If you’ve gone through or are considering bankruptcy, you know that it seriously damages your credit. Having a bankruptcy on your credit report often cuts off your access to credit and can even make it difficult to rent an apartment or sign up for cell phone service.
It doesn’t have to be that way. Bankruptcy, when necessary, should be seen as a fresh start rather than a death sentence for your finances. It will take time, but if you follow the right strategies and stick to it, it is possible to rebuild your credit after a bankruptcy.
What Happens to Your Credit after Bankruptcy
One thing most people know is that bankruptcy is one of the worst things that can happen to your credit score. However, bankruptcy isn’t forever.
The exact repercussions to your credit score depend on several factors. The higher your credit score is at the time you file bankruptcy, the more you have to lose. If your credit score is already very low, perhaps due to years of being overdue on multiple accounts, the impact of filing for bankruptcy will be more minimal. The severity of the bankruptcy, or in other words, the amount of debt and number of accounts that were discharged, also makes a difference. In general, you can expect your credit score to decrease anywhere from 130 to 220 points.
The type of bankruptcy you file for can make a difference as well. While Chapter 7 and Chapter 13 bankruptcy affect your credit similarly, creditors may be more likely to lend to you if you file for Chapter 13 bankruptcy because it requires you to pay off some of your debt. Furthermore, Chapter 7 bankruptcy will stay on your credit report for 10 years, while Chapter 13 bankruptcy only stays on your credit report for 7 years.
Steps to Improve Your Credit after Bankruptcy
There are several concrete steps you can take that will improve your credit score as long as you follow through.
Monitor Your Credit
The most important thing to do when rebuilding credit is to monitor your credit score and credit report regularly. Not only will this keep you in the loop if errors or fraud show up on your credit report, but it will also give you a sense of how each step you’re taking impacts your credit score.
You’re entitled to 1 free credit report per year from each of the 3 credit bureaus, Experian, Equifax, and TransUnion. You can obtain this credit report at AnnualCreditReport.com. Make sure to do this once each year and read through your report thoroughly, checking it for accuracy.
You also want to monitor your credit score. The 3 credit bureaus offer credit monitoring services for a monthly fee. There are also free credit monitoring services, but do your research and make sure the one you’re signing up for is legitimate. Finally, many secured credit cards, which are recommended below as a good credit-builder, come with free credit monitoring.
Open a Secured Credit Card
A secured credit card is one of the most effective and affordable ways to rebuild credit. Many people assume that a bad credit score means you can’t qualify for a credit card, but anyone can open a secured credit card because they require you to make a refundable security deposit of anywhere from $49 to $200. That amount often serves as your credit limit, so the credit card company avoids taking on any risk.
If you use this credit card several times per month and pay it off in full each month, your credit score will steadily climb upward. However, it’s crucial that you pay it off every month to avoid interest and fees and ending up in debt again. The best way to use a secured credit card to build credit is to put a couple of monthly bills on the credit card and leave it at home so you can’t overspend. Set up automatic payments to guarantee that it’s always paid off on time.
Get a Secured Loan
Another method for building credit is to take out a secured loan. However, both of these options involve paying interest and fees, so they’re not ideal. This scenario is particularly true when you have bad credit because the loans you’re likely to qualify for will be expensive.
Secured loans are guaranteed by offering collateral, usually property like a house or car, so you don’t always need to have perfect credit to qualify. You do put that property at risk though, and it could be seized if you don’t repay the loan. On top of that, you’ll find a lot of predatory lenders offering secured loans to people with bad credit at sky-high interest rates.
Ask a Friend to Add You as an Authorized User
If you can convince a friend or family member to add you to their credit card as an authorized user, this status can help you build credit. As an authorized user on the account, their account activity impacts your credit score. Their on-time monthly payments and high credit limit will likely increase your score.
This option involves risk on both ends. If the main account holder misses a payment or racks up a large balance, it will also drag your credit score down. On the other hand, if you use their account to make lots of purchases, the main account holder is on the line for paying them back if you don’t.
There’s no one miracle solution for rebuilding credit. By combining several of the steps mentioned above and committing to them, though, you can recover from bankruptcy.