Bankruptcy is often used the way a parent puts misbehaving kids in place by threatening to ground them for a year. The idea is that it’s a point of no return, that once you go bankrupt, you can’t dig yourself back out. It’s a drag, sure, but bankruptcy isn’t as hopeless as it sounds. There are ways to bounce back and rebuild your credit, and even qualify for prime rates again.
The impact of bankruptcy on your credit score depends on several factors, including the amount of debt discharged, how long you’ve had the debt, and how many creditors the money was owed to. Your current credit scores also come into play; people who had high scores before the bankruptcy see far bigger drops than those who had low scores to begin with. The damage can range from 100 to 400 points.
The bankruptcy itself stays on your file for seven to ten years, depending on the chapter you file under. There’s no way around this—you’ll have to wait it out and deal with less-than-ideal loan terms as long as it’s there.
What you can do
Recovering from bankruptcy all boils down to keeping debt to a minimum and paying bills on time. Of course, if times are really tough, even this can be a challenge. Here are some ways to make it simpler.
* Get a secured credit card. Secured credit cards work much like prepaid debit cards. You put in a deposit, and your expenses are counted against it. Once you’ve used it up, you put in more money and start spending again. Usually, after keeping it up for a while you can switch to an unsecured card starting with a small credit limit.
* Choose your lenders wisely. If you decide to go for secured credit, look for a lender who regularly reports to the credit bureaus. Some of them simply offer the product and don’t report payments, so it can take time for your credit to improve. With regular reporting, you can see the effects sooner.
* Use cash or debit whenever possible. Limit yourself to just one or two credit cards, including one for emergencies. Pay for everything else with cash or debit. It’s a good way to stay on budget and only spend money you actually have.
* Pay bills on time. Contrary to popular belief, paying every bill on time won’t add points to your credit score—but it will keep it from dropping. It also looks good on your credit report, even if the score itself isn’t that impressive. Set up automatic payments from your bank account to avoid missing deadlines.
* Be a good renter. If you lost your home in the course of a bankruptcy, you’ll probably be renting for at least a year. Use this time to build up your credit history. Make sure your landlord reports regularly to the bureaus, and pay on or ahead of time every month.
* Avoid bad credit loans. These are often marketed as a good way to build up credit, but the rates are so high that borrowers, already struggling with debt to begin with, are likely to default anyway. Some of them are reliable, but they should be taken as a last resort.
* Build an emergency fund. Set aside part of your income, no matter how small, and put it in a high-interest savings account. These accounts limit the number of withdrawals you can make in exchange for higher earnings. This adds extra points to loan applications, especially when there’s still a bankruptcy on your record.
* Compare your credit scores. Obtain your scores from different credit bureaus and look for any discrepancies. Studies show that erroneous reports appear in about 80% of credit reports. You can get these corrected for free by calling the creditor (not the bureau). It may only add a few points to your score, but it’s better than nothing.
Take your time
There’s no such thing as quick credit repair. FICO’s formula is designed so that points are earned over time and shortcuts don’t get much credit. If a company offers to “erase” bankruptcy from your report, you can almost be sure it’s a scam. The only way to get your score back up is by using credit properly over the years. Make it a habit, and you’ll be back in the game before you know it.