Bankruptcy sounds like a dirty word, but for many people, it is a lifeline to starting over. Whether you lost your job, were overwhelmed with an unavoidable expense or found yourself dealing with a costly illness, bankruptcy was designed to give people a chance to begin again. However, bankruptcy does take a serious toll on your credit score.
Understanding the Impact of Bankruptcy
Luckily, that’s not to say that your credit score is going to be ruined forever. According to the Federal Trade Commission, your bankruptcy can stay on your credit report for as long as 10 years after your debts are discharged, and that can make accessing new credit, buying a home or even getting a job difficult. While the impact can be severe, it is possible to repair your credit after bankruptcy. It just takes some proactive efforts on your part.
Look at it like this: Your credit score is meant to be indicative of how risky it is to let you owe money. High balances, late payments and anything else that could show you may be living outside your means is suspect. Filing for bankruptcy is largely the culmination of those issues. Now, you may have had extenuating circumstances that were completely outside of your control, or you may have merely gotten underwater and couldn’t find your way out. Whatever the case, the bankruptcy on your credit report is objective; it doesn’t matter why it happened. To repair your credit, you have to demonstrate that you are no longer a credit risk.
Starting Over After Bankruptcy
The first advice most people hear after filing for bankruptcy or facing some similar credit crushing issue is to establish new credit as soon as possible. That is good advice, but it is incomplete. Repairing your credit after bankruptcy will require that you have accounts on which you make regular payments. Getting a loan and then paying it off will not do nearly as much good for your credit report as making consistent payments.
“The key is to establish at least three positive trades actively reporting on each of your reports with Equifax, Transunion and Experian,” explains Marco Carbajo for the Small Business Administration. “For example, if you’re currently making timely payments on a car note but have no other positive credit that’s active, then you should obtain two secured credit cards and use them regularly.”
Understanding Your Credit Score
Aside from exercising your credit, you also want to practice good spending habits. According to the Federal Reserve Board, your credit score is influenced by whether you make your payments on time, the amount of debt you have, the number of accounts you have, the length of your credit history and how much you owe.
For instance, once you get your first credit cards after bankruptcy, you will want to make sure that you keep the amount of debt on those cards at less than 30 percent of the credit limit, and increase your credit limit whenever you can – the higher your credit limit, the more your creditors trust you and the better it looks on your credit reports. Also, make sure you are making your payments on or before the due date and paying any billable amounts in full.
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Being Selective About Your Credit
After bankruptcy, you want to be selective about where you find your credit as well. Many people with bad credit are sold solutions that promise to provide them access to new credit far more quickly than through any other source, but beware of those offerings. Even if the lender is legit, if the company is known as a “high-risk lender,” using them for your credit or banking needs could actually hurt your credit score. Instead, focus on well-known lenders and credit companies. Choosing a big bank over a high-risk lender, even if it means you have to start with a lower credit limit or a secured credit card over a traditional credit card, looks better and may even give you more options for growing your credit as you repair the damage from your bankruptcy.
Righting the Wrongs in Your Credit Report
You should also take a look at your credit reports to make sure that the debts from your bankruptcy were discharged properly and that all information is accurate. An error on your credit report can really work against you. To do correct inaccuracies, the Federal Trade Commission says that you will need to obtain a copy of your credit report from each of the credit reporting agencies and inform them in writing of any inaccuracies. You may need to provide proof of the inaccuracy if possible, and it may be necessary to tell your creditor that you are disputing the entry. Hiring a credit repair company can make the process easier. They handle the paperwork for you and handle the dispute on your behalf.
Once you begin to take steps to improve your credit score after bankruptcy, you can start to see modest improvements pretty quickly. As long as you are careful with your credit, choose the right lenders and maintain accurate credit reports, you can repair your credit after bankruptcy.
- Federal Reserve Board, “5 Tips for Improving Your Credit Score” http://www.federalreserve.gov/pubs/creditscore/creditscoretips_2.pdf
- Federal Trade Commission, “Coping with Debt”, November 2012. https://www.consumer.ftc.gov/articles/0150-coping-debt
- Federal Trade Commission, “Free Credit Reports”, March 2013. https://www.consumer.ftc.gov/articles/0155-free-credit-reports
- Small Business Association, “How to Restore Your Credit After Hard Times”, Marco Carbajo, May 2013. https://www.sba.gov/blogs/how-restore-your-credit-after-hard-times