A bankruptcy may feel like the worst thing in the world when it comes to your credit. After all, you can be stuck with one on your credit report for up to 10 years from the date you filed. But that doesn’t mean you have to spend a decade completely shut out of the credit marketplace.
In fact, it’s possible build a halfway decent credit score while you wait for the bankruptcy to age off of your report.
“If you do all the right things, it’s fair to say within 3 to 5 years you can have if not a 700 score, then very close to it,” said Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com.
Of course, doing all the right things can be easier said than done, especially if bad habits led to credit troubles in the first place. Here are some steps you can take to get yourself on the right track and increase the odds of getting a new loan with a bankruptcy on your report.
1. Check Your Credit Reports
Yes, a bankruptcy is going to damage your credit score. But, “assuming you don’t get into more trouble after the bankruptcy, your score is actually rebounding from the time you file,” Paperno said. And having all those debts discharged may make you more creditworthy than before the bankruptcy hit your credit file. (Your credit-to-debt ratio, for instance, will improve since you no longer owe on the accounts involved in filing.)
But, in order to begin the healing process, you’ll need to make sure the bankruptcy has been reported correctly to the three major credit reporting agencies. That’s why you’ll want to pull copies of your credit report after the bankruptcy is complete, said Martin Lynch, director of education for Cambridge Credit Counseling Corp.
Make sure all of the accounts involved in your bankruptcy “have a zero balance and are labeled as discharged so the prospective lender knows you have additional income to spend now,” he said. These notations could make it easier to get a new line of credit that will help you further rebuild your scores. (You can go here to find out how to pull your credit reports for free each year at AnnualCreditReport.com and here to learn what how to dispute any errors you may find on them.)
2. Build a Positive Payment History
Rebuilding after bankruptcy is all about accentuating the positive.
“The most important thing you can do to recover as quickly as possible is to pay your bills on time, every time after the bankruptcy,” Rod Griffin, director of public education for credit bureau Experian, said in an email. “Building a positive payment history will help offset the bankruptcy over time.”
To speed up the process, Griffin suggested keeping one account open after the bankruptcy, ideally with a zero balance.
“Make small purchases and pay the balance in full each month to establish a record of positive, on-time payments,” he said.
3. Shop for (Re-)Starter Credit
If you don’t have any accounts open following your filing, consider applying for a secured credit card or credit-builder loan at your local bank or credit union, Lynch said. These types of credit are designed specifically to help people with bad credit fix their scores, so they’ll be easier to get. Plus, it’ll be harder for you to get into too much trouble with the account. (Secured credit cards, for instance, require a cash collateral deposit which serves as a credit line for the account.)
But don’t go too crazy in your search for new credit.
“You’ve just declared bankruptcy, so lenders will wonder why you suddenly are trying to rapidly gain access to a lot of new credit,” Griffin said. “The question is, are you making the same mistakes again that will land you right back in bankruptcy in the future. Just one new account with a low limit is sufficient to start rebuilding a positive credit history. In time, the accounts included in bankruptcy and the bankruptcy filing will be removed from your credit report leaving the positive payment history you’ve build in the intervening years.”
You can track your progress as you move to rebuild by viewing your two free credit scores each month on Credit.com.
More on Credit Reports & Credit Scores:
- The Credit.com Credit Reports Learning Center
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
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