9 steps to rebuilding your credit after bankruptcy
May 5, 2021
Your credit can take a big hit after bankruptcy—the negative mark can stay on your credit report for ten years. But it’s possible to rebuild your credit with hard work and responsible spending.
With each positive mark on your report, your credit score begins to rise. You’ll be eligible for new credit, loans and mortgages with better rates and terms. Here are nine steps to rebuilding your credit after bankruptcy.
1. Keep up payments with non-bankruptcy accounts
After you file bankruptcy, determine which accounts were not closed. Bankruptcy cancels much of your debt, but there’s usually some remaining debt, such as student loans or alimony payments.
Repair your credit post-bankruptcy by paying down these balances. This lowers your debt-to-income ratio and which should boost your credit. To speed up progress, pay more than your minimum monthly payment when you can. Making timely payments is key to building good credit.
2. Avoid job hopping
Job hopping doesn’t directly affect your credit score but it can influence lenders. They want to know you have a reliable income and will be able to repay the loan.
When reviewing your application for new credit or a loan, a lender considers your income, job history in the past 24 months, your credit score and other factors. Having a stable job works in your favor, boosting the lender’s confidence in your ability to repay your loan even after bankruptcy.
3. Apply for new credit
It’s usually harder to get new credit after a chapter 13 or chapter 7 bankruptcy. Interest rates and fees might be higher, and it could be harder to get approved.
But it’s vital that you get new credit after bankruptcy to show that you’re a responsible lender. Building up a positive history of on-time payments gives your credit score the positive history it needs to start boosting it in the right direction. With any new credit, make sure the company reports to the three major credit bureaus: Experian, TransUnion and Equifax.
Here are the best ways, in our experience, to get new credit after bankruptcy.
Apply for a secured credit card: Secured credit cards are easier to get than unsecured credit cards because they require a cash security deposit (e.g., $1,000 deposit = $1,000 credit limit). By making timely payments, you can rebuild your creditworthiness. Eventually, the credit card issuer might increase your credit limit or offer you a regular, unsecured credit card.
Get a credit builder loan: With a credit builder loan, you pay the lender back before you receive the money. These are usually small loans, anywhere from $500 – $5,000. After making payments upfront, you receive your sum of money.
Retail and gas cards: These types of credit cards typically have more consumer friendly qualifications than other unsecured cards. Be aware of their standards before you apply, since applying can harm your credit. If you aren’t accepted, you won’t get the affect you’re going for. Make small purchases, like a few tanks of gas, and be sure to pay the balance off.
Open a small loan: Installment accounts with fixed payments, like an auto loan or home equity loan, show creditors that you can borrow responsibly. Interest rates might be higher after bankruptcy, but the cost could be worth it to rebuild your credit.
4. Consider a cosigner or becoming an authorized user
Having a cosigner on a loan or rental agreement can help your chances of approval after bankruptcy. A cosigner acts as a legal financial backer in case you don’t make payments. Auto loans, mortgages and even rental agreements often take cosigners. With a cosigner, you’re approved for credit under your name. Successful payments boost your creditworthiness and your credit score.
You can also become an authorized user on someone else’s credit card. See if a family member or friend will add you to their credit card account. Payments show up on your credit report, as long as the credit card issuer reports them to the credit bureaus.
5. Be smart about applying for new credit
Each new credit application prompts a hard inquiry on your credit report. Too many hard inquiries in a short period of time can hurt your credit score because lenders see it as risky behavior.
If you’re frequently denied for new credit cards, their requirements might be too high for you current credit profile. Keep an eye on your credit and be aware of issuer’s underwriting standards, so you apply for credit more wisely.
Try a secured credit card or become an authorized user first. You can also sign up for a rent reporting service that reports your rent payments to the credit bureaus. Having a more positive credit history will increase your chances of being approved for credit cards with stricter requirements over time.
6. Keep up payments with new credit cards
Payment history is the most important factor that impacts your credit score. It’s crucial, especially after bankruptcy, to make timely payments once you have new credit.
You can stay on top of your payments by:
- Enrolling in autopay
- Paying off your card multiple times a month
- Setting reminders to make payments
- Arranging your personal finances to help you pay off the full balance each month
7. Have your payments be reported to the credit bureaus
Creditors and lenders aren’t obligated to report your activity to the bureaus, so ask them if they do. Ideally, any lender or creditor you use after bankruptcy should report to all three so that your positive activity is captured and raises your credit score.
You can even have your non-credit related payments (like rent, utilities, cell phone) reported to the bureaus. Not all credit scoring models include these payments when calculating your score, but it certainly won’t hurt to have these positive payments as a part of your credit history.
8. Keep your balances low
When your balance is low on your credit card, it means that you’re using a smaller percentage of your overall available credit. Experts recommend a credit utilization ratio of less than 30 percent. A low credit utilization ratio is one indicator to lenders that you’ll repay what you borrow.
9. Check your credit report to ensure your bankruptcy is accurately recorded
Bankruptcy seriously damages your credit report, but there can be errors that make it worse than it actually is. For example, debt shown as active or late instead of discharged might harm your credit report.
Be sure to review your free credit reports after bankruptcy. If you spot an error, dispute it as soon as possible. Lexington Law can often help you to work to remove bankruptcy related items from your credit report.
Many consumers find unfair credit reporting and outright inaccuracies. Be aware that your old bankruptcy shouldn’t linger on your report after seven years (chapter 13 bankruptcy) or 10 years (chapter 7 bankruptcy) have passed.
Your credit report after bankruptcy
For the years following your bankruptcy, monitor your credit reports regularly. Watch for errors and then file disputes. Get help from a credit repair service who can spot inaccuracies, dispute the errors and coach you toward your best credit score possible.
Call For A Free Credit Report Consultation
Lexington Law has helped clients work towards fair and accurate credit scores by leveraging their rights. We’ve helped hundreds of thousands of clients remove unfair, inaccurate and unverified accounts from their credit reports.Call 1-855-255-0139