How to rebuild credit after bankruptcy

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

Rebuilding credit after bankruptcy as a business owner can be difficult, but it’s not impossible. The first step is understanding that rebuilding credit takes time and consistent effort.

How Bankruptcy Affects Credit

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

A bankruptcy filing will appear on a person’s credit report for up to 10 years, making it difficult to obtain credit or loans in the future. An entrepreneur may also have difficulty obtaining credit from suppliers or vendors, as they may be reluctant to extend credit to a business that has filed for bankruptcy.

Regardless of the type of bankruptcy, lenders will see it on a credit report in the public records section, and it’s likely to be a decision-making factor. After the legal process is complete, the bankruptcy and the debts included and which have been discharged will appear.

However, it is important to note that filing for bankruptcy can also provide a fresh start for an entrepreneur, allowing them to pay off debt and start anew.

When applying for credit, lenders may not approve certain types of credit — and even if approved, a person may find they are offered higher interest rates or other unfavorable terms.

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

Can I get a credit card after bankruptcy?

It can be difficult for a business owner to obtain a credit card after filing for bankruptcy. Many lenders consider people who have filed for bankruptcy to be 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 rebuild credit. An ideal card choice 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 collateral provided.

However, some unsecured card issuers will not pull a credit score or may extend a credit line even if there are blemishes on one’s credit history. Just be aware that these types of cards usually have extremely high prices and loads of fees. A secured card is probably the best option at a lower cost.

The Best Ways to Build Credit After Bankruptcy

Once a bankruptcy is finalized, the person can begin working on building credit. Some of the best ways include the following:

Keeping payments on non-bankrupt accounts

After filing, determine if any accounts have been closed. While bankruptcy cancels most of the debt, there may be some left over. Paying off these balances can lower your debt-to-income ratio — paying on time remains crucial. Consistent payments will also help maintain accounts.

Keep credit balances as low as possible

Credit balances not only affect your 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 your credit card usage and pay off balances — it will benefit your financial health.

Build emergency savings

Save some money each payday to have an emergency fund. This will provide a fund for unexpected expenses, which will help avoid future debt that could hinder credit rebuilding.

Get a secure card

As we mentioned above, a secured credit card could help rebuild credit. Although a security deposit is required, every time a payment is made to the card account, it will be reported to the credit bureaus. This will show responsible credit behavior.

Some secured card issuers allow cardholders to upgrade to an unsecured card after consistent and timely payments. This is a big benefit as you won’t need to apply for a new card as your credit starts to improve.

Consider credit building loans

A credit building loan could be another way to help build credit. A person should have a certain amount of money in a secured savings account, but the person can make monthly payments until the loan amount is paid off. Depending on the lender, it is also possible to get a secured loan that allows you to borrow against savings.

As with a traditional loan, payment activity for a credit builder loan will be reported to the major credit bureau, which will help improve credit scores over time.

Related: I filed for bankruptcy at age 21

How long until credit improves?

This will depend on a person’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 start to see positive changes in their credit score after about six months.

However, be prepared to take a long-term approach. Remember that bankruptcy will be on your credit report for seven to 10 years. While results will decrease over time, responsible behavior will lead to improvements. Be 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 disappear from a credit report to apply for a mortgage. However, if applying for a conventional mortgage, a person will have to wait at least four years after the bankruptcy discharge. If there are extraneous circumstances, it may be possible after two years.

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