How To Build Credit After Bankruptcy: 6 Steps

Rebuilding Your Credit After Bankruptcy

Once your bankruptcy case has been discharged, and you’ve received notice from the court, you’re officially free of the debts you had included in your filing. Now is the time to course correct.

First, take some time before you apply for another credit card or do borrowing of any kind. Get used to the feeling of earning income and living “in the black.” Be sure to pay all your current bills on time. Over the course of the next several months you can carry out a methodical plan that will help you slowly build a healthier credit score through any of these several key steps:

·       Learning to monitor and interpret your credit report

·       Applying for a secured credit card

·       Applying for a credit-builder or secured loan

·       Applying for a loan with a co-signer

·       Becoming an authorized user on a credit card

1. Regularly Check Your Credit Score

As you likely know, one of the long-lasting setbacks to filing for bankruptcy is the drop in your credit score. Bankruptcy can drop your score by up to 240 points and the filing will be noted on your credit report for 7 years. Since lenders have fairly high credit score minimums they’ll allow when approving a loan, your credit score after bankruptcy can be a problem for some time.

But you can improve your score, and you can track it to see progress. Your credit score is tracked by three major credit bureaus: Equifax®, Experian™ and TransUnion®. You can set up an account and track your score with any of these organizations. Your bank might also allow you to get a free credit score check through your account.

Another increasingly popular way to track your score as much as you’d like is through a financial app that has a credit score feature, such as the Rocket Money^SM app.

2. Monitor Your Credit Report

It’s actually quite common for people to find errors in their credit report that negatively impact their score. You need to know which errors can impact your credit score and how to fix them. Here are a few:

·       Identity errors: These can include incorrect personal information about you, such as a misspelling of your name, the wrong name or incorrect address or phone number. If you were a victim of identity theft, someone could have opened an account in your name without your knowledge. There may be accounts to people with the same or a similar name as yours.

·       Duplication errors: Upon closer inspection, you might find that the same debt is listed several times. It might be listed under different names or creditors, so be sure to look at all the numbers. This could happen when a creditor or lender undergoes acquisition and there’s a name change.

·       Balance errors: Common errors with your balance could be the wrong amount of balance on a credit card, or the wrong credit limit. A lower or higher credit limit than the real one can affect your score.

·       Account errors: Mistakes in the actual status of your accounts. For example, an account that should still be open is reported as closed, or vice versa. There could be reports of late payments on accounts when you made the payments on time.

If you find an error, you can file a dispute with the credit bureau where it was found. The credit bureau is required to respond within 30 days, and it’s free.

3. Apply For A Secured Credit Card

One of the best ways to build your credit score is by using a credit card and paying off your monthly balances. But coming out of bankruptcy you might find it impossible to qualify for a regular credit card. This is where a secured credit card can be a big help.

Secured credit cards are usually low-balance cards that require you to seed the card with your own money. This security deposit acts as collateral for the credit card company and makes it easier to qualify for credit. You can then use the secured card and pay off your balances to build credit like any other credit card.

4. Get A Credit-Builder Or Secured Loan

When you’re trying to build credit after bankruptcy, it can be difficult or even unwise to take out a regular loan. A secured loan can be easier to get approved for. With a secured loan, you offer an asset that you own as collateral, which your lender can seize if you default on the loan.

Types of assets that can be offered as collateral in a secured loan include:

·       Bank accounts

·       Insurance policies, including life insurance

·       Real estate

·       Vehicles (cars, RVs, motorcycles, boats, etc.)

·       Stocks or other securities

You can build credit by making monthly payments on a secured loan. Be aware, however, that you will likely pay a higher rate of interest due to your bankruptcy filing.

5. Consider Applying For A Loan With A Co-Signer

It can be much easier to qualify for a loan if you have a person with better credit act as a co-signer. This person is essentially taking a risk on your behalf, since they will be responsible for paying back the loan if you default. However, if you make your regular payments on time each month, you can build your credit score this way.

Just beware that you put your relationship with your co-signer — usually a friend or family member — in peril when you put them at financial risk. This increases your personal responsibility to paying back the loan.

6. Become An Authorized User

If you’re unable to get your own credit card after bankruptcy, a good middle step might be to become an authorized user on someone else’s credit card, such as a friend or family member. As an authorized user, you’ll have your own credit card with your name on it. You can use the credit card normally, but you should have a rock-solid set of rules with the primary cardholder as to how often you can use the card and what your spending limit is.

Even if you don't use the card, your credit will still be affected based on the primary user's behavior. Being an authorized user can help raise a credit score in as little as a few months. But remember this: just as your behavior with the card affects the primary cardholder, so does their behavior affect you. If they are irresponsible with the card it can lower your credit score, too.

The Bottom Line: Rebuilding Credit After Bankruptcy Is Possible

The secret to building your credit after bankruptcy is no mystery, but it does take time, work and discipline. It’s mostly about spending less than what you earn and building some savings, along with making all your monthly bills, loan payments and credit card balances on time, every time.

You can also download the Rocket Money app or tips and daily help with tracking your income, bills and spending.