Improving your credit score after bankruptcy is no small feat, but it can be done. All it takes is a bit of hard work and perseverance. With that said, below is a practical guide on how to rebuild credit after bankruptcy. If you follow the steps below, you can eventually see your score start to rise, and you’ll be able to start making sense of your finances once again.
Check your credit report for errors
The first step to improving your credit score after filing for bankruptcy is to check your credit report for any errors. While there’s no doubt that having a bankruptcy on your credit report will have a negative impact on your score, if there are any miscellaneous errors as well, it will worsen the effect. For example, after bankruptcy, if your debt is still recorded as active instead of discharged, it will further harm your score.
With that in mind, it’s a good idea to take a thorough look at your credit report. Thanks to the pandemic, now through April 2022, borrowers can access a free, online copy of their credit report each week from AnnualCreditReport.com. Typically, you are entitled to one free report from each of the credit bureaus each year.
Once you have your credit reports in hand, read them over carefully and check for any misinformation. If you find any errors, you can always write a credit dispute letter and ask the credit bureaus to remove that information from your report.
Apply for new credit
Although it may seem counterintuitive, applying for new credit after bankruptcy is an important step to building your score. Put simply, it gives you a chance to show lenders that you can make payments on time and to be responsible with the credit you’ve been given.
The caveat here is that you need to be careful how often you apply for new credit. Each time a lender processes an application, it creates a hard pull on your credit report, further damaging your score. To that end, you should carefully research your credit options and only apply for one account at a time.
To help you get started in your search, we’ve listed two viable options for you below:
Opt for a secured card
Secured cards work differently than traditional credit cards. To open one of these cards, you first have to make a deposit with the bank or credit union. That deposit then serves as your credit limit. This method gives the lender more reassurance because if you can’t make your payments on the card, they have the option to keep your deposit as payment.
Due to how credit limits function on secured cards, they are often easier to be approved for than a traditional credit card. People who have filed for bankruptcy will often use secured cards as a stepping stone to traditional credit. If you get a secured card and use it responsibly, your score should improve over time.
Get a credit-builder loan
Credit-builder loans work very similarly to secured credit cards. In this case, your deposit will serve as your loan balance. You’ll be able to use the money but won’t be able to access it again until you’ve fully repaid the loan. As you make payments over time, that information will be reported to the credit bureaus, and it will help to rebuild your credit score.
Typically, smaller lenders and credit unions are the ones who are most likely to offer this type of loan. While almost every lender will know what you mean by the term “credit-builder loan,” these loans can also be called “starting over loans” or “fresh start loans.”
Practice good credit habits
After you’ve gotten approved for a new account, the next step is to make sure that you practice good credit habits. With that in mind, follow the tips below to start rebuilding your credit score.
Make your payments on time
The most effective thing that you can do to improve your credit score is to make your payments on time. According to FICO, payment history accounts for 35% of your total credit score and is the highest-weighted factor. However, in addition to making your payments by the due date, you also want to be sure to pay as far above the minimum payment as possible.
Keep your balances low
It’s also a good idea to keep your balances low. Credit utilization measures the amount of credit you’re using versus the total amount of credit available to you. FICO factors credit utilization as 30% of your score. So whenever possible, it’s best to use less than 30% of your total available credit.
The bottom line on rebuilding your credit score after bankruptcy
Rebuilding your credit after Chapter 7 or Chapter 13 bankruptcy can be a long process. It’s important not to give up. If you take the steps above, eventually, you will see improvement in your credit score. In addition, bankruptcies do fall off your credit report. Chapter 13 bankruptcies come off your credit report in seven years, while it takes ten years to get rid of a Chapter 7 bankruptcy reporting. Still, after that time, you’ll be able to have a fresh start.
If you’re wondering whether there are alternatives to bankruptcy, reach out to Tayne Law Group today. We can help you take the steps you need to avoid filing for bankruptcy and get your finances back on track. Call us at (866) 890-7337, or fill out our short contact form and we’ll get in touch!