If you've gone through a bankruptcy, it’s time to start thinking about rebuilding your credit. Although a bankruptcy can remain on your credit reports for up to ten years, its impact will fade with time, and your credit will improve. You can help the process of repairing your credit by taking certain steps. Some of these steps are relatively quick and easy, like reviewing your credit reports to make sure they’re accurate. Other steps, however, like staying current on your bills, require more effort and time.
Under the Fair Credit Reporting Act, a bankruptcy can remain on your credit reports for no more than ten years. Because a Chapter 13 bankruptcy involves repaying some of your debt, this kind of bankruptcy stays on reports for up to seven years. A Chapter 7 bankruptcy, on the other hand, is reported for the entire ten years. If your bankruptcy is dismissed, and you didn’t get a discharge, the bankruptcy might be reported for up to ten years, although some credit reporting bureaus will remove it after seven.
As long as a bankruptcy appears in your credit reports, it will have a negative affect. But you can take steps to mend your credit while the bankruptcy is still being reported.
When it comes to improving your credit after a bankruptcy, your first objective should be to make a budget. Taking a look at your income and expenses will give you a clear picture of your financial situation. Through the budgeting process, you’ll see where you can make changes so you’ll be able to make regular, on-time payments on your remaining bills. You might have to periodically re-review your finances and make adjustments to your figures and spending. The sooner you establish an on-time repayment record, the faster your credit will recover.
The credit counseling you went through as part of the bankruptcy process should have provided information on budgeting. If not, you can get help from a nonprofit credit counseling agency, like one affiliated with the National Foundation for Credit Counseling (NFCC).
You might think that you need to apply for new credit as soon as possible after a bankruptcy to reestablish good credit, but that’s not necessarily true. The most important step in rebuilding your credit is to pay your existing debt obligations on time and in full every month.
Here are some other ways to help your credit scores that don’t involve getting new credit:
Getting a new credit card, using it regularly, and paying off the bills in full and on time can help your credit get better. But you should consider getting a new card only if you don’t already have one. If you already have one or multiple credit cards, applying for an additional card won’t help your credit score, and it might hurt it. That’s because getting a lot of new credit or making a bunch of credit inquiries tends to make it look like your desperate to get more credit, which negatively impacts your credit scores. Also, credit scorers normally consider the length of your credit history when determining your credit scores. A new account will reduce the average length of your credit history.
If you can't qualify for a regular credit card, you might consider getting a secured one. With a secured credit card, you deposit a sum of money with a credit union or bank and get a credit card with a credit limit for a percentage of the amount you deposit, like 50%. But before you apply for a particular card, ask the card issuer if it reports to the credit reporting agencies. If not, you’re missing out on the main benefit of getting a secured card.
Some credit unions and community banks, as well as a few online lenders, offer "credit-builder loans," which are sometimes called "Fresh Start Loans" or "Starting Over Loans." You fill out an application and, after approval, the lender puts the loan money (say $500 or $1,000) into a savings account. But you don’t get to use the funds. Instead, you make payments on the loan for 12, 18, or 24 months. The lender reports the payments to the credit reporting bureaus and, after you pay off the loan, you get the money.
This kind of loan is designed solely to help build good credit.
Another option to consider is to get an auto loan, if you don't already have one. As you make payments on time, you begin to build a positive payment history. Having a healthy mix of different types of credit, both revolving and installment accounts, is another factor that credit scorers use when determining a score. If you don't have an installment loan on your credit report, then getting an auto loan might help your profile by creating a more diverse credit mix.
Of course, make sure you're financially ready before applying for any new credit
Bankruptcy lawyers are experienced not only in how bankruptcy works but also in how to fix credit. Consider talking to a lawyer if you have further questions.