June 2nd, 2010
Dear Credit Karma… Fixing Credit After Bankruptcy
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Dear Credit Karma,
How do I start improving my credit health after filing Chapter 7 bankruptcy?
Bankruptcy will deal a devastating blow to your credit and credit score, but rest assured, improving your credit health and lifting your finances out of the red can start right away.
A Chapter 7 bankruptcy is a liquidation bankruptcy, meaning it wipes most of your debt and you receive your bankruptcy discharge in 4 to 6 months after filing. In fact, a Chapter 7 bankruptcy can sometimes improve a credit score in some cases because so much debt is discharged. After a bankruptcy, steer clear of:
- Applying for a loan or mortgage. A bankruptcy on your record makes you a subprime borrower: lenders charge you a high interest rate, steep penalties, and consider you a greater risk. Your low credit score qualifies you for a rate 2 to 4 percentage points higher than a normal borrower, which amounts to thousands of dollars difference in payments.
- Using a credit repair agency or service. These are scams that claim they can remove the bankruptcy from your credit report or fix your credit score, and will cost you time and money.
- Applying for a credit card. Issuers rarely approve newly bankrupt consumers’ applications because of their rock-bottom credit scores.
Instead, take the following steps after your bankruptcy discharge to head for a bright financial future:
- Check your credit report. Request your free credit report (AnnualCreditReport.com) from all three credit bureaus and make sure that your debts included in the bankruptcy are marked as “discharged in bankruptcy” or “included in BK”. Sweep your credit report for errors, missing information, and inaccurate items that will ding your credit score if left unchecked.
- Get a secured credit card. A secured credit card is your training wheels to better credit. Use your card for small monthly purchases, like a grocery run or gas fill-up, month to month to keep your credit utilization rate—the percentage of your available credit you are using—under 30%. Pay in full and on-time every month. Be consistent and get in the habit of managing credit like this now, and your actions will have maximum positive impact on your credit score.
- Pay your loans. If you have any installment loans that were not discharged, like student loans, use them to improve your credit health by making payments on-time and paying more than the minimum to quickly reduce your debt. You can take out new loans with time, but give yourself time to improve your credit health for a better credit score that will earn you better terms and lower interest on your loan.
Also keep in mind that many lenders have a bankruptcy filter in their underwriting, meaning they still may not approve you despite a good credit score because you have a bankruptcy on record.
As you build good credit history over the next year or two, you’ll better qualify for more favorable loans, unsecured credit cards with better terms, and your credit score will be on its way up. It takes 7 to 10 years for a bankruptcy to fall off your credit report, but diligent, responsible credit habits can reflect in your credit score within months.
Submit a question now, and maybe Credit Karma will answer your question on our next Q & A blog post!