Bankruptcy can be devastating to your credit rating in many cases, although some people actually find filing for bankruptcy boosts their credit score because all negative marks now fall under one. Once your bankruptcy is discharged, it’s important to take stock of your credit report and begin taking steps to improve your credit. Contrary to popular misconception, bankruptcy won’t destroy your financial future and you can start rebuilding your credit with the help of credit repair companies. In fact, it’s possible to get approved for a mortgage just 18 to 24 months after bankruptcy. Here’s what you need to do.
Before you do anything, order free copies of your credit reports from Experian, Equifax, and TransUnion at AnnualCreditReport.com, the only place to get your free credit reports under federal law. Make sure there are no mistakes on your credit reports and dispute any you find. After bankruptcy, debts that were discharged (including medical and credit card debt) can no longer be reported as past due or unpaid. All discharged debts should be reported with a zero balance and discharged or “included in bankruptcy.” Be sure you check any unfamiliar debts as they can be discharged debts that were bought and sold to a third party.
Start with a Secured Credit Card
A secured credit card is an easy way to establish new credit history. Once your bankruptcy is discharged, you will be able to qualify for most secured credit cards, which work just like regular credit cards except they require a deposit that is usually equal to your new credit limit. With your new secured card, make small purchases occasionally and pay your bill in full and on time every month. Make sure you never use more than 15% of your available credit limit.
A secured card is one of the best strategies for boosting your score because you can get approved as soon as your bankruptcy is discharged (and you have the money for the deposit). Just make sure you don’t rush into getting a card with unnecessary fees. Many secured cards have no annual fee, but you don’t need to pay more than $29 for an annual fee. Compare offers and check if the card has any application and processing fees you will need to pay that will eat up your credit limit. It’s also a good idea to confirm that the credit card reports to all three major credit bureaus.
Apply for a Credit Builder Loan
Many credit unions offer credit builder loans that can help you improve your credit after bankruptcy. These loans don’t work like other loans: in most cases, the bank loans you a specific amount (usually around $1,000) that is put into a CD. You won’t be able to touch or spend the money, but you will need to make monthly payments toward the loan for one year. Your loan payments are reported to credit bureaus to improve your credit. At the end of the loan term, the money in the CD is yours. This strategy doesn’t just improve your credit; it can also help you save money.
About one to two years post-bankruptcy, your credit score should have improved to the point where you can apply for a car loan or line of credit. Make sure you do this cautiously; while you will still likely pay a higher interest rate than someone who does not have a bankruptcy on their file, you should be able to qualify for an affordable loan.