Yes, with proper management of your auto loan and other credit accounts, you can heal your credit after a bankruptcy. Negative marks on your credit reports don’t stay there forever, and by finding the right lender, you could be looking at an improved credit score after bankruptcy with a car loan.
Repairing Your Credit After Bankruptcy
If you take on an auto loan that’s reported to the major credit reporting bureaus, it impacts many aspects of your credit health, and it can heal some of the damage that bankruptcy caused.
There are five categories of your FICO credit score (we reference FICO because it’s the one most commonly used by lenders). We’ve got some tips for each category and we cover how car loans impact your credit score:
- Payment history: 35% – Paying your bills on time, including your monthly auto loan payment, has the biggest impact on your credit score. This is because a lender’s main concern is knowing how reliable of a borrower you are and if you're going to repay on time. A borrower that misses a lot of payments, or frequently makes late payments, is likely to make a lender hesitant to approve them. Due to this, the FICO credit scoring model puts the most weight on payment history.
- Amounts owed: 30% – The second biggest impact on your credit score is your amounts owed, and it has a lot to do with your revolving credit usage on credit cards. If you have maxed out credit cards all the time, or you come close to maxing them out a lot, it can indicate that you’re overextended. Reducing your credit card balances improves your credit score. The rule of thumb is that when your balances are above 30% of your credit card limits, it starts to really negatively impact your credit score. Aim for lower than that, but the closer to zero, the better.
- Length of credit history: 15% – Length of credit history keeps track of the age of your accounts and how long you’ve been in the credit bureaus (when you started using credit). To boost this aspect of your credit score, don’t close old accounts. Having long-standing lines of credit open, in use, and in good shape improves your credit score. Car loans help in this area, too, since they’re usually years long. A long-standing, on-time payment history can improve both your payment history and length of credit history categories.
- Credit mix: 10% – Credit mix refers to the different kinds of credit you have, like installment credit like loans and revolving credit like credit cards. The more variety you have on your credit reports, the better your credit score is because it shows you can handle different kinds of credit. If you don’t currently have any installment credit on your credit reports, adding an auto loan can help by introducing that variety you’re lacking.
- New credit: 10% – New credit keeps track of how often you apply or take on new accounts. Borrowers who apply for new credit frequently can show signs of overextension, or may rely on credit too much to get by. Applying for new credit temporarily hurts your credit score, so if you can help it, don’t apply for new credit unless you need it. Since you’re fresh out of bankruptcy, don’t rush to take lots of new credit all at once; it can cause some heavy damage on your credit score.
Now that you know what makes up your credit score, it’s easier to know what parts you need to work on to repair that bankruptcy damage. However, choosing where you get your first car loan after bankruptcy matters, too.
Which Car Loans Help With Bankruptcy Credit Damage?
Not all auto lenders report their loans to the credit reporting agencies, which means not every car loan has the potential to heal your credit after bankruptcy damage.
An auto loan that isn’t reported means that the on-time payments you make don’t reflect positively on your credit score. Future lenders don’t know that you’re making the payments and handling an installment loan responsibly if the loan isn’t reported.
Many direct and third-party lenders do report their car loans to the credit bureaus. Dealers that use in-house financing, also called buy here pay here (BHPH) dealerships or tote the note used vehicle lots, sometimes don’t.
They're known for skipping over the credit check, but as a result, your auto loan may not get reported, so there wouldn’t be a chance for credit repair. If you’re concerned about fixing your credit after the damage caused by bankruptcy, ask your lender about their reporting practices.
Or, you can work with a bad credit car lender that can handle borrowers who’ve gone through bankruptcy. They're called subprime lenders, and they report your auto loan to the major credit bureaus.
Subprime Auto Loans and Bankruptcy
Subprime lenders use more than your credit score to determine your ability to pay for a car loan. Since you’re a clean-slate borrower because bankruptcy reorganizes your finances, many subprime lenders assist bankruptcy borrowers.
Subprime lenders take a look at your check stubs and available income, ask about your work history and living stability, and require a down payment. This allows them to look at all the moving parts of your financial situation outside of your credit reports.
Auto lending can get complicated, but the main theme with subprime lending is stability. These lenders want to see that your work history is stable, that you’ve lived in the same area for a while, and that you have enough income to reasonably afford a vehicle. The more stable you are, the higher your chances for a car loan approval are, all else being equal.
If you qualify for subprime financing, then that auto loan can be what helps your credit reports heal after bankruptcy.
Bankruptcy Car Shopping
For many borrowers, the hardest part about car shopping is finding a lender that can work with their unique credit situation. With a bankruptcy listed on your credit reports, that can be a difficult task – but not if you start right now with us at The Car Connection.
We’ve created a network of dealers that are signed up with subprime lenders, and we match bankruptcy borrowers to these locations at no cost. To begin, fill out our secure auto loan request form. After you do, we’ll look for a dealership in your local area that has the resources you need for a car loan after bankruptcy.