Advice to help rebuild your credit and finances after bankruptcy

It can feel like it’s going to be impossible to rebuild your credit quickly after filing for bankruptcy because how long the filing leaves a mark on your credit. Chapter 7 stays on your credit report for 10 years, while Chapter 13 is slightly less at 7 years. That’s a long time.

There are ways you can get financing, though. There are plenty of lenders and creditors that are willing to work with consumers that have gone through bankruptcy and give you the line of credit you want. But the bigger question is, should you really be going for these types of financing or are you just setting yourself up for another round in bankruptcy court?

Finding a good credit card with a bad credit score

First, don’t go for traditional credit cards right after bankruptcy. You either won’t get approved or you’ll face interest rates that are so high you could easily fall back into debt problems. In fact, you may want to consider living without credit cards for a period of time. This can help you learn how to maintain a balanced budget and break any dependency you’ve developed on credit cards.

“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 if you decide that you need credit, getting a credit card after bankruptcy isn’t as difficult as you might think. You can open a “secured card,” which is similar to a debit card in the sense that you put up the money you charge. But you build credit.

You’ll need a deposit amount – usually around $400-$500 to open the account. Then you can use one of these cards to rebuild your credit, as long as you use credit wisely by paying the bill on time every month. If you don’t pay your bills, you could lose this monthly deposit.

A secured card offers lower interest even if you have bad credit because you secure the credit line with the cash deposit. Since the creditor has a way to recoup their losses if you don’t pay, you can get approved even if you have the worst credit score possible.

“You’re borrowing from yourself, but by making timely payments, you actually build back your credit,” Dvorkin says.

Once your score is high enough, you can qualify for traditional lines of credit at higher credit limits. If you want to know more, read How to Rebuild your Credit After Bankruptcy.

Taking out a loan after bankruptcy

Traditional loans can be a little tougher to qualify for than a credit card. And while there are secured loans that you can get approved for, it’s usually not worth the risk to the collateral they ask you to put up.

Loans are usually secured with physical collateral – like a home equity loan where you borrow against the value of your home to get money. This is a bad idea. If you fail to pay back the loan, the bank can foreclose on your home. In many cases, it’s not worth that risk.

But that doesn’t mean that you can’t find a loan that will work for your finances right after bankruptcy. The chances of you getting approved are often dependent on how much you want to borrow. A small personal loan is easier to take out than an auto loan, which in turn is much easier to get approval on compared to a mortgage.

In any case, you can usually find lenders who are willing to work with high-risk (bad credit) borrowers. Just make sure they’re not tacking on lots of extra fees and hidden add-ons that drive up your costs to maximize their profits. Even a loan for bad credit can be a good loan as long as you can maintain the payment schedule.

Credit building loans

There are also personal loans that are designed to help you build credit. Credit building loans are small unsecured personal loans that you can get through online lenders, such as Self. You can get these loans even with a bad credit score.

The money you receive from the loan is put into a Certificate of Deposit (CD), which is a saving product that helps your initial deposit to grow with interest. So, you take out a loan to open the CD, then you pay the loan back to build credit. At the same time, the CD grows to increase your savings. So, the benefit is two-fold.

These loans can be a good way to build your credit back up and promote financial stability after bankruptcy.

Howard Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

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Article last modified on November 15, 2019. Published by Debt.com, LLC