Filing for bankruptcy can feel like hitting rock bottom financially. Your credit score likely took a nosedive, which can make it difficult to get approved for loans or credit cards. However, bankruptcy does not have to permanently ruin your credit. With some strategic planning and dedicated effort, you can rebuild your credit score after bankruptcy.
Developing Responsible Credit Habits
The most vital thing you can do post-bankruptcy is to develop responsible credit habits. How you manage credit and debt going forward has a major influence on how quickly you can improve your credit.
Some tips for practicing good credit habits:
- Make on-time payments – Payment history is the biggest factor in credit scores. After a bankruptcy, aim to never miss payments on any bills or debts again. Setting up autopay can help ensure payments post on time every month.
- Keep credit card balances low – High balances relative to your limit (your credit utilization rate) hurts your credit score. Try to keep balances below 30% of your credit limit on each card.
| Credit Card | Limit | Balance | Utilization Rate |
|---|---|---|---|
| Visa | $1,000 | $250 | 25% |
| Mastercard | $2,000 | $450 | 22% |
- Review credit reports regularly – Check your credit reports from Equifax, Experian and TransUnion every 4 months. Dispute any errors promptly. Monitoring your credit helps ensure accurate reporting.
Developing strong money management skills takes discipline, but it’s necessary to demonstrate you can now handle credit wisely after the financial hardship of bankruptcy.
Timeline For Credit Score Improvement After Bankruptcy
How long it takes for your scores to recover depends largely on the type of bankruptcy you filed:
Chapter 7 Bankruptcy
With a Chapter 7 bankruptcy discharge:
- The bankruptcy remains on your credit reports for 10 years from filing date
- You can start rebuilding credit immediately after the discharge
Rebuilding credit after a Chapter 7 bankruptcy is a gradual process. Most people don’t see a “good” credit score again for 2-4 years. But you may notice small improvements every few months by practicing good credit habits.
For example, say Sam files Chapter 7 bankruptcy today, when his credit score is 550. Here is an approximate timeline of how his credit score could improve over time:
| Time Elapsed | Credit Score | Contributing Factors |
|---|---|---|
| 2 months | 560 | Got secured card, uses responsibly |
| 8 months | 610 | Perfect payment history, got installment loan |
| 16 months | 670 | Credit mix improves, low card balances |
| 2 years | 700+ | Several years of good payment history |
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy:
- The bankruptcy stays on your credit for 7 years from filing date
- You begin payments on a 3-5 year repayment plan
- You can start rebuilding credit during the repayment plan
Making consistent on-time payments on your Chapter 13 repayment plan demonstrates responsibility and can boost your credit score during those 3-5 years.
After completing payments, most people see their credit score significantly improve compared to when first filing. Scores typically continue gradually increasing in the years following completion of the repayment plan as well.
For example, Julie files a 5-year Chapter 13 plan today with a 550 score. Here is how her credit score may improve:
| Time Elapsed | Credit Score | Contributing Factors |
|---|---|---|
| Year 1 | 580 | On-time payments |
| Year 2 | 610 | Mix of credit types |
| Year 3 | 640 | Low card balances |
| Completion (Year 5) | 680 | Completes Ch. 13 payments |
| Year 7 | 720+ | Years of good payment history |
No matter what type of bankruptcy, the most vital thing is re-establishing responsible money habits.
Strategies To Rebuild Credit Faster After Bankruptcy
Recovering from a bankruptcy takes patience and diligent effort. But incorporating credit-builder strategies can help accelerate your credit rebound.
Get A Secured Credit Card
Secured cards require a refundable security deposit and tend to be easier to qualify for post-bankruptcy. They function just like regular credit cards, reporting your activity to the credit bureaus each month.
Using a secured card responsibly demonstrates you can now handle credit wisely. Small, on-time payments help rebuild your credit history month by month.
Aim to use the secured card for 6-12 months with perfect payment history. Then you may qualify to “graduate” to an unsecured card and get your deposit refunded.
Become An Authorized User
Ask a friend or family member with good credit to add you as an authorized user to their credit card. As an authorized user, the card history gets added to your credit reports, instantly giving your credit profile a boost.
Just make sure the primary cardholder makes on-time payments so no negative information gets attached to your credit file.
Take Out A Credit-Builder Loan
Credit-builder loans function differently than regular loans. The loan amount is held in a savings account while you make fixed payments over 1-2 years. You receive the money back once the loan is paid off.
Credit-builder loans help demonstrate responsible repayment history and expand your mix of credit types. Both factors can help improve credit scores.
Dispute Any Credit Report Errors
If your bankruptcy filing or other information is inaccurately reported by the credit bureaus, promptly dispute the errors. Sometimes credit reports contain serious mistakes that unlawfully deflate your scores.
Getting inaccuracies corrected ASAP ensures you earn the maximum score your credit history deserves. Disputing directly with Equifax, Experian and TransUnion is typically easiest.
Avoiding Setbacks When Rebuilding Credit
When rebuilding credit, a major score setback can feel devastating. By proactively avoiding certain mistakes, you can minimize backslides on your credit journey.
Don’t Close Your Oldest Credit Card
Even if a credit card has an annual fee, try to keep your oldest account open because the age of your oldest line of credit factors heavily into credit scoring models. As long as there is no annual fee, sock drawer the card instead of closing it.
Be Wary Of Credit Repair Scams
Many companies make big promises about fixing your credit overnight or removing bankruptcies from your credit report. Unfortunately, these are often scams that do nothing but siphon people’s money. Don’t believe claims that sound too good to be true.
Don’t Apply For Too Much Credit At Once
Every credit application triggers a hard inquiry on your credit report. Too many inquiries in a short span can temporarily ding your scores, primarily if you open many new accounts rapidly. Apply for new credit judiciously, allowing some space between applications.
Long-Term Credit Management After Bankruptcy
Rebuilding credit is a marathon, not a sprint. Developing lifelong responsible money habits enables you to continue progressing your credit health for years to come.
Ongoing strategies that facilitate enduring credit success include:
- Maintaining low credit utilization rates
- Securing credit limit increases periodically
- Setting up automatic payments to avoid ever missing due dates
- Monitoring your credit reports at least every 4 months
- Keeping credit accounts open long-term
Building and protecting your credit is crucial not just to recover from bankruptcy, but to have financial opportunities and flexibility for life. By internalizing sound credit principles, you pave the way for stability and continued improvement for the long run.
The bankruptcy may feel like a black mark on your financial history forever. However, its impact inevitably fades over time as you put in the work to demonstrate renewed responsibility. Years down the road you may even qualify for top-tier credit scores again through diligence and prudent habits.
While the bankruptcy cannot be erased, responsible behavior gives you significant control over your financial future. By applying proven credit-builder strategies, you put your credit health on upbeat trajectory and inspire confidence from lenders once more.
