8 Steps To Repair Your Credit After Filing For Bankruptcy
Updated May 2, 2018
What is bankruptcy?
A bankruptcy allows consumers to get rid of unwanted debt and re-start their financial life, while providing businesses with a way to revitalize a company.
Although it has a negative connotation, bankruptcy removes extra debt and keeps credit running in the economy. In spite of this, filing for bankruptcy may severely damage your credit (as much as 240 points) and can stay on your credit report for up to 10 years.
What steps do I take after bankruptcy?
- Check your credit score
You can check your credit score by accessing your free annual credit report at www.annualcreditreport.com or you can enlist the help of our top rated credit monitoring services to keep an eye on any further changes. Credit repair companies should provide you with a copy of your Equifax, Experian, and TransUnion reports.
- Dispute a bankruptcy
As you aim to rebuild your credit, keep track of any monthly changes. If you come across any inaccurate or unverifiable information in your credit reports, disputing and having them removed will help increase your credit score. You can do these corrections yourself or have a professional credit repair service do the legwork for you.
Keep in mind that only erroneous information can be removed, which means that if any of the paperwork going into filing a bankruptcy is incorrect, that can be disputed. However, all accurate information will stay on your credit report for 7 to 10 years. Rebuilding a credit score seen by lenders helps you apply for future credit.
- Emergency stash
After filing for bankruptcy, you should build a nest egg for inevitable future emergencies. Since you have now eliminated debt, save a small portion of a paycheck or spare change to build up a savings. Even a couple of hundred dollars prevents you from taking out loans or running up credit card debt in case of an unexpected expense. If possible, save up a minimum of three months of living expenses.
- Rebuild your credit with a card
After disputes, another way to rebuild your credit is by getting a credit card. Because payment history is 35% of your credit score, paying off all your accounts is a great way to rebuild your credit. Although you don’t want to add any more debt, having a good payment history increases your credit score. You don’t want to charge everything to your credit card, so start off with a small purchase or bill and immediately pay it off afterwards.
Getting a credit card may be difficult, but there are a few unsecured and secured credit cards that you can be approved for. With secured credit cards you can put a refundable deposit equal to your credit line (some are only half of your deposit), which means that when you charge an item you pay for it out of pocket. The initial deposit covers any payments you miss, and the credit limit is generally your deposit minus any annual fees.
A secured card, which you can apply for at a local bank or credit union, generally has high annual fees (anywhere from 15% to 23%) and possibly high interest rates. This is a short term fix for boosting your credit until you can qualify for an unsecured card. Before applying, check to see if you will receive a refund in case you are denied the card and make sure the bank allows credit increases and does not report the card as secured.
When using these new credit cards, make sure you keep your balances as low as possible. Try to use only around 10% of your credit line, pay them off on time, and do not use them for large purchases. It is also important to check that the credit card companies report to all 3 credit bureaus and that you do not submit too many credit card applications, since each one can take around 5 points off your score.
You can also apply for a retail card at a department store, which is easier to qualify for once you have successfully used a secured card. Since these have higher interest rates, ensure that you pay off the account every month.
- Secured loan
In the case that you need a loan, there are 2 types provided by banks and credit unions. Secured loans, which are similar to secured credit cards, allow you to borrow money that you have on deposit, and you will be unable to have access to the deposit money while you are paying off a loan.
A second type of loan is made with a cash payment, and the money loaned to you is put in a savings account and only given to you once you have made payments. In return for your on time payments, banks and credit unions send reports about your payment history to the credit bureaus.
- Co-signed credit card or loan
Another way to boost your credit score is by applying for a co-signed credit card or loan. This is risky for the co-signer, who is putting their own credit score on the line for you and is responsible for payment if you do not pay. They may also run into limits on their own credit line because of the additional debt.
If you are not comfortable asking someone to co-sign, they can be an authorized user on your credit card. Although this won’t raise your score as much as a co-signed credit card, it is important that the credit card companies report payments by authorized users to the credit bureaus or it will not help your score.
- Avoid taking loans
After bankruptcy, spend as little as possible and avoid taking loans -- especially payday loans. These predatory lenders search for consumers with bad credit and charge them ridiculous fees for loans. Some of these fees are almost as much as 400%.
- If I have to take loans, when can I take loans again?
The time in which you can take out a loan for a house or car varies with each lender. Although it is possible to take out a loan the day after filing for bankruptcy, it will most likely take 18 to 24 months to rebuild your credit to a good score. With low credit, you must be ready to pay higher interest rates, but not fall victim to predatory lenders. A good rule of thumb is to check the Better Business Bureau to see if a business is accredited.
Getting an FHA mortgage is possible one to two years (sometimes even more) after the bankruptcy has passed if payments have been made regularly for one year and if the courts grant you permission. In the case of foreclosure, consumers are unlikely to get a mortgage unless they can rebuild their credit score to good standing.
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