Filing for bankruptcy is a tough decision to make. Often, it is the right thing to do. But with filing for bankruptcy comes a whole bunch of other anxieties and worries, not the least of which is the looming question of how are you going to rebuild your credit?
It would be a lie to claim that rebuilding your credit is easy. It isn’t, it will take work and effort on your part. But rebuilding your credit is something that is absolutely possible and something that brings a wave of relief in its wake. We’ll cover tactics on how to rebuild your credit and what mistakes you should avoid when rebuilding your credit below. But first, let’s take a closer look at what kind of an impact bankruptcy has on your credit.
How Does Bankruptcy Affect My Credit?
A bankruptcy may affect your credit, there is no way around it (though see below for some notes on this topic). But how long it affects your credit depends on the type of bankruptcy that you filed.
- A Chapter 13 bankruptcy will stay on your credit report for seven years from the date of the final discharge
- A Chapter 7 bankruptcy will stay on your credit report for ten years from the date of the final discharge
Both types of bankruptcy stay on your credit report for quite some time; however, they affect it less over time so the impact goes down every year until it drops off of your credit reports.
Unfortunately, if you spent a lot of time building up good credit before your bankruptcy then you’ll be disappointed to learn that the higher your credit is, the more of a hit it’ll take following a bankruptcy. On average, bankruptcy tends to leave a person with a score in the low to mid 500s. If you had a credit score of 800 then that’s a lot further to fall than someone who had a credit score of 650.
But keep this in mind: the vast majority of our clients who reach the decision to file for bankruptcy have already had their credit score impacted by missed payments. If your credit has already been hit by missed payments and judgments, a bankruptcy filing is not going to bring down your score much further. Perhaps most importantly, your debt to income ratio is often even more important than your credit score when you are seeking a loan. If you are considering bankruptcy, your debt to income ratio is almost certainly already in very bad shape, and discharging your debt can actually improve your creditworthiness substantially! We have many clients who are able to secure loans not long after receiving their bankruptcy discharge, and then they can start rebuilding their credit even faster.
So now let’s take a look at how you can rebuild your credit score following your bankruptcy.
What Can I Do to Rebuild My Credit Following Bankruptcy?
There are a number of ways in which you can rebuild your credit such as:
- Get a Secured Credit Card: A secured credit card requires you to pay down a security fee in order to receive the card. Companies do this so that they can ensure they don’t lose money when offering a credit card to somebody with bad credit. Many people will start their credit-building journey with a secured credit card.
- Get an Unsecured Credit Card: The next step people tend to take is to get an unsecured credit card. These represent a bigger risk to your potential score, but consistently using them and paying them off on time will help you to raise your credit score.
- Keep a Close Eye on Your Credit Reports: A powerful habit to get into is keeping up with your credit score. It’s a good idea to check your reports once a year to keep track of exactly how well your credit rebuilding process is going. This will also let you see if you are making any mistakes that are affecting your credit as well. You are entitled to a free copy of your credit reports from all three major credit reporting agencies once a year by law.
- Get a Co-Signer: A trusted friend or a family member can help you get a loan by co-signing with you. While this can help to build credit, it’s important to remember that it affects not just your credit but also your friend’s credit should you fail to maintain your payments.
- Credit-Builder Loans: Community banks and credit unions often offer credit-builder loans which are designed to help people get out of situations just like yours. These are pretty low-risk and so they make for a good step before getting a more risky loan.
- Stick to a Budget: You should have a budget even if you aren’t working on rebuilding your credit. But after a bankruptcy, a budget is an important step in ensuring you know exactly where your money is going and how much you have to work with for groceries, gas, leisure, and the like.
- Dispute Incorrect Balances: When checking your credit score following bankruptcy, it’s important to ensure that the debts which were discharged are showing as such with each of the credit reporting agencies. If any aren’t showing a zero balance, dispute them.
- Create an Emergency Fund: Another good habit to have regardless of your credit, an emergency fund can give you some financial protection in the event of an emergency so that you don’t need to put additional strain on your credit.
What Credit Mistakes Should I Avoid When Rebuilding My Credit?
You should also avoid committing too many mistakes when focusing on your credit, mistakes such as:
- Applying for Too Many Credit Cards: Applying for too many credit cards in a short window of time will damage your credit. Each application counts against your score. It’s best to focus on one card at a time, at least at first.
- Applying for Too Many Loans: Everything we just said about credit cards applies to other types of loans as well. Though there are some exceptions, such as when making multiple mortgage loan inquiries within a short period of time, it’s always best to apply for credit slowly, over time.
- Failing to Pay on Time: Missing payments matters here a lot–in fact, no almost no other factor is as important in determining your credit score. If you want to build credit, you need to make your payments on time. For most people, missing one or two payments over a long period of time might not be so bad, but you are trying to rebuild your credit, and your primary goal is to prove that you won’t be missing your payments again. So work hard to make all your payments for the first couple of years on time if you can.
- Taking on Too Much, Too Fast: It’s understandable to want to rebuild your credit quickly, but biting off more than you can chew is never a good idea. It’s better to build a plan for rebuilding your credit and following that one step at a time, rather than trying to take them all at once and tripping over everything.
How Do I Make a Plan to Rebuild My Credit?
The best way to make a plan to rebuild your credit is to work with an attorney that is well-versed in bankruptcy and credit laws. They can help you come up with a plan to follow to rebuild your credit, one that is based on the specifics of your situation.
Attorneys like those at Israel & Gerity can also help you by answering your questions and really getting you the relevant information you need to improve your credit score after a Bankruptcy here in Phoenix.