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By the end of this year, more than 750,000 people will file for bankruptcy. If you’re one of them, you don’t have to live with bad credit forever. Although a day in bankruptcy court is not the happy ending most of us hope for, you can still rebuild your credit and live happily ever after.
Here’s how to boost your credit rating after bankruptcy.
Your credit score could decrease by more than 200 points after a bankruptcy filing. The effect is worse if your score was good or excellent. The bankruptcy penalty will stay on your credit report for 7 to 10 years, depending on the type of bankruptcy you filed for. The good news? That penalty won’t have the same impact even a year from now.
Almost as soon as you file for bankruptcy, you can begin to rebuild your credit. Here’s how.
Check Your Credit Reports. Within 30 days after you filed for bankruptcy, pull your credit report from all three bureaus. You are entitled to a free report once a year from annualcreditreport.com, the only authorized source for free credit reports. Keep monitoring your credit on a regular basis to make sure no errors prevent you from reclaiming an accurate score. Although free monitoring services like Credit Karma and Nerdwallet carry less detail than your full report, they are excellent ways to check your credit more frequently. (Don’t forget to freeze your credit when not applying for new cards or loans. It’s free, and helps protect you from fraud.)
The first time you check your credit report after bankruptcy, make sure that any discharged debts show a zero balance. Report any problems to the bureau right away and go through the dispute process to have them rebalanced to zero. Do this for all three bureaus.
If you had bills in collections, check your reports often, and get those delinquencies removed as soon as they can come off the report. Delinquencies sometimes hang on your report long after they are supposed to disappear. That can hinder your progress as you rebuild your credit.
Keep up with your debts. For any debts that were not discharged, such as student loans or debts that you agreed to pay under a payment plan, make all your payments on time. Here are some tips for tracking what you owe.
Ask to be an authorized user. If a spouse or relative with good credit is comfortable adding you to their credit card account, that’s an excellent way to boost your score without affecting theirs. Just make sure to cut up the card unless you also have permission to use it. And if you do, show your gratitude by immediately repaying what you spent.
Even in bankruptcy, you can apply for credit again. Start small, and pace yourself.
Join a credit union. Credit unions are nonprofit, community-based institutions that are set up their members, not stockholders. Credit unions offer a variety of savings options with relatively small cash requirements. For example, my credit union requires me to keep $5 in my account, and my low balance is fee-free. Credit unions offer favorable terms on car loans, mortgages, and home improvement loans, sometimes points below banks and auto credit companies. A credit union often will approve you for a loan with only fair credit if you are a member and can demonstrate solvency and ability to make payments. Find a credit union near you.
Get secured credit. Some credit unions and other institutions offer secured loans, which are an excellent way to build credit. With a secured loan, you either deposit cash into an account as a back-up in case you miss payments, or you are given a small personal loan that you can’t access until the end of the term, and you must make regular payments until then. Either way, these loans help you save while you build back strong. Plus, your payments are reported to your credit bureaus, and Win-Win!
You can also apply for a secured credit card. You back your card with a cash deposit. Otherwise, it behaves like a regular credit card. Secured credit cards are typically the easiest to qualify for with a low credit score. Making regular payments on a secured card will instantly help your credit.
Introduce new credit slowly. When you feel ready to apply for more credit, start slowly. Do not apply for more than one credit card at a time. In fact, it’s wise to limit your new credit applications to one every six months for the first few years.
Keep your credit usage below 30%. One of the best ways to have a positive impact on your score is to use only one-third or less of your available credit.
Make an extra payment each month. Get a sense of how often your credit reports are updated (interim updates happen every few days, with major updates once a month). Try to make an extra payment to one of your debts every month before the next reporting, in order to boost your score a few points now and then.
A few more things to consider for stronger credit:
Avoid easy outs and outright scammers. You’ve probably already noticed the offers for personal loans and debt repair “counselors” piling up in your inbox and mailbox. Unless you are still in a lot of debt, there’s no reason to take up the loan companies on their offers (and even then, check the terms, rates, and reputations of the lenders).
Even more important, don’t believe any claims you see that someone can “take the bankruptcy offer your report” or do anything else to help your credit. Bankruptcy stays on your credit report for 7 to 10 years by law. Anyone claiming otherwise is scamming you.
Seek good advice. There are many resources for good advice on restoring and maintaining your credit. One important resource, especially if you feel yourself slipping in too deep again, is the nonprofit National Federation of Credit Counseling. This is a national network of trustworthy nonprofits that specialize in credit counseling. Many of the organizations in the network charge a fee or percentage for their services, and can only help people who have serious repayment issues, but their advice is sound and they can negotiate lower amounts with your creditors and create a repayment plan to keep you out of bankruptcy next time.
The Consumer Finance Protection Bureau is a wealth of good information, as well as an agency that can take action to support consumer complaints. Specifically set up to address consumer issues with banks and credit companies, the CFPB is a great resource for your questions about debt and bankruptcy’s effects.
Avoid job changes. Although your job history does not directly affect your credit score, it is one of the factors a lender will check. Especially if you think you will need a car or home loan in the first years after bankruptcy, try not to change jobs.
The events leading to bankruptcy can be overwhelming, and the bankruptcy process is hard on the psyche and the pocketbook. Yet the road to recovery is at hand. Although really big credit boosts will take about 12 months to see, you’ll see positive impacts on your credit score sooner than that, and life will return to normal within just a few months. Hang in there.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.