14 Key Steps to Rebuilding Credit After Bankruptcy

Bankruptcy can crush your credit. If you went into bankruptcy with a good credit score you could lose over 200 points. If your credit is average you could drop 130 to 150 points. If your credit is already poor you’ll lose less. Rebuilding credit after bankruptcy takes planning and effort.

Your credit will drop after bankruptcy, but so will your debt load. Without those debts on your back, you have the freedom to build a better credit score and a more stable financial life. Here’s how to do it.

1. Start a budget — and stick to it

A budget is the basic building block of your financial plan. Start the budgeting process by assessing your needs. Record every expenditure, no matter how small, for at least a month, ideally more. Use those figures to understand where you are spending money and where you can adjust your spending.

Break your spending into categories and allocate a percentage of your income to each one. Be sure to allocate a percentage to savings! It may take some adjustments to come up with a realistic budget, but once you have one, stick to it. It’s the first step toward financial freedom.

2. Build an Emergency Fund

Life is full of surprises, and some of those surprises cost money. An emergency fund is your cushion against those surprises. With an emergency fund in place, you can face unexpected expenses without taking on high-interest debt which makes rebuilding credit after bankruptcy more of a challenge.

Many experts advise keeping three to six months of living expenses in your emergency fund. If you can’t meet that goal — research shows that 27% of Americans have no emergency fund — anything is better than nothing. Start with whatever you can set aside and add to it whenever you can.

3. Become an authorized user

Authorized user status is one of the easiest ways to add a positive record to your credit file, and it’s free. All you need is a friend or relative with a solid credit record who is willing to add you as an authorized user on their card. The card issuer will place the card’s record on your credit report. You don’t need to use the account or even have a card.

You’ll have to be sure that the card issuer reports authorized users to the credit bureaus (most major issuers do). You’ll also need to be sure that the cardholder is reliable. If they miss payments or run up high credit utilization, your credit will be hurt instead of helped.

4. Sign up for Experian Boost

Experian Boost is a service that allows you to place utility payments on your credit report. It’s not a perfect solution, as it only affects your Experian credit report, but it’s free, so there’s nothing to lose.

Since its launch, roughly 60% of people who have completed the Experian Boost process have increased their FICO score, with consumers experiencing a 12-point increase on average, according to Experian.

Of those who improved their score ranges:

  • 21% improved the score from poor to fair
  • 4% improved from fair to good
  • 3% improved from good to very good
  • 3% improved from very good to exceptional

5. Get a secured credit card

A secured credit card is a great way to benefit from the convenience of a credit card and put a revolving credit account on your record. You’ll have to put down a deposit, and the deposit will become your credit limit.

Your deposit limits the card issuer’s risk, so these cards are available to people with bad credit. Many popular secured cards have no annual fee.

If you’re rebuilding credit after bankruptcy you’ll have to be sure to keep your credit utilization low — a challenge when your card has a low credit limit — and make every payment on time, or you could harm your credit instead of helping it.

6. Take out a credit-builder loan

A credit-builder loan is an ideal complement to a secured credit card and a great way of rebuilding credit after bankruptcy. It will place an installment loan on your record, improving your credit mix and giving you an affordable way to build a positive payment history.

When you take out a credit-builder loan the proceeds of the loan are placed in a locked account. You make regular payments, generally quite small, and when you have paid off the loan the proceeds are released to you.

These loans are generally easy to get and many don’t even require a credit check. Many credit unions and banks offer credit-builder loans and online lenders like Self provide loans nationwide.

If you are already paying an installment loan that was not discharged in your bankruptcy (a student loan, for example), a credit-builder loan may be less effective.

7. Keep your credit utilization low

Credit utilization is one of the most important factors in generating your credit score. It is the percentage of your credit limit that you actually use. Credit utilization is calculated from your revolving credit accounts, mainly credit cards. Installment loans don’t affect it.

If you have a card with a $2,000 credit limit and your balance is $1,000, you are using half of your limit and your credit utilization is 50%. Most experts advise keeping your credit utilization under 30%, and lower is better. About 10% is considered ideal.

If your limit is low, you can keep your utilization low by using your card only for a few small expenses that you can pay off easily each month. Use cash or a debit card for everything else.

8. Use your credit strategically

Rebuilding credit after bankruptcy takes some strategy. If you’re using credit cards or loans to cover cash shortfalls and survive until the next payday, you have a problem that you need to deal with. Go back to your budget, modify it if you need to, and reduce your spending to fit your means.

A credit card is a great way to build credit, but it can get you into trouble. It’s best to put a few small recurring expenses that you’d pay anyway on your card (like your internet bill or Netflix subscription), set up an automatic payment from your bank account, and just put the card away.

That strategy lets you keep the card active, keep your credit utilization low, and make every payment on time. As long as you pay the bill in full before the due date, you’ll never pay a dime in interest.

9. Shop around for the best terms

Every time you take on new credit, shop around and look for the best deal. Borrowers who actively compare different products get consistently better deals.

If you’ve decided to look for a secured credit card, examine several cards before choosing. Look at the annual fee, any other fees, and the APR. Read the fine print. Try to pre-qualify if you can. 

The same goes for any credit card, loan, or credit-building product. Don’t choose on a whim or after seeing a convincing ad. Do your homework and see what’s out there.

10. Get a car loan

As your credit grows you’ll want to take bigger steps toward rebuilding credit after bankruptcy. We’re not suggesting that you run out and buy a car if you don’t need one, but when you do need one, a car loan is a good choice for your first major use of credit after a bankruptcy.

A car loan is secured — the vehicle is collateral for the loan — so lenders are more willing to extend credit to someone with a bankruptcy in their recent past.

This is a step to take after you have begun to build credit. If you have pushed your credit up to a good level, it will help you up to the higher tiers. If you buy a car while your credit is still poor or fair you will pay a very high interest rate. And it’s usually easier to qualify for a loan through a car dealership than through a traditional lender.

Avoid long-term car loans, which will put you underwater on your loan for much of its term and will lead to very high interest costs. If you can’t afford the monthly payment on a 60-month loan, look for a cheaper car.

You’ll need to save for a down payment and shop for the best loan deal as well as the best car deal. Prequalify with several lenders to get a sense of what’s possible. A co-signer can help, but be sure that both you and your co-signer understand the responsibilities.

11. Make all payments on time

Payment history is the single most important part of rebuilding credit after bankruptcy. On-time payments build your credit, late payments destroy it. Adding new accounts will help you build credit, but only if you make every payment on time. If you don’t, they will do more harm than good.

Before you take on any new credit, check your budget and make sure you can afford it. If you have an emergency fund in place you’re in better shape: if you’re having a rough month you can dip into your emergency fund to keep your payment history solid.

Setting up automatic payments from your checking account can help if you have problems with forgetting payment dates. Be sure the balance in your account will cover the payments. Overdraft fees add up fast!

12. Monitor your credit reports and check them for errors

Your credit report is a financial report card. Monitoring your credit reports will help you keep track of your progress and understand your financial situation.  Reading your credit reports regularly will also help you to find errors that can drag your credit down. You may even spot early signs of identity theft.

You are entitled to one free credit report every year from each of the major credit bureaus: Experian, Equifax, and TransUnion. You can get these credit reports from annualcreditreport.com.

13. Sign up for credit counseling

Nonprofit credit counseling agencies offer basic credit counseling sessions for free. Many local banks and credit unions can also provide credit counseling or help you arrange it. A credit counselor will examine your situation and help you make the best decisions.

If you sign up for a debt management plan you will pay a fee, but this is unlikely: if you’re coming out of bankruptcy most of your eligible debts will already be discharged. 

Credit counseling is a valuable source of personalized advice that can help you build a better credit score and a better financial future. 

14. Use credit repair software or hire a credit repair company

You may encounter credit problems as you’re rebuilding credit after bankruptcy.

  • Debts that should have been discharged in bankruptcy may still appear on your credit report.
  • Your new accounts may be reported with incorrect details, such as credit limits or balances.
  • You may see accounts on your credit report that you don’t recognize.

You can address this problem yourself, using the credit dispute process. If that seems overwhelming, consider using credit repair software or even hiring a credit repair company to handle the dispute process for you.

If you choose to hire a credit repair company, be sure to use a legitimate one. Do some research and check a company’s reputation and reviews. Credit repair scams are common!

Want to learn more about rebuilding credit after bankruptcy? Financial guru Dave Ramsey has a few tips:

Debts that may not be discharged in the bankruptcy process

Bankruptcy may not leave you with a completely clean slate. Some debts cannot be cleared in bankruptcy. For example:

  • Alimony or child support
  • Most tax debts
  • Most student loan debts
  • Court-imposed fines or judgments

If you brought these debts into bankruptcy, you’ll still have them after bankruptcy. You’ll need to include the payments in your budget and build your financial plan around them.

How long does bankruptcy stay on your credit report

Your bankruptcy will be on your credit report for a considerable time.

While your bankruptcy will stay on your credit report for what seems like a long time, its influence on your credit score will fade. Credit scoring models place more emphasis on more recent information. Creditors want to know what you’re doing now, not five years ago.

You can’t remove your bankruptcy from your credit report, but you can fill your credit report with more recent positive accounts. If you manage your credit well you can rebuild your credit score long before your bankruptcy drops off your credit report. 

Why does my credit score matter?

Your credit score determines your eligibility for financial products and how much you will pay for them. 

If your credit is poor you may not be approved for loans or credit cards. If your credit is fair you won’t get the best products and you’ll pay high fees and interest rates. Push your credit up to “very good” and lenders and card issuers will roll out the red carpet and offer you the best deals.

Your credit score isn’t just about financial products. Landlords will check your credit before renting to you, and utility companies may demand large deposits if your credit is bad. Even employers will check your credit.

Your credit score is also an indication of your financial health. The steps that you take to build your credit score are also building financial security, and that’s invaluable!

The bottom line

Bankruptcy may seem like a financial death sentence. It isn’t. It’s meant to be a fresh start.

Your credit will take a hit from bankruptcy, but you’ll also be free of many debts. If you use that freedom effectively, build a realistic financial plan, and put your plan into effect, rebuilding credit after bankruptcy is completely possible.

It will take time and effort, but the benefits of good credit and financial stability are worth it!

FAQs

Why do late payments hurt my credit score?

Lenders, credit card issuers, landlords, and other people who look at your credit score want to be paid on time. It’s their single biggest question: will you pay on time?

If you’ve made late payments in the past, there’s a good chance that you’ll make them again. That’s why payment history is the most important component of your credit score, and it’s why late payments hurt your score so much.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Almost all consumer bankruptcies in the US are Chapter 7 or Chapter 13.

Chapter 13 is designed for people who have enough income to pay their debts. Your trustee will develop a 3-5 year payment plan. You will pay the trustee and the trustee will pay your creditors. Debts left at the end of the plan may be discharged.

Chapter 7 is for people who have no way to pay their debts. Some assets may be sold to pay your creditors, but this is rare: almost all Chapter 7 bankruptcies do not involve asset seizure. At the end of the bankruptcy, your unsecured debts will be discharged.

If you earn less than your state’s median income you will qualify for Chapter 7. If you earn more you will have to pass a means test to determine whether you can afford to pay some debts. If the means test establishes that you can pay, you will have to use Chapter 13.

Can I use monthly subscriptions to build credit?

Subscription companies will not report your payments to the credit bureaus, so they will not appear on your credit report. Grow Credit offers a service that will use a virtual credit card to pay your subscriptions and report them to the credit bureaus. The basic tier is free, but it covers a limited number of subscription providers.

What’s a FICO score?

FICO stands for Fair Isaac Corporation, the leading provider of credit scores. FICO takes the information in your credit report, runs it through a proprietary algorithm, and generates your credit scores. FICO produces many credit scores, including scores for specific types of lenders, like the FICO Auto score for car loans. The FICO 8 score is the most widely used. Fico breaks scores into the following ranges.
Poor: Less than 580
Fair: 580-669
Good: 670-739
Very Good: 740-799
Exceptional: 800-850
Different lenders may classify scores into different ranges and have their own cutoff points for approval. In general, higher scores mean easier approval and lower interest rates.
Most free credit score providers use VantageScore, which uses a different algorithm and may be different from your FICO score.
Experian will provide you with a free FICO score based on your Experian credit report. This may be slightly different from a FICO score based on your Equifax or TransUnion credit report. Many financial service providers, including banks and credit card issuers, will provide you with free FICO scores. If you’re shopping for a credit card, look for one that includes free FICO scores!

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