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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 will stay on your credit reports for seven years, and a Chapter 7 will stay on your reports for 10 years.
But, while a bankruptcy may 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 — and then begin to repair your credit history and financial habits.
The first step? Take a good, hard look at why it happened.
Though bankruptcy is sometimes unavoidable, we all have 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 it 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 — to verify that all delinquent accounts have been removed. (You can get one free credit report per bureau per year at AnnualCreditReport.com.)
Any affected accounts 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, you’ll need to dispute them directly with the credit reporting agencies. You should wait to apply for new credit lines until they’re cleared up, as credit card companies will likely deny an applicant with certain negative information, like delinquent accounts, on their reports.
You can also check your credit reports 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 get back on track is to get back on the horse. New and positive uses of credit won’t erase your bankruptcy, but they will help offset its negative damage and start you back down the path toward good credit.
A few easy strategies to boost your credit if you 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, these require a deposit — which will usually serve as your credit limit — to “secure” your account. If you put down a $500 deposit, for example, you’ll only be able to spend $500 on the card before you’ve maxed it out.
Secured cards generally come with fees and high interest rates, and most don’t offer rewards like points or cash back. But they’re still a great tool for credit repair, because, unlike prepaid debit cards, most secured cards report your payments to the credit bureaus.
Applying for credit cards dings your credit scores, 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 you might be a fit for, 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.
Here are our recommendations for post-bankruptcy credit cards.
Our advice is to get one with low or no annual fees, avoid interest by paying your bill in full each month, and, above all, pay your bill on time, every time.
You should also check how many credit bureaus the card reports to; the more the better. The major credit card issuers will report your card activity to all three bureaus. (If a card doesn’t report to any, don’t bother applying, as it won’t help you build credit.)
Various card options — check here.
If you have no luck with these cards, you can consider cards that don’t require a credit check. We do not recommend these cards because they generally have high fees and bad reviews for poor customer service. If you can’t get approved for any secured cards and can’t become an authorized user on someone else’s account, though, these 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 seven 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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