Bankruptcy and Your Credit Score: How to Get Back on Track in 7 Steps
Bankruptcy and Your Credit Score
Bankruptcy is a financial trade-off. In exchange for reducing or eliminating your debts, your credit report bears a black mark that represents your risk to lenders. This mark lasts 7-10 years, depending on the type of bankruptcy.
Unfortunately, bankruptcy can drop your credit score by over 200 points. The exact impact varies based on the amount of debt, repayment plan, and starting credit score.
The first step to rebuilding your credit is understanding what changes your score. For instance, taking out too much debt, making late payments, and letting loans go into collections by stopping payments can all drop your score.
On the other hand, making on-time payments, keeping your credit usage low, and managing different types of debt show that you can manage money responsibly.
Rebuild your credit with debts you can afford.
As you dip your toes into the debt pool again, you’ll want to start with borrowing small so that you can repay on time and in full. Don’t try taking on sizeable or high-interest debt you can’t afford. Instead, start with affordable, lower-risk options like:
Secured credit cards
Secured credit cards act like a prepaid credit card, but they help you rebuild credit with little risk to the lender. Typically, you put down a deposit between $500 and $1,000, with the lender issuing an equivalent credit line. You can use this credit to make purchases and repay your debts, just like a credit card, to establish a positive credit history and rebuild your score.
Credit builder loans are another low-risk way to build credit. Essentially, you “borrow” up to the loan amount, with the lender holding on to the funds initially. Then, you make monthly payments as the lender reports your payments to the credit bureaus to establish a good credit history. Once your balance hits zero, the money is yours!
Become an authorized user
If you have friends or family members with good credit, you might ask to become an authorized user on their credit card. As an authorized user, your credit will benefit from their payments and credit usage – even if you never use their account.
Make your payments early.
Consistency in monthly payments is key to rebuilding your credit score. While paying bills early won’t get you brownie points, it will ensure you don’t miss your payment deadline. Over time, your history of meeting monthly financial obligations will boost your score and paint you in a positive light with potential lenders.
Ask for payments to be reported to the credit bureaus.
Not every lender automatically reports payments to the credit bureaus and not every lender factors in every payment. (It’s not a perfect system.) Additionally, some payments you make – such as your monthly rent and utility bills – aren’t reported at all.
But if you’re making payments anyway, it doesn’t hurt to ask your lender, landlord, or utility company to report your positive history and boost your credit!
Keep your credit utilization low.
All three major credit bureaus heavily weigh your credit utilization, which is how much debt you use divided by how much credit you’re approved for. For instance, 30% of FICO scores are determined by credit utilization. Most bureaus want to see your credit use under 30%, though less than 10% is ideal. That means if you have credit lines of up to $1,000, you won’t want to borrow more than $300.
Monitor your credit.
Free tools like CreditKarma, Chase Credit Journey, and even your bank or credit card’s financial app offer a glimpse at your credit score. If you use credit responsibly, pay your bills on time, and keep your debts low, you can watch your scores rise.
Once every 12 months, you can request a free copy of your credit report by law. Check your credit report to make sure your debts are properly discharged and that any errors (especially if they are negative marks) are promptly removed.
Talk to a nonprofit credit counselor.
If you’re struggling to get a grip on your credit, a nonprofit credit counselor can help you strategize and stick to a plan. By following a strict budget, paying bills on time, and using debt responsibly, you can build credit over time.
Keep in mind that no credit repair company can restore your credit overnight for a fee. Any calls, letters, or emails promising to fix your credit immediately are probably a scam.
How long does it take to rebuild your credit after bankruptcy?
Depending on your credit score, bankruptcy filing, and post-bankruptcy habits, it can take anywhere from 12-18 months to substantially improve your credit score. While that seems like a long time, less than two years to recover your financial standing isn’t that long in the grand scheme of life. And with each positive mark on your report, your credit score will nudge you further in the right direction.
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