in their scores over 12 to 18 months as long as they practice good credit habits. Chapter 7 cases are much faster than Chapter 13, as they can conclude in as few as six months. This allows you to work on rebuilding your credit much sooner.
How Long Does It Take to Rebuild Credit After Chapter 13?
Chapter 13 bankruptcy can last anywhere from 3 to 5 years. Although the process is longer than Chapter 7, you can still see improvements in your credit scores after a year or two of hard work. By the time you receive your Chapter 13 discharge, you should be well-equipped to work on rebuilding credit.
Contact the Skilled Bankruptcy Attorneys at O’Bryan Law Offices Today
At O’Bryan Law Offices, we have helped thousands of Kentucky and Indiana residents find their financial footing through bankruptcy. We understand that facing foreclosure, wage garnishment, or repossession is stressful. Bankruptcy can give you the breathing room you need to prevent those actions. Our Louisville bankruptcy lawyers are extremely knowledgeable and experienced in their field. We will give you the support and guidance you need to not only make it through your bankruptcy, but also rebuild your finances after your discharge. To schedule a free consultation with us about your situation, please call our office at 502-339-0222 today.
