How to rebuild credit after bankruptcy

by Ana Lopez

Opinions of contributing entrepreneurs are their own.

Bankruptcy can provide financial relief, but the downside is that it can negatively affect credit. While a bankruptcy remains on a credit report for up to 10 years, the impact will diminish over time. Whether you’ve filed Chapter 7 (which means you have the option to repay your debts) or Chapter 13 (you’re obligated to pay your creditors all of your disposable income), it’s possible to start with some simple steps rebuilding credit.

Rebuilding credit after bankruptcy as an can be challenging, but it is not impossible. The first step is to understand that rebuilding credit takes time and consistent effort.

How bankruptcy affects credit

Payment history is one of the most important factors in determining credit scores. When someone files for bankruptcy, the individual will not fully repay secured debts according to the original credit agreement. This means that when bankruptcy is filed, it can have a serious negative impact on one’s credit score.

A bankruptcy filing appears on a person’s credit report for up to 10 years, making it difficult to get credit or loans in the future. An may also struggle to get credit from suppliers or vendors as they may be hesitant to extend credit to a company that has filed for bankruptcy.

Regardless of the type of bankruptcy, lenders will see it on a credit report in the public records, and it’s likely a decision factor. After completing the legal process, it will show the bankruptcy and contain the debts that have been forgiven.

However, it is important to note that filing for bankruptcy can also mean a fresh start for an, allowing him to pay off debt and start over.

When applying for credit, lenders may not approve certain types of credit – and even if they are approved, an individual may find themselves being offered higher interest rates or other unfavorable terms.

Related: How this achieved his greatest success after his worst failure

Can I get a credit card after bankruptcy?

It can be difficult for an to get a credit card after bankruptcy. Many lenders view individuals who have filed for bankruptcy as a higher risk. However, it is possible to get a credit card after bankruptcy, but it can take time and effort.

The best approach is to apply for a card specifically designed to help build credit. An ideal card option is a secured credit card – approval is possible even with a new bankruptcy. Secured cards usually have a credit limit equal to the amount of security deposit being provided.

However, some unsecured card issuers won’t get a credit score or renew a line of credit even if there are blemishes in someone’s credit history. Keep in mind that these types of cards tend to have extremely high rates and a plethora of fees. A secured card is probably the better option with a lower cost.

The best ways to build credit after bankruptcy

As soon as a bankruptcy has been completed, the private individual can start building credit. Some of the best ways are as follows:

Maintain payments in non-bankruptcy accounts

After filing, determine if no accounts have been closed. While bankruptcy cancels most debts, some may remain. Paying off these balances can lower the debt-to-income ratio – timely payments remain crucial. Consistent payments also help you stay on top of bills.

Keep the credits as low as possible

Credit balances not only affect the credit utilization ratio, but depending on how the need to file for bankruptcy developed, people should try to avoid falling into the same habits. Reduce credit card use and pay balances – it will benefit your financial health.

Build emergency savings

Save some money each payday to build emergency savings. This will fund unexpected expenses, which will help avoid taking on future debt that could hinder credit rebuilding.

Get a secure card

As we discussed above, a secured credit card can help rebuild credit. While a security deposit is required, each time a refund is made to the card’s account, it is reported to the credit bureaus. This demonstrates responsible credit behaviour.

Some secured card issuers allow cardholders to switch to an unsecured card after consistent and timely payments. This is a great advantage as there is no need to apply for a new card when credit starts to improve.

Consider lender loans

A credit building loan can be another way to build credit. A person must have a certain amount of money in a secured savings account, but he can make monthly payments until the amount borrowed is repaid. Depending on the lender, it is also possible to have a secured loan that allows borrowing against savings.

Similar to a traditional loan, payment activity for a credit building loan is reported to the major credit bureau, which will help improve credit scores over time.

Related: I filed for bankruptcy at age 21

How long does it take for credit to improve?

This depends on an individual’s specific circumstances, but if someone makes consistent payments and has a low credit utilization ratio and a low debt-to-income ratio, they should see positive changes in their credit score after about six months.

However, be prepared to take a long-term approach. Remember, bankruptcy will be on a credit report for seven to 10 years. Although the effects diminish over time, responsible behavior leads to improvements. Stay patient.

Related: 6 steps resilient entrepreneurs take to recover from bankruptcy

Can I get a mortgage after bankruptcy?

You don’t have to wait for bankruptcy to clear from a credit report to apply for a mortgage. However, if you apply for a conventional mortgage, you’ll have to wait at least four years after bankruptcy is lifted. If there are strange circumstances, it may be possible after two years.

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