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. However, there are steps you can take to rebuild your credit after bankruptcy and qualify for financing before a bankruptcy drops off your credit report.
Chapter 7 bankruptcy stays on your credit report for up to 10 years. However, as time passes, it has lesser impact on your credit score.
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 of working with credit bureaus. They can help you dispute negative items 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.
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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. Create 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.
However, with credit builder loans, you don’t actually receive the loan funds until after you’ve made all the monthly payments. Your on-time payments are then reported to the consumer 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 from scratch after bankruptcy is with a credit card. It may seem counterintuitive since you want to avoid spiraling 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 file 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 in a savings account that equals your credit limit.
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 your payment history to the three major credit bureaus. In addition, limit the number of credit applications you submit since each new credit inquiry lowers your credit score by about five points.
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 a 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
Put aside some money for a down payment so you can offset the loan amount. Even if you qualify for the full loan amount, you’ll likely be charged a high interest rate. Paying a large down payment helps you avoid getting trapped in another financial debt trap by reducing your financial burden.
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. Additionally, call around to community 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 considering 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 must show at least 12 consecutive months of on-time payments and permission from the court to take on new debt.
As a result of bankruptcy, down payment requirements for home purchases will likely be higher.
An FHA loan, for example, typically allows for just a 3.5% down payment. However, if your credit score is under 580, your down payment will be 10% of the purchase price of your home. 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.
Frequently Asked Questions
How long does it take to rebuild credit after bankruptcy?
It typically takes anywhere from two to seven years to rebuild credit after bankruptcy, depending on how diligently you work to improve your financial situation.
What can I do to rebuild my credit score?
To rebuild your credit score, you should focus on making all your payments on time, reducing your debt, and managing your credit responsibly. You should also consider taking out a secured credit card, getting a cosigner on a loan, or becoming an authorized user on someone else’s credit card.
Is it possible to get a loan after bankruptcy?
Yes, it is possible to get a loan after bankruptcy. However, you may need to look for lenders that specialize in providing loans for people with bad credit, and you may have to pay higher interest rates.
Is it possible to get a good credit score after bankruptcy?
Yes, it is possible to get a good credit score after bankruptcy. As long as you manage your finances responsibly and build a strong history of on-time payments, you can eventually get back to a good credit score.
What should I avoid doing when rebuilding my credit?
You should avoid taking out too many loans or credit cards, as this can make it harder to rebuild your credit. You should also avoid missing payments or making late payments, as this can further damage your credit score.
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 scores up. Then, when you need financing help, you’ll be ready with a strong application that proves you are indeed creditworthy.