Depending on your situation, filing for bankruptcy may be the best option to solve your financial problems. Chapter 7 and Chapter 13 bankruptcies both come with significant repercussions. However, they certainly don’t end your ability to get credit for the rest of your life.
These items remain on your credit reports for seven or ten years. But, there are still several proactive steps you can take to rebuild your credit after bankruptcy and qualify for financing before a bankruptcy drops off your file.
Even though a chapter 7 bankruptcy is visible on your credit reports for up to 10 years, it stops affecting your credit score well before it drops off.
With that in mind, we’ll show you other ways a bankruptcy affects your credit and what exactly you can do to fix it.
How to Dispute a Bankruptcy on Your Credit Report
Disputing a bankruptcy on your credit report is tricky, but it’s not impossible. Plus, it’s a very effective way to accelerate the credit repair process.
However, it may be difficult to accomplish if you try to do it on your own. To have a better chance at success, consider talking to a credit repair company to find out if you have a convincing case.
Credit repair companies have the experience and knowledge to help you dispute any negative item on your credit report. You may be able to get the bankruptcy completely deleted well ahead of schedule. The accounts included in the bankruptcy filing, like charge-offs and collections, can be removed as well.
Rebuilding Credit After Bankruptcy
Some people file for bankruptcy because of excessive credit card debt or spending outside their means. But others find themselves in major financial trouble because of circumstances beyond their control, from job loss to medical emergencies.
Whatever your reason for reaching the point of bankruptcy, you need to develop a plan to prevent it from happening again in the future. Here are nine ways to build credit after bankruptcy.
1. Credit a Budget
If you tend to overspend, create a monthly budget, and think of ways to hold yourself accountable for sticking to it. You could reward yourself each time you put money into your savings account. You could also schedule weekly updates with a friend who can help keep you motivated.
2. Build an Emergency Fund
If your financial hardship came from something out of your control, start building an emergency fund. Everyone should have one of these. Ideally, you should save between three and six months’ worth of living expenses.
Then, if you have an illness or have trouble finding work, you have some backup cash to fall back on until things return to normal. It may be challenging to come up with extra money for savings each month, so get creative in ways you can spend less and earn more.
3. Get a Credit Builder Loan
Credit builder loans are similar to secured credit cards, but they don’t require a security deposit. A credit builder loan is a secured loan, usually a small amount that you make payments on over 12 months or so. Except, you don’t actually receive the loan funds until after you’ve made all the payments. Your on-time payments are then reported to the credit bureaus. These loans are strictly used to build credit.
Getting a Credit Card After Bankruptcy
One of the quickest and best ways to build credit after bankruptcy is with a credit card. It may seem counterintuitive since you don’t want to spiral into more debt. However, positive payment history is the most important component of your credit score.
You will probably have a lot of “accounts in bankruptcy” on your credit report. Therefore, you’ll likely need to rebuild this portion of your credit report by adding some positive credit accounts.
You don’t have to charge all of your expenses on your credit card. Instead, start by selecting one bill to pay every month with your credit card. Then, immediately pay off the balance. As you start to accrue timely payments, your credit scores will eventually start to increase.
Now you might be wondering how to get a credit card if you have a bankruptcy on your credit report.
4. Get a Secured Credit Card
Secured credit cards don’t require good credit, so you can get one fresh out of bankruptcy. However, with a secured credit card, you’re required to put down a refundable security deposit that equals your line of credit.
When you charge an item to your secured card, you still have to pay for it out of your own wallet. The deposit merely serves as protection in case you stop making credit card payments.
Like any other credit card, you’ll be charged interest if you don’t pay off your balance on time. However, this can be a great tool to start repairing your credit after bankruptcy, especially if you don’t qualify for an unsecured card or the interest rates are too high.
Before choosing a secured credit card, ensure that the credit card issuer reports monthly payments to the three major credit bureaus. Also, limit the number of applications you submit since each new credit inquiry knocks off about five points from your credit score.
5. Keep Your Credit Utilization at 30% or Less
Another tip for rebuilding your credit is to keep your credit card balances at 30% or less of your available credit limit. Getting a credit card or applying for new loans should strictly be for rebuilding credit at this point. Don’t use credit cards for making large purchases or for making loans to yourself.
6. Become an Authorized User
Being added as an authorized user on someone else’s credit card account can almost instantly boost your credit score. If the primary account holder has excellent credit, the authorized user will also show excellent credit on their credit report.
The credit card shows up on your credit report from the original date family member opened it, not when they added you to the account. So, being added as an authorized user can potentially add years of positive credit history to your credit report.
Buying a Car After Bankruptcy
At some point in your post-bankruptcy life, you’ll likely want to buy a car. You can certainly do so and even walk into a dealership with some bargaining power.
To prepare for this moment, use your credit card responsibly for at least six months. This simple act adds to your credit history and shows that creditors can trust you to make on-time payments.
7. Save Up for a Down Payment
Also, save up cash for a down payment to help offset the loan amount. Even if you qualify for the full loan amount, you’ll likely be charged a high interest rate. So paying a sizeable down payment helps lower your financial burden to avoid setting yourself up for another financial debt trap.
It’s also helpful to realize that you don’t need a brand new car. A reliable used car can be just as functional without the depreciation as you drive it off the lot.
8. Shop Around for the Best Loan Terms
Call around to dealers to find available financing. Just be wary of applying for a loan directly on the lot. Some car dealerships authorize multiple credit checks on your credit report from different lenders without you even realizing it.
Aim to get offers in the way of pre-approvals based on a soft credit check. Also, call around to local banks and credit unions to see if you qualify for financing. You’ll likely need to put in many calls to find a viable option, but you certainly can make it happen.
Buying a House After Bankruptcy
If you’re thinking about buying a house after a bankruptcy, you’ll need to wait a specific amount of time based on the type of bankruptcy you had and the type of loan you want.
It typically takes four years after a Chapter 7 bankruptcy discharge for a conventional loan. However, it only takes two years for FHA or VA financing. This is referred to as a seasoning period.
Of course, each lender has different underwriting guidelines, so meeting this requirement alone doesn’t automatically qualify you for a loan. For Chapter 13 bankruptcy, you might be able to get a conventional loan just two years after the discharge date. It’s just one year for FHA and VA loans.
9. Make Your Monthly Payments on Time
Making your debt payments on time every month should be obvious. However, you will need to show at least 12 consecutive months of on-time payments and permission from the court to take on new debt.
Because your credit is so heavily affected by bankruptcy, you might also expect to see higher down payment requirements when you go to buy a house. An FHA loan, for example, typically allows for just a 3.5% down payment.
If your credit score is under 580, you’ll need to pay a full 10% of your home’s purchase price as your down payment. That’s a huge difference. There are no official guidelines for a conventional loan. But, you can still expect to have a larger down payment on your future home.
Your credit score has a significant impact on how much you’ll pay for your home, both in terms of down payment and your interest rate. That’s why you must spend those seasoning periods rebuilding your credit as soon as your bankruptcy has been discharged. You’ll also want to check your credit score and monitor your credit reports regularly to make sure everything is being reported accurately.
Creditors want to see that you are now making an effort to pay your bills on time. They want to know that you are managing your debt better. Making responsible choices every day after your bankruptcy can slowly help you rebuild your credit and reputation as a trustworthy borrower.
Rebuilding credit after bankruptcy takes time, but it also takes effort.
With just a bit of strategy, you can create a comprehensive action plan to improve your credit habits and get that credit score up. Then when you need financing help, you’ll be ready with a strong application that proves you are indeed creditworthy.