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If you’ve recently filed for bankruptcy, you might still be feeling the sting of losing whatever credit standing you had. Keep your chin up. There is hope. The most important thing you can do right now to rebuild your credit after bankruptcy is to make your bankruptcy payments in full and on time and stay focused on rebuilding your credit score.
Bankruptcy can stay on your credit report for up to 10 years depending on the type of bankruptcy you file. There’s a good chance your credit score will be lower than you’d like until your bankruptcy is discharged and you’ve taken the necessary steps to rebuild your credit.
For an overview and explanation of your credit standing after bankruptcy, check out your free credit report snapshot. It gives you a free look at your credit scores, plus it helps you track the areas of your credit that are improving and helps you understand how to rebuild credit after bankruptcy.
How to Rebuild Credit After Bankruptcy with a Secured Card
A secured card is a good way to go if you’re coming out of bankruptcy. Keep in mind that until your bankruptcy is discharged, you may still be turned down, even for a secured card.
That doesn’t mean it’s not possible to get a credit card before your bankruptcy is discharged. Your post-bankruptcy credit card options will, however, be limited and will usually require high annual fees and high annual percentage rates.
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How a Secured Card Helps Your Credit
With a secured card, you make a deposit into a savings account, which then secures a line of credit. The credit limit on a secured card is the amount of the deposit minus any fees. For example, if you make a $300 deposit on a secured card with an annual fee of $29, your credit limit will be $271.
- To optimize rebuilding your credit after a bankruptcy:
- Use your secured card to make small purchases.
- Pay the account on time each, every month.
- Keep your balance low; target using just 10 to 15% of your credit line each month.
Choose a secured card that reports to all three major credit bureaus. This way, your on-time payments get reported on your credit reports from each of the credit bureaus, which maximizes your credit rebuilding efforts.
Rebuild Your Credit with a Retail Card
Retail cards and department store cards have more lenient credit requirements. Once you have several months of payments with a secured card behind you, you may be able to qualify for a retail card after a bankruptcy.
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Retail cards do have higher credit card interest rates, which makes it important that you pay the account in full each month.
A couple of small charges a month combined with on-time payments will help you reboot your credit and build a positive payment history after a bankruptcy. Why? Because your payment history makes up 35% of your credit score, so making small, steady on-time payments is the best way to rebuild your credit after bankruptcy.
Diversify with a Loan or Credit Builder Account
If you’re trying to rebuild your credit after a bankruptcy, the type of credit accounts you have also matter. So, it’s important to not just have credit card accounts, but to also to diversify your credit options.
A small personal loan is one way to diversify. The loan money can be used for anything, including home repairs and for investing. A loan will show that you can pay off the loan while helping you build better credit and financial standing in the process.
Credit Builder Account
A Self Lender Credit Builder Account is another easy way to build credit. And, you can get one with poor or no credit history. It’s not a credit card. It’s essentially a secured-installment loan combined with a CD that has a 12- or 24-month term length. Rather than put down a lump sum into a CD, you’re opening one in installments. You put money in, but can only take it out at the end of the CD term.
For a Self Lender Credit Builder Account, you pay a $9 to $15 administration fee. You pick how much to put into the account each month—$25, $48, $89, or $150. The $25 monthly payment requires a term of 24 months. All others have a term of 12 months. You pay interest on the account as you would a loan. But you also earn interest on it as a CD. The CD earns interest at a lower rate than what you pay for the loan. See the Self Lender FAQ for details.
What you gain is better credit. Self Lender reports your timely payments to all three credit bureaus—Experian, Equifax, and Trans Union. You build positive credit history, which makes up 35% of your credit score, as a result.
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Monitor Your Credit Closely
Monitoring your credit following the bankruptcy process is critical. Doing so allows you to track your progress and see if any of the steps you’re taking are having a positive effect on your credit score and credit history.
It may not take many months after your bankruptcy to see improvement in your credit score. Maintaining good credit standing, making on-time payments, and keeping utilization down means you might recover in less time than you think.
Take the First Steps
Now that you know what’s involved in how to rebuild credit after bankruptcy, it’s important to take the right steps before you jump back into the credit pool.
First, assess the situation you’re in by checking all of your credit reports to see exactly where you stand. Knowing this information can help you better determine the proper course of action you need to take to begin rebuilding your credit.
Next, check your credit score and verify the accuracy of everything on the credit reports. If you find errors, make corrections to your reports, and then find the right credit to begin to rebuild your credit.
If you take the right steps, are diligent about how you rebuild your credit after a bankruptcy, and make payments on-time, bankruptcy doesn’t have to be a long-term burden. Soon enough your credit score will be strong enough to let you qualify for a better card or loan at lower interest rates.
This article was originally published December 5, 2013, updated February 23, 2017, and has since been updated by another author.