It’s not uncommon for borrowers who file for bankruptcy to already have less than perfect credit, and that’s OK! When you go through bankruptcy, you’re doing so to reorganize your finances and come out the other side with a clean slate, which can make repairing your credit easier.
Getting Started After Bankruptcy
Bankruptcy isn’t as uncommon as you might think. Thousands of Americans file every year, but even so, it can be a stain on your credit reports for up to 10 years depending on how you filed. Despite the lower credit score due to bankruptcy, you can move forward in repairing your credit and reorganizing your finances for the better.
If you’re gearing up to raise your credit score and leave that bankruptcy damage behind, we’ve got five easy credit repair tips for you.
1. Check Your Credit Reports and Credit Score
Before you dive headfirst in taking on new credit after bankruptcy, you should request your credit reports from the three credit reporting agencies. Right now, due to the coronavirus, the credit bureaus are allowing everyone a free copy of their reports once every week. You can request your free reports from www.annualcreditreport.com.
Once you have your reports, be sure to scour them thoroughly and look for any inaccuracies. Since you were just discharged, make sure that your bankruptcy is reported as such.
If you see any mistakes on your credit reports, you can dispute them and work to get those inaccuracies removed. You can file a dispute online with all three credit reporting agencies – TransUnion, Experian, Equifax – and start to repair your credit. You may be required to send proof that an account is wrong in order for the dispute to work and get them to remove the error.
If your reports are riddled with errors and you don’t know where to start, you could look into credit repair companies. Some charge a start-up fee, and most are paid in monthly installments. If you’re interested in this service, check out our trusted partner.
2. Apply for New Credit Sparingly
Whether you filed Chapter 7 or Chapter 13 bankruptcy, getting new credit may have been difficult while your bankruptcy was open. However, once your bankruptcy has been discharged, you can usually get qualified by bad credit lenders for new credit rather quickly.
Even though this is possible, you shouldn't rush into a ton of new credit all at once. It’s tempting to want to immediately take on new credit after bankruptcy, since much of your debt has likely been paid off or discharged, but don’t go crazy. If you take on too much new debt within a short period of time, you’re likely to lower your credit score even more.
There's a piece of your FICO credit score called “new credit,” and it keeps track of how many new accounts you open, and how many times you’ve applied for new credit.
Owing too much debt, or applying for a lot of credit in a short time frame, is an indicator that you may rely on credit too much, and might be overextending yourself. After bankruptcy, limit yourself to what you can comfortably afford. If you want to repair your credit, rather than reviving old habits, don’t risk overextending yourself by taking on a lot of new credit in a short time.
3. Keep Your Balances Low
Once you’ve been discharged from bankruptcy, your debt to income (DTI) ratio is usually much lower than it was when you first filed. Your DTI is a major factor when you apply for new credit. If most of your income is already being used to pay for your current bills, it can be hard to get approved for things that you need, like a car loan or a mortgage.
After you’ve completed a bankruptcy successfully, much of your debt has either been paid off or discharged. Try to keep any new debt, notably any new credit cards that you choose to take on, at a lower balance. Most credit experts recommend that you keep your credit cards balances below 30% of their spending limits – any higher and you could risk lowering your credit score even further.
4. Consider a Secured Credit Card
Unsecured credit cards can be hard to qualify for if your credit score is tarnished after bankruptcy. A secured credit card is different from a traditional credit card, and it can be a way for you to start rebuilding your credit.
With a secured credit card, you make a deposit and that determines your spending limit. For example, if you deposit $500 on a card, that becomes your spending limit. You can then use the credit card, and make payments on your balance, like a regular credit card, which can improve your credit. If you’re unable to make payments, the deposit acts as collateral and covers any balance you can’t repay.
If you always make your payments on time, you may build your credit up enough to qualify for an unsecured credit card (one that won’t require a deposit) next time you need to apply for credit. Some secured credit cards allow you to upgrade to an unsecured card with a higher spending limit without the deposit.
Secured credit cards are relatively easy to qualify for, since there isn’t much of a risk to the lender because your deposit covers any potential loss.
5. Get an Auto Loan
While you shouldn’t take out too much credit after a bankruptcy, an auto loan can be a great opportunity for credit repair. This is because car loans are long-term installment loans which can help create a solid repayment history.
Payment history is the most important factor that makes up your FICO credit score. Additionally, an auto loan improves your credit mix which factors in all the different kinds of credit you utilize. A healthy credit mix of installment loans and revolving credit tells the FICO credit scoring model that you’re able to manage multiple types of credit, which can improve your credit score.
The length of the car loan can also help – the longer you’ve been borrowing and managing credit, the better off your credit score is likely to be.
New borrowers often start off their credit history with an auto loan, so getting a car loan after bankruptcy can be a way to put yourself back in the green credit score range.
Ready to Take On New Credit?
Getting financed for anything can be difficult if you just got done with bankruptcy. However, there are lenders that can work with bankruptcy and bad credit borrowers, called subprime lenders.
These lenders operate through dealerships that have special finance departments, and they know that people are more than their credit reports. To get matched to a dealer with subprime auto loan options, start with us at The Car Connection. Fill out our car loan request form and we’ll begin the process of connecting you to a dealership in your area for free!