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When you file for bankruptcy, being proactive about rebuilding your credit is a vital step in regaining financial stability. A credit card can be a useful tool during this process.
There’s nothing easy about declaring bankruptcy.
From the stress that precedes the decision to the restrictions that come after, it’s a long road for both your financial and emotional health.
Then there’s the damage done to your credit. It’ll likely take years to recover.
But a bankruptcy doesn’t have to be a life sentence: Here’s how to start improving your credit scores today.
Already know how to restore your creditworthiness? Check out our favorite credit cards for bankruptcy recovery.
A Chapter 13 bankruptcy can stay on your credit reports for up to seven years. Meanwhile, a Chapter 7 bankruptcy can stay on your reports for as long as 10 years.
But, while a bankruptcy might impact your credit reports for a decade, you don’t need to wait that long to rebuild your credit.
Before applying for a credit card after bankruptcy, you should examine why you experienced bankruptcy in the first place. Once you understand the problems or mistakes that lead to your current situation, you’ll be better prepared to repair your credit history and financial habits.
The first step? Take a good, hard look at why you had to file bankruptcy in the first place.
Though bankruptcy is sometimes unavoidable, we all have financial habits we could improve (or lose altogether). Whether it’s forgoing shopping, purchasing health insurance, or building up an emergency fund, consider what you should do to avoid going bankrupt again.
And, if you haven’t already taken your debtor education course, look at it as a learning opportunity rather than just a legal obligation. By taking this course seriously, you’ll learn skills — such as budgeting and using credit wisely — that can help you avoid financial trouble in the future.
Next, you should pull your credit reports from the three major credit bureaus — Experian, TransUnion, and Equifax. You’ll need to verify that the accounts included in your bankruptcy are all reporting accurate information on your credit reports. (You can get one free report per bureau every 12 months at AnnualCreditReport.com.)
Accounts included in your bankruptcy don’t have to be deleted from your credit reports. However, they should indicate they were “included in bankruptcy” and should show no balances, past due amounts, or late payments after the bankruptcy filing or discharge date.
Since you’ll need to wait for your credit reports to update, here’s when to check:
If you come across errors on your credit reports, you’ll need to dispute them directly with the credit reporting agencies. You should wait to apply for new credit until they’re cleared up, as credit errors could make it difficult to qualify for new loans or credit cards (or at least difficult to qualify for a good rate and terms).
You can also check your credit reports and/or scores using free services offered by some credit card issuers and websites. See our page on Monitoring Your Credit Reports to learn more about these services.
Though you might be wary of credit after bankruptcy, the best way to start rebuilding your credit after bankruptcy is to get back on the horse. New and positive uses of credit won’t erase your bankruptcy, but they may help offset its negative damage.
Here are a few easy strategies you can use to try to boost your credit if you currently have low scores:
Then, when you’re ready, it’s time to apply for a new credit card.
When you apply for a credit card after bankruptcy, you’ll most likely start with a secured card.
As opposed to a typical (unsecured) credit card, secured cards require a deposit, which will usually serve as your credit limit. If you put down a $500 deposit, for example, you’ll typically only be able to spend $500 on the card before it’s maxed out.
Secured cards generally come with fees and high interest rates, and most don’t offer rewards like points or cash back. But they can still be a great way to build your credit. Unlike prepaid debit cards, most secured cards report your payments to the credit bureaus.
Applying for credit cards does have the potential to hurt your credit scores, albeit usually only slightly. So, you should be selective about which card you apply for — and make sure you have a good chance of getting approved.
To get an idea of which cards might be a good fit for you, check your credit scores and look for pre-qualified credit card offers in the mail or online. And, before filling out a credit card application, read the fine print to ensure the credit card issuer doesn’t have any restrictions when it comes to bankruptcies.
Our advice is to look for a credit card with low or no annual fees, and once you’ve been approved for the card, avoid interest by paying your bill in full each month. Above all, pay your bill on time, every time.
You should also check how many credit bureaus the card issuer reports to — the more the better. The major credit card issuers will report your card activity to all three bureaus. (If a card issuer doesn’t report to any credit bureaus, don’t bother applying, as it won’t help you build credit.)
Various card options — check here.
If you have no luck with the credit cards above, you can consider cards that don’t require a credit check. We do not recommend no credit check credit cards because they generally have high fees and bad reviews for poor customer service. But if you can’t get approved for any secured cards and you can’t become an authorized user on someone else’s account, the following cards may help you establish some credit history to qualify for a better card:
If you do use one of these cards, we recommend paying your balance in full well ahead of the due date. Some consumer complaints revolve around payment processing time — so don’t wait until the last minute.
Opening a new credit card is only one piece of the puzzle when it comes to rebuilding credit.
To make sure you don’t fall into credit card debt or bankruptcy again, you need to develop responsible credit management habits.
Here are three basic rules you should follow during the credit-building process:
You don’t need to wait 7 to 10 years to improve your credit. Follow the guidelines above, work on building good financial habits, and, little by little, you’ll bring your credit — and your life — back to where you want it.
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The information related to Discover it® Secured, Capital One® Secured Mastercard®, and Citi® Secured Mastercard® have been collected by Credit Card Insider and have not been reviewed or provided by the issuer or provider of these products.
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