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It can feel like it will take forever to rebuild your credit after you file for bankruptcy. The credit report notation for Chapter 7 bankruptcy sticks around for 10 years, while Chapter 13 remains for 7 years. But the good news is that the “weight” of these penalties decreases over time. What’s more, before they expire (and even right after you incur them) it’s still possible to get the financing you need.
In fact, there are loans and credit cards specifically designed to help you rebuild credit after an event like bankruptcy. If you decide that you need credit once you receive the final discharge from your bankruptcy, this guide can help you find and use new credit successfully.
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After you complete your bankruptcy filing, it’s important to ask yourself if you’ve become reliant on credit cards. Could you go one month without using credit without facing overdraft charges or driving yourself crazy?
If the answer is no, then you may need to break your credit card dependence before you consider jumping back in with new financing.
“Credit card usage is so widespread and ingrained in our culture, people look at me like I’m crazy when I suggest going cold turkey,” says Chairman of Debt.com Howard Dvorkin, CPA. “It’s as if I told them to ditch their cell phones for landlines.”
But deciding to live without credit cards isn’t as crazy as ditching your cell phone. In fact, it can be a good exercise to help you get back to a stable lifestyle. You should set a budget that allows you to cover all your daily expenses without pulling out plastic. Your budget also needs to build in savings, so you can cover unexpected expenses.
Finding a good credit card after bankruptcy
If you decide that you need a credit card directly after bankruptcy, don’t go for traditional unsecured cards. In most cases, you will either get rejected or you will face high interest rates that increase your risk of facing a new round of financial hardship.
Instead, you should look into secured credit cards. These are cards specifically designed to help people with bad credit or no credit build their score. Instead of giving you a credit card based on your score, you get a card because you offer up collateral.
In this case, that collateral is a small cash deposit. This means you’ll need some cash to open the credit line. For most cards, you’ll need $200 to get started, although some cards allow you to open a line with as little as $50.
The credit limit you receive on the card is usually equal to your cash deposit. So, if you open a card with a $100 deposit, you have a $100 credit limit.
This will allow you to make small purchases and pay them off each month to build a positive credit history. This can go a long way to helping you build your score.
“You’re borrowing from yourself, but by making timely payments, you actually build back your credit,” Dvorkin says.
Is your credit rating holding you back? Find out how to fix it.
Taking out a loan after bankruptcy
Traditional loans will also be tough to qualify for directly after bankruptcy. It’s unlikely that you can get an unsecured personal loan at a low interest rate. Higher rates mean a higher risk of facing financial hardship again. And you want to avoid being forced to file for bankruptcy twice.
In addition, while you may be able to find financing on secured loans, such as an auto loan for people with bad credit, this usually isn’t advisable directly after you complete your filing. The interest rates will be high, which drives up the cost of your purchase and also increases your risk.
Instead, you should consider loans that are specifically designed to help you build credit. These are known as credit builder loans. These types of loans usually don’t require a credit check, meaning you won’t even ding your score with a hard inquiry.
They’re small loans that simply allow you to build a positive payment history. This will help you recover faster, so you can qualify for traditional loans.
How credit building loans work
You won’t get the money you receive from a credit building loan upfront. Instead, you receive it once you complete the installment payments on the loan. So, for example, if you take out a $1,000 loan with a 12-month term, you’ll receive $1,000 minus the interest charges once you make 12 payments.
Some credit builder loans like Self allow you to earn interest back while you repay the loan. They do this by investing the money in an interest-earning Certificate of Deposit (CD). The interest you earn goes a long way to offset the interest charges on the loan. This means you get more of that $1,000 back at the end of the term.
Self’s secured credit card uses your CD as the deposit
If you decide to get a credit builder loan through Self, you can also get a secured credit card. Self offers an option to get a secured credit card once you have $100 or more in savings progress on your credit builder loan.
This will give you an additional account that you can use to build a positive payment history. In this case, you also get a revolving credit limit, which allows you to maintain a good credit utilization ratio. As long as you pay off any charges in full every month, you can build credit quickly.
Learn how to master your credit score with Smartcredit.
Article last modified on May 7, 2020. Published by Debt.com, LLC