How to rebuild credit after bankruptcy

Going through bankruptcy can be incredibly stressful. You’re saddled with debt and trying to negotiate with lenders and the courts for relief. To make matters worse, you’re left with damaged credit once you complete bankruptcy proceedings.

Applying for new credit might be the last thing you want to do after bankruptcy. However, the difficult reality is that credit is an all but essential aspect of modern life. It’s in your interest to start rebuilding your credit score as soon as possible after bankruptcy.

Looking for a credit card to start over with your credit? Here are some of the best credit cards for rebuilding your credit

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How to rebuild credit after a bankruptcy

You’ll have a heavily damaged credit score after you go through bankruptcy. Rebuilding your credit is important if you want to qualify for a car loan, lease or mortgage in the future.

Your credit score is determined using these five factors:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%

The good news is that you may have a reasonable length of credit history, even if you’ve just gone through bankruptcy, though your average age of accounts may fall as lenders close any loans or credit cards. You also probably won’t have much new credit, which looks at just the last two years of applications.

Unfortunately, your payment history is likely down the drain after bankruptcy due to missed or late payments. Given that it’s the most important factor impacting your credit score, that’s where you need to focus.

A large part of the amounts owed component looks at your debt compared to the credit limits of your credit cards. Your lenders will likely close any credit cards when you go through bankruptcy and may not discharge all your debt, which will also negatively impact your credit score.

The best ways to rebuild your credit history after bankruptcy are to find a way to reconstruct your payment history and show that you can keep your debts low by paying off any balances that remain after bankruptcy. Use these tips to get started:

Focus on existing bills

The last thing you want to do after going through bankruptcy is to fall behind on any bills again and damage your credit even further. Before you do anything else, ensure you can handle your current bills and any payments required for your bankruptcy.

If these bills include a debt that bankruptcy did not fully discharge, paying that off can help you rebuild your payment history and lower your owed amounts.

Consider a secured card

Consider applying for a secured credit card when you have some cash on hand to submit as a security deposit (many secured cards require at least a $200 deposit, which will serve as your line of credit). These cards have few qualification requirements because your deposit mitigates the lender’s risk. You might be able to qualify for one just a few months after your bankruptcy.

When you get the card, make sure to use it responsibly. You can use it for just one small monthly purchase each month that you pay off in full every billing statement period. By doing this, you will be adding back positive payment history to your credit reports.

Alternatives to a secured card include getting a loan with a co-signer, credit-builder loans, or asking someone to add you as an authorized user on their card. With the exception of credit-builder loans, which don’t require a co-signer, these strategies can help build credit but require knowing someone with good credit who is willing to help.

Monitor your credit reports and score

Many online services let you check your credit reports and scores, and you’re legally entitled to a free credit report from each bureau every year. Through Dec. 2023, you can check your credit reports weekly for free at AnnualCreditReport.com.

Keep a close eye on your credit report to ensure all the information is accurate. If you see mistakes, let the credit agencies know. You should also monitor your credit score to ensure it’s heading in the right direction.

Be patient

Rebuilding your credit takes time. However, your bankruptcy’s impact on your credit will lessen as you add more positive information to your credit reports. Bankruptcies fall off your report after 7 or 10 years after the filing date, depending on the type of bankruptcy. As you near that date, your credit should improve as long as you keep your debt load in check and pay all your other bills on time, every time and continue to add positive repayment activity to your credit reports.

Ways to improve your overall financial health after a bankruptcy

Your bankruptcy may have been a simple case of bad luck, but it might also have happened because you didn’t practice good financial habits.

Taking the time to improve your overall financial health after bankruptcy can set you on better footing for improving your credit and achieving your financial goals. That means trying not to spend more than you can afford every month, creating a budget and making sure bills are paid on time.

Make a budget

One easy way to craft a budget is to track your spending for a month. You can do this manually or use a budgeting app to track every dollar you spend and what you spend it on.

At the end of the month, review your expenses. Then consider how your spending compares to your income and aligns with your financial goals. Step one is to make sure you spend less than you bring in each month, giving you a chance to pay down debt and grow your savings.

Build an emergency fund

Step two is to ensure you’re spending money on necessities and reduce spending on purchases that are wants instead of needs. But things crop up when you least expect them, and that’s when it helps to have an emergency fund if you have to cover an unexpected bill or car repair. Without an emergency fund, it’s easy to fall back into debt.

Start by saving $500 in a savings account and only use it for emergencies. Over time, you can grow your fund to cover a few months’ expenses. You can start your fund by transferring small amounts every week or month of, say, $15 to $25 or more, to your savings account. If you deplete the fund for an unexpected expense, refocus your efforts to build it back up again.

Reassess your relationship with credit

Having good credit is crucial if you want a car loan or mortgage in the future, but just because many people use credit cards daily doesn’t mean you have to.

Think about your relationship with credit and debt. If you struggle to control your spending, you may be better off avoiding credit cards as much as possible, using them just enough to help build your credit score.

All you need is one card with a small credit limit that you can charge a streaming subscription or cellphone bill and set up auto payment to cover that charge every month to ensure the card gets paid on time. Then put the card away and don’t carry it around, reducing the urge to spend on items you otherwise can’t afford.

Why would someone file for bankruptcy?

Bankruptcy allows people to either discharge their debts entirely or work with the legal system to negotiate with lenders and design a reasonable repayment plan for their debt.

Usually, someone files for bankruptcy when they realize their financial situation is unsustainable and are stuck with insurmountable debt that they cannot afford to repay.

How long does it take to rebuild your credit after bankruptcy?

If you take steps to start rebuilding your credit soon after resolving your bankruptcy, you can expect to begin progressing toward repairing your credit. It can take a year or two after your debts are discharged to see an improvement in your credit. A bankruptcy stays on your credit report for seven to 10 years. Missed payments or other negative information generally falls off your credit reports after seven years.

Final word

Bankruptcy is already stressful, and adding credit repair to the pile of things you must deal with may not sound appealing. However, the sooner you start adding more positive information to your credit reports, the better.

Frequently asked questions (FAQs)