How To Fix Your Credit After Bankruptcy
Filing for bankruptcy is a tough move for many to make because they know it severely affects their credit – possibly lowering your score by as much as 240 points. In addition, a Chapter 11 and 7 bankruptcy stays on your public record 10 years, while Chapter 13 remains 7 years (source: myfico.com). There is a difference between your public record and your credit report. All bankruptcies are removed from your credit report after 7 years. If you had to file bankruptcy and want to know how to fix your credit afterward, follow these tips!
Know Your Timelines
Once your bankruptcy case is finished, it will be discharged. This means that you are no longer responsible for the debts you included in the bankruptcy filing. It takes about 3-4 months after filing to receive your discharge. You’ll receive a notice in the mail. For Chapter 13, it’s discharged once you’ve completed the repayment plan.
Know Your Budget
One of the most important things to do after filing bankruptcy is to learn the lesson. No need to beat up on yourself, everyone hits bumps on the road. The key is to course correct after filing. Address the money management issues that landed you there and develop a plan to form better habits. Start with creating a spending plan or budget. A lot of people don’t like to write down expenses and income, but it is an important part of financial stability, especially after filing bankruptcy.
Budgeting doesn’t have to be difficult; there are many apps available to help you and old school pen and paper still works. Get a notebook that is for budgeting only and list how much money you have coming in each month and how much is going out. Simple addition and subtraction.
Take some time before you apply for another credit card or do borrowing of any kind. Do not apply for anything while you are waiting for your discharge notice. Be sure to pay all your current bills on time. You just want to let the dust settle and give yourself time to regroup.
Regularly Check Your Credit Score
You want to make sure you’re checking your credit report regularly.
Watch to make sure accounts have been discharged from the bankruptcy when they are supposed to be. There may be a note next to each debt that reads “dismissed in bankruptcy.” Don’t make yourself crazy, just create an account on a credit monitoring site like Rocket HomesSM to make it easy. You can also set reminders in your phone to review every 3-6 months.
How far your score drops after you file depends on where it was initially. Ironically, the higher your score, the more it drops. This makes it difficult to determine the average credit score after Chapter 7 bankruptcy, but it appears to be around 540.
Here’s an example from FICO:
Score of 680 – Down 130 – 150 points
Score of 780 – Down 220 – 240 points
Get A Secured Credit Card
In addition to paying your bills on time, there are other things you can do to rebuild your credit. One option is to get a secured credit card that you load money onto and use as a credit card. You are essentially borrowing from yourself but demonstrating discipline in spending. Secured cards will start off with low balances of $200 or $300 to help you begin to improve your credit. If you apply for an unsecured credit card and are approved, be very careful. Pay it off every month – if you carry a balance, you will end up in the same debt cycle again.
Become An Authorized User
Some people ask someone very close to them to become an authorized user on their credit card. As an authorized user, you benefit from the good credit of someone else. They add you to their credit card as a user, though you may never actually purchase anything. You benefit from their purchases and on-time payments. If you have someone you are comfortable asking, this may be an option.
But becoming an authorized user also poses some risks for you. If the credit card holder faces financial challenges and can’t pay the bill, your credit will be affected as well. At that point, you can remove yourself from the card – hopefully before it damages your score.
You’ve Got This!
One common mistake is immediately borrowing again before becoming truly financially disciplined. You may have a difficult time being approved without a co-signer which puts that person at risk if you do not pay on time. If you are approved, you will most likely have a ridiculously high interest rate while your bankruptcy is new.
Slow and steady wins the race. Learn how to manage your money smartly and strategically. Keep your balances low or at zero and pay on time. Though it will take a few years to achieve an 800 credit score after bankruptcy, you can begin to rebuild your credit successfully.
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