Strategies to Improve Your Credit After Bankruptcy



Filing bankruptcy can reorganize your debt or erase your balances, which provide a fresh start and a way to get creditors off your back. But even if you file bankruptcy due to a situation beyond your control, such as a job loss, an illness or divorce, the consequences can haunt you for years.

Depending on whether you file a Chapter 7 or a Chapter 13, a bankruptcy remains on your credit report for up to 10 years. A bankruptcy can also reduce your credit score by as much as 200 to 250 points. It takes years to rebuild your credit, and a lower score can trigger loan rejections and higher interest rates. In some cases, a bankruptcy can affect your job options.

Fortunately, filing bankruptcy isn’t the end of the world. Yes, your credit score will drop, and you might be embarrassed about the situation, but you can rebuild your credit. In fact, you can possibly recover in as little as two to three years. The damaging effects of a bankruptcy lessens with time. But your credit won’t improve itself. Here's a look at four things you can do “after” a bankruptcy discharge to significantly improve your credit score.

1. Apply for a credit card

You have to acquire new credit to reestablish your credit after bankruptcy. If you included all debts in the bankruptcy, you can rebuild credit by applying for a secured credit card.

These credit cards are easier to get with bad credit or no credit history. Secured credit cards do require a minimum security deposit between $250 and $500. Your credit line is based on the amount of your security deposit. This is not a prepaid credit card. The bank issuing your card places the deposit in an interest-bearing account. You’ll still receive a monthly statement and you're still required to make minimum payments.

2. Don’t stop making other payments

You don’t have to include all your debts in a bankruptcy. If you still have a mortgage or an auto loan, continue to make these payments on time every month. Timely payments add positive activity to your credit report, which gradually improves your FICO score.

3. Pay off credit card balances

Timely payments make up 35% of your credit score. However, the amounts you owe also make up a big chunk of your credit score, about 30%. For that matter, you also need to maintain low balances to improve your credit score fast. It's important to note that installment loans don't hurt your credit as much as revolving credit accounts, such as credit cards. If you have a credit card, keep your balance at no more than 30% of your credit line. For example, if you have a credit card with a $1,000 credit limit, your balance should never exceed $300. Ideally, you should only charge what you can afford to pay off within a month. This not only demonstrates self-control, it also minimizes your debt load and helps you build your credit score faster.

4. Review your credit report annually

Just because you file bankruptcy and your credit score drops doesn't mean you should neglect your credit report or ignore errors on your report.

Check your credit report at least once a year by visiting AnnualCreditReport.com, or order reports directly from the credit bureaus. If you find mistakes on your report, file a dispute to have this information removed or corrected. Removing legitimate errors from your credit report also raises your credit score.