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Guide to rebuild credit after bankruptcy: Steps for Chapter 7 and 13

Guide to get started building credit after Chapter 7 or 13 Bankruptcy.

There’s no doubt the decision to file bankruptcy is not something done lightly. The debt relief bankruptcy provides comes with cost.

Bankruptcy stays on your credit report for up to 10 years.

It’s one of the biggest negative marks on a credit report. But your credit score does not have to suffer for 10 years. You can begin taking steps to rebuild your credit score and history soon after bankruptcy.

If you’ve recently filed bankruptcy your main focus should be managing your finances while adding positive credit accounts to your credit report.

As your bankruptcy gets older you will have positive credit information getting older along with the negative bankruptcy listing. By using new credit wisely you can rebuild your credit within as little as 12 months of the bankruptcy discharge.

It may seem counter-intuitive to get new credit but using credit is how you rebuild credit. Making monthly payments on credit cards or loans is the only way creditors can report payments to the credit bureaus. The credit bureaus list your payment history on your credit report, which shows potential new creditors that you can manage debt well.

The negative effects on your credit score will begin to decrease once the bankruptcy case is discharged and positive credit information is added. Below are tips that will give insight on how to rebuild credit after bankruptcy.

Steps To Build Credit After Bankruptcy

Qualifying for mortgage loans, auto loans and credit cards, with good rates, is possible long before a bankruptcy comes off your credit report.

1. Build an emergency fund

Bankruptcy can be a great opportunity to start fresh, rebuild your credit, and save up money. After you emerge from bankruptcy, it's important to focus on prioritizing savings. If you don't have an emergency fund, it's likely to repeat the same financial mistakes that led to bankruptcy unless you invest a portion of your money into a high-yield savings account.

2. Practice new habits

Prior to rebuilding your credit, make sure you can at least make the minimum payment on all your obligations before the due date. Paying less than the minimum due on a credit account can lead to a charge-off. Do not apply for new credit until the financial circumstance that caused the bankruptcy has been resolved. Only apply for new credit when you can manage debt successfully.

The most favorable scenario would be to pay your obligations in full each month. Carrying a balance is not necessary to rebuild your credit score. Start rebuilding credit history with the following type of credit accounts reporting to your credit files:

  • 2 to 3 revolving accounts (credit cards) that have a low utilization rate of 10% or less. That means never charge over ten percent of your available credit unless you pay the bill in full each month.
  • At least one installment loan (car, mortgage, personal or student loan) will help you rebuild your credit history and scores. But only take on an installment loan if you are able to afford the commitment of a fixed monthly payment. If your BK included making mortgage or car payments, make sure they are paid on-time.

3. Get new credit and use it

Bankruptcy can be devastating not only on your credit score but mentally too. Many consumers who file bankruptcy decide to live on a cash-only basis. This is a wise choice if you cannot manage credit and debt. However, if you want to rebuild credit history and improve credit scores, you must start by getting new credit and using it.

Just don't make the mistake of using all of your available credit. Let me reiterate that you should keep your balances low and never charge more than 10% of your available credit. Not using the total amount of your credit limit can help improve the credit utilization factor in your scores.

A good rule is to use a credit card for things you would normally buy with cash, like gas and groceries. That way you can easily repay in full every month.

4. Unsecured credit cards

Consumers that have filed bankruptcy may be surprised to receive a flood of credit card and loan offers after the bankruptcy is discharged. But there are just a handful of credit card companies that really cater to consumers who have filed bankruptcy like the Indigo Mastercard® Credit Card.

Credit unions can also be a good source for credit cards to help rebuild credit. Because credit card issuers will likely view you as a poor credit risk, expect the terms to include a higher interest rate and possibly an annual fee. Consider easy to get credit cards to start instead of the big-name credit card issuers that might require good credit scores.

5. Secured Credit Cards

Some consumers who have filed bankruptcy run into roadblocks when trying to qualify for an unsecured credit card. Secured credit cards may be your only option. A secured credit card will set the credit limit equal to or slightly more than an amount you deposit at the issuing bank. Compare the best secured credit cards for building credit that report monthly to the major credit bureaus.

6. Retail credit accounts

In case you find yourself unable to qualify for a Visa or Mastercard, try an easy to get retail card. But be careful when applying for retail credit accounts because they tend to have some of the highest interest rates. If you do get a high interest credit account paying in full each month alleviates the high interest.

7. Alternative to credit accounts

Credit accounts are not the only tool to restart your credit journey. If creating debt doesn't fit your financial goals, consider a debit card to build credit. The Extra debit card totals monthly transactions and reports them as paid-in-full to the credit bureaus to help build a positive credit history.

Experian Boost is a free service that helps consumers instantly improve their FICO® Score by giving them credit for on-time utility, cell phone, rent and some streaming service payments like Netflix and DisneyPlus.

8. Pay bills before the due date

Any debt not included in bankruptcy, such as student loans, must be paid on time. Student loans are normally not dischargeable through bankruptcy. But this can have a positive impact on your credit score. As you pay down student loans your credit scores should improve. Making timely payments is one of the best ways to repair your credit after bankruptcy.

9. Installment loans

In addition to revolving credit such as credit cards to rebuild your credit, installment loans such as a car, personal, mortgage or student loan will also help rebuild credit history.

  • Personal Loan. Because an installment loan can last for many months and payments are evenly spread out over the term of the loan they can be used to help build credit for people with bad credit, poor credit or no credit history. Multiple on-time payments over time may help create a history of repayment that is reported back to credit bureaus and may help improve credit scores. Find loans with the lowest interest rates to keep debt to a minimum.
  • Credit Builder Loan. A credit builder loan is designed to help establish or improve credit scores. These loans are typically offered by banks, credit unions or other financial institutions and work by requiring you to make regular payments on the loan, which are reported to credit bureaus. Unlike traditional loans, you won't receive the loan funds upfront. Instead, the funds are held in an account while you make payments towards the loan over a set period of time. Once the loan is fully paid off, you receive the funds, along with a boost to your credit score.

10. Mortgage loans after bankruptcy

Filing bankruptcy does not prohibit you from ever obtaining a mortgage loan but you will not be able to get a mortgage loan immediately. Applying for a mortgage loan after bankruptcy depends on the type of loan you want, the type of bankruptcy filed, and how good your credit is at the time you want the loan.

  • Chapter 7 BK: To obtain an FHA loan or a VA loan after a Chapter 7 bankruptcy, you must wait 24 months from the date your Chapter 7 is discharged. For a USDA loan, you must wait three years from the date of a Chapter 7 discharge. Conventional loans have the longest waiting periods. If you want a conventional loan, you must wait four years after receiving a Chapter 7 discharge.
  • Chapter 13 BK: You can obtain an FHA loan or a VA loan during a Chapter 13 bankruptcy as long as you have made 12 months of satisfactory Chapter 13 plan payments, but you must have bankruptcy court approval to get the loan. For a USDA loan, you must wait 12 months of making Chapter 13 plan payments, with court approval. For a Conventional loan you must wait two years after receiving a Chapter 13 discharge. If your Chapter 13 case was dismissed without a discharge, you must wait four years from the date of the dismissal.

11. Car Loan

Car loans can be easier to obtain because the car you are purchasing serves as collateral for the loan. This means that if you fail to make payments on the loan, the lender can repossess the car and sell it to recoup their losses. Be prepared to pay a higher interest rate when you first get a car loan but stay far away “Buy Here, Pay Here” car dealerships that are known for predatory lending practices.

InstantCarLoan is able to help over 30,000 people a month get financed regardless of their credit situation. They can even help consumers with bankruptcies in their credit files.

Shop around for lenders. Look for lenders who specialize in working with borrowers who have filed for bankruptcy, as they may be more willing to work with you.

12. Correct your credit report

Check your free credit reports regularly to ensure all credit accounts included in the bankruptcy are properly reported as such. Any credit account included in the bankruptcy but reported as open and overdue will further lower your credit score.

Dispute errors in reporting to the credit bureaus and demand the accounts be correctly reported as “included in bankruptcy.” If an account has been included in bankruptcy it cannot simultaneously be an open account. No further activity can continue unless you have filed a Chapter 13 bankruptcy.

If you filed a Chapter 13 bankruptcy, stay on top of your plan payment to the Chapter 13 Trustee and make the payments in full each month.

13. Monitor your FICO credit scores

After the bankruptcy discharge monitor your credit report and FICO score regularly. It will cost you but it's best to get your credit reports and FICO scores from myfico.com. There are many sites that offer free credit scores but you want your FICO score as it is used by 90% of banks and lenders.

How to use credit after Bankruptcy

Make a budget. Figure out what you can afford to pay every month on your debts after paying your necessary expenses. Only borrow what you can afford to pay back. Once you know your budget, you know what you can afford. If you know you cannot afford something, don’t use a credit card to fund it. Stay out of the credit card trap and use the card only for things you can afford to buy yourself.

“Make no mistake, using credit cards is a loan. You are essentially borrowing money from the credit card company when you use credit cards. So only borrow what you can afford to pay back.”

Never max out credit cards. When using new credit after a bankruptcy do not spend up to the limit. For revolving credit (credit cards), always use the 10% rule. Charge no more than 10% of your available credit limit. Make more than the minimum payment every month. Make your payments on time and pay it off when you can.

Pay in full each month. Pay revolving credit off each month in order to develop good credit habits. Use credit accounts regularly to demonstrate how well you manage credit and debt. Be careful not to over-do it in getting new credit. While you need credit accounts to rebuild credit after bankruptcy, stick with a modest amount of credit accounts.

Set up automatic payments. Set up automatic payments by having your payments deducted directly from your bank account every month on the due date. That way you’ll never miss a payment even if you don’t remember.

Rebuilding credit after bankruptcy is a process of maintaining any current credit accounts, adding revolving credit such as credit cards and adding installment loans such as a mortgage, car, personal or student loan. A variety of credit will help rebuild credit history more quickly.


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