There are a few different approaches to rebuilding your credit after bankruptcy. Knowing your options can help you make a plan for how to jump start your financial future.
Filing for bankruptcy can impact you differently depending on the credit score you have before you file.
If you have good credit, bankruptcy will have a more negative impact on your credit score. The higher your score before bankruptcy, the bigger hit it will likely take once you file.
However, if your credit score is already low, there’s a good chance that filing for Chapter 7 will actually help improve your score after you erase your debts.
Once you receive your discharge, it will be important to check your credit score and develop a strategy to help rebuild your financial profile.
You can hire a credit repair attorney, but there are a few other ways to jumpstart your credit. This article highlights some of the options you have after getting a fresh start.
Create a Budget. Make a plan and stick to it.
Learning how to create and follow a budget is one of the most important habits to get into after your discharge.
Take a month or two to keep track of everything you spend and what you spend it on. At the end of the month, examine your expenses.
Decide what you like to do, what you want to keep doing, what you could spend less on, and what you could be doing for free or not at all. This will help you avoid practices or situations that lead to bankruptcy.
There are a few different approaches to budgeting. Like most things, it’s all about finding the style that works best for you.
Many approaches include:
The hardest part is just getting started!
Build a Rainy Day Fund and an Emergency Fund. Putting money aside each month is a great practice to get into.
Even if it is only a small amount, having something to fall back on if an emergency or sudden expense comes up can give you both financial security and peace of mind.
A rainy day fund and an emergency fund are two great ways to help manage unexpected or upcoming events. It is, however, important to understand the difference between the two.
A rainy day fund is made up of money that you set aside for upcoming expenses that you know will come but you aren’t sure exactly when. This can include incidental expenses like braces, a car repair, a school trip or travel.
On the other hand, an emergency fund is designed as a longer term safety net.
This is typically enough cash to cover six months of your monthly expenses. An emergency fund helps reduce the impact of unexpected life events like medical illness, job loss, or divorce and keep your financial life as stable as possible.
Get a secured credit card.
A secured credit card is a great way to establish or rebuild your credit. These cards are specifically designed for the purpose of regaining your financial footing.
Often times, they don’t require a credit check or even a checking account to obtain.
A secure credit card functions just like an unsecured credit card with one main difference: your credit limit is already paid for by a deposit to the bank.
This means that if you want a credit card with a $500 limit, then you simply put a $500 deposit down at the bank to secure the card. If you want to have a higher credit limit? Add more to the deposit you have at the bank.
Depending on what kind of secured card you have, it’s possibly that it reports as an unsecured card to the credit agencies. This means that, with some cards, most people will not be able to tell that you’re using a secured card simply by looking at your credit report.
It’s important to note that a secured card requires the same responsibility as an unsecured card. Maybe more since you are using it specifically to rebuild your credit.
This means that, in order to get the maximum benefit, you must be sure to make your payments on time and be mindful about keeping your balance less than 30% of the total limit.
Get a secured credit builder loan A credit builder loan is sometimes known as a “Fresh Start Loan.”
Think of this as a loan with training wheels. These loans help you build up your credit by reporting your on-time loan payments to credit bureaus.
Here’s how it works: You’ll apply for a small loan that gets deposited into a bank account.
You don’t get to use the money that you borrow right away -- sometimes between 12 and 24 months. Instead, you will make monthly interest payments on it to build up your financial reputation.
These on-time payments show that you are a reliable borrower and help improve your credit score.
You should stop by a smaller financial institution like your local credit union to learn more about these tools as a way of repairing your credit after bankruptcy.
Get a Co-Signed Card or Loan Having someone else co-sign on a loan or a car is a huge ask on your part and a huge decision on theirs.
Let’s start with the upside: it is an opportunity for someone else to help you rebuild your credit. It can help you get access to money for school or a home.
That said, there are some major consequences if something doesn’t go as planned.
Becoming a co-signer on a loan means that the person will be responsible for the debt if you are unable to pay.
If you fail to pay this loan, it can damage the other person’s credit, create a financial burden, and put a significant amount of strain on your relationship.
Because of this, it can be hard to get someone to agree to co-sign and, if they do, there could be a lot on the line if it doesn’t work out.
Becoming an authorized user on someone else’s card is another option when you can’t get approved for a new credit card on your own or if you are not comfortable asking someone to be a co-signer for you.
This basically means that someone can add you onto their line of credit with a credit card that is in your name.
This allows you to make transactions and pay them off in order to reestablish your credit, however you are not responsible for the debts owed on the account. Those debts are the sole responsibility of the primary card holder.
Because you are not on the hook to pay the balance on this card, being an authorized user won’t help rebuild your credit as much as other options.
In certain cases, becoming an authorized user is more beneficial if you are just starting to build up credit instead of rebuilding your credit after bankruptcy.
Either way, it is an option that can help and the decision ultimately comes down to how much you need the benefit that being an authorized user can offer.
Monitor Your Credit Checking your credit score regularly is a crucial step in developing good financial habits.
Knowing your credit score will help you better understand how you compare to other borrowers, what habits help and harm your score and set goals for how to improve your financial status.
Your credit score will be a number typically between 300 and 850. The higher the number, the better your credit. Different lenders use this number to determine how reliable of a borrower you are.
Many people who file for bankruptcy have credit scores in the 500s or lower. Despite those dips, many people are able to see a 60 - 80 point increase in their credit score within the first two quarters after filing.
To track the progress, there are multiple ways to keep tabs on your credit. For starters, you can request a free (!) credit report.
Each of the three main credit reporting agencies: Equifax, Experian, and TransUnion are legally required to give you one free report a year. That’s up to three free credit reports a year!
There are also numerous credit monitoring services that will alert you if there has been an inquiry to your credit or any suspicious activity.
Rebuilding your credit after bankruptcy is a crucial step in having a strong financial future.
There are many options available to help you make wise financial decisions and establish a new financial foundation.
Monitoring your credit score is the first step. But, you also have other resources to set you on the right path.
Tools like a secured credit card, credit builder loans, getting someone to co-sign on your loan or credit card or becoming an authorized user on someone else’s card can all help you create financial habits that can help you in the long run.
Improving your credit after bankruptcy is an important, and achievable, first step in establish a healthy financial future.
Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.