Whether you love or hate them, credit scores are a part of American life. Bankruptcy can lead to sweeping changes in your score, and knowing what will happen to your credit opportunities after bankruptcy can provide greater confidence as you go through the process. Rest assured, bankruptcy isn’t the end of your credit journey, and you have options for rebuilding and getting back on track.
Rebuilding Your Financial Status After Bankruptcy
Does filing for bankruptcy mean that your credit is forever ruined? In most cases, no. Filing for bankruptcy does significantly impact your credit score, often causing it to drop, but this initial decline can be overcome.
Interestingly, after filing, your credit score can improve within a year due to the discharge of debts reducing your outstanding balances. This discharge will be noted on your credit report and works in your favor, as it shows creditors that your debt issue has been resolved, and you may be able to manage payments on time.
Lenders often target debtors who recently filed for bankruptcy and offer them credit cards. The downside is that these typically come with high fees and interest rates. In the long term, you want to work on building your credit if you intend to use credit cards or loans to make significant purchases.
Tips for Rebuilding Credit After Bankruptcy
- Monitor Your Credit Report Regularly: After bankruptcy, keeping a close eye on your credit report gives you the peace of mind that your plan to rebuild your credit is staying on course. Checking your report for errors helps you catch any discrepancies early, which can prevent further damage to your credit score. Aim to review your credit report from all three major credit bureaus—Equifax, Experian, and TransUnion—at least once a year. If you find any mistakes, such as debts that should have been discharged, promptly dispute them to correct them.
- Look For Secured Credit Card Options: Secured credit cards can be fantastic tools for rebuilding credit after bankruptcy. As opposed to a traditional card, secured cards require a cash deposit, and use this paid amount to determine your credit limit. When selecting one of these credit cards, look for one with low fees and a reporting policy to all three major credit bureaus to jumpstart the rebuilding process.
- Make All Payments on Time: Payment history is one of the key components used to calculate your credit score, and demonstrating a pattern of timely payments will build your score over time. Automatic payments or reminders take the stress out of using your card and can help you never miss a due date again. Even small, regular payments on secured credit cards or loans can significantly impact your credit positively over time. Remember never to spend money on a credit card just to build credit and show a history of payments. Assuming you obtain a secured credit card or a card meant for rebuilding credit, using it to pay for household essentials is enough to establish a pattern. Going overboard and spending more than needed can leave you in the same situation as before.
- Limit New Credit Applications: The more applications you send out, the worse your score may become. Hard inquiries on your credit report that come with each application will temporarily lower your score. Instead of applying to everything coming your way, focus on rebuilding your history with the accounts you still have before seeking new credit. If you need to apply for new credit, minimize the negative impact on your score by spacing out applications as much as possible. As an alternative, many companies offer preapproval processes that can give you a good idea of your chances of success. For some secured cards, providing the credit line payment upfront can be part of a guaranteed acceptance process.
Your best opportunity to rebuild after a financial crisis is to work with a bankruptcy professional who can ensure the process goes smoothly. Richard V. Ellis is a Sarasota bankruptcy attorney who has helped hundreds of residents get a fresh start. Call today to learn more.
