Filing for bankruptcy can be an effective way to dig out from crushing debt. But there is, of course, a consequence of having your debt sharply reduced or completely discharged through either chapter 7 or chapter 13 bankruptcy. For example, your credit score will likely have fallen to a very low level, either before or during the bankruptcy.
The good news is that it is not a permanent situation. There are steps you can take immediately after filing for bankruptcy that will help you start rebuilding your credit.
How Long Will a Bankruptcy Be on My Credit Report?
A bankruptcy stays on your credit reports for either seven or 10 years, depending on whether you file for Chapter 7 or Chapter 13. But that does not mean you can't get credit until the bankruptcy is removed from your credit reports, nor does it mean that a bad credit score will be stuck at bad for all that time. Decisions you make from the day you file bankruptcy can help you rebuild your credit.
How Can I Start to Rebuild My Credit After Bankruptcy?
1. Pay Your Bills on Time
Paying your bills, such as mortgage or rent, is a powerful sign to lenders you may want to ask for a credit card or a loan in the future. Your bankruptcy is in the past, but how you manage your finances now tells a lender how you might behave in the future. Read more about how to get your rental payments reported to Experian so your rent can help you build credit.
2. Create a Budget
As part of your bankruptcy, you should have received counseling on how to better manage your credit. Creating a budget can help you stay on top of your spending and avoid taking on too much debt.
3. Keep up Your Student Loan Payments
If you had student loan debt, it was likely not discharged in bankruptcy. You are still expected to pay that back. This is now an opportunity to help rebuild your credit after the bankruptcy by making on-time payments. Establishing months of on-time payments will have a positive impact on your credit scores.
Can I Qualify for a New Credit Card After Bankruptcy?
One of the realities of how FICO® credit scores are calculated involves your track record in paying credit card bills on time, along with your credit card utilization ratio. But if you went through bankruptcy, you may have had all your credit card accounts closed down.
Don't worry, you are not shut out from having a credit card again. While you may initially find it hard to qualify for a standard credit card, you can likely qualify for a secured credit card.
How Can a Secured Card Help Build Credit?
With a secured credit card, the issuer does not take on the risk of you overspending and not paying your bill. You must give the card issuer money up front, similar to a security deposit, and the spending limit on your secured card is typically limited to the amount of your deposit.
A secured credit card can be a smart way to build your credit after bankruptcy. You can't really get into trouble, as your spending is limited to your deposit. Using a secured card a few times a month, and then paying the entire bill each month will start to improve your "payment history" that accounts for 35% of your FICO® scores calculation.
When you find a secured credit card deal, confirm with the card issuer that your payment history will, in fact, be reported to the credit bureaus.
Can a Co-Signer Help Build Credit?
If family or friends have good credit, they may be able to indeed help you rebuild your credit after a bankruptcy.
One option is to ask someone with solid credit and income to be a co-signer for a credit card or loan. This is a big ask, as the co-signer is responsible for paying back your debts if you fall behind. Carefully consider whether you want to ask someone you are close to putting their good credit on the line for you.
Or you can be added as an authorized user on someone else's credit card account. Just be sure to check if that credit card issuer reports the account history for the authorized user to the credit bureaus. Not all do.
Can Loans Help Rebuild Credit After a Bankruptcy?
It's understandable if you're leery of taking on debt after a bankruptcy. However, if you manage the right kind of debt in the right way, you can help rebuild your credit.
You may want to look into a credit-builder loan. These loans are typically for small sums, say $500 or $1,000, with repayment terms of a year or two. The interest rate may be high—generally above 10%—but the total dollar amount of interest you owe will likely be a manageable sum with the big payoff of helping you build credit after a bankruptcy. For example, if you borrow $1,000 at 12% and repay it in one year, your total interest charges would be around $66.
Not all lenders offer credit-builder loans. You can search online for "credit builder loan," or check with local credit unions and community banks. Smaller lenders with ties to a community are typically more active in making these types of loans than big national banks.
Just be sure to double check that the lender will indeed report your payments to the credit bureaus. Showing you made on-time payments for a year or two, and that the loan was repaid in full, can be a great step in building your credit after a bankruptcy.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on October 11, 2018, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.