How to rebuild your credit after bankruptcy

Declaring bankruptcy may feel like a severe move but it can be the best way to get back on solid financial footing if you’re in dire straits.

Bankruptcy allows troubled consumers to eliminate crushing debt or establish long-term repayment plans, depending on the circumstances and type of petition filed. It can stop collection calls and may protect debtors from foreclosure.

While bankruptcy will damage your credit rating – information about the filing stays on a credit report for up to 10 years, according to the Federal Trade Commission – it needn’t place a permanent cloud over your financial life.

You can start working to re-establish good credit right away. In fact, median credit scores for those who file for personal bankruptcy protection steadily increase each year afterward, according to a U.S. Consumer Financial Protection Bureau report.

“The bankruptcy will haunt a filer for a while but it gives breathing room to reassess what when wrong and how to rebuild,” said Scott Cole, CFP, founder and president at Cole Financial Planning and Wealth Management in Birmingham, Ala.

Here are several measures that can help someone rebuild creditworthiness after declaring bankruptcy.

Check your credit report

Monitor your credit report for errors on a regular basis, as mistakes are common, according to Greg Plechner, CFP, partner at Greenspring Advisors, a corporate retirement and wealth management firm in New Jersey.

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Federal law permits you to obtain a free credit report annually from each of the three major credit bureaus through AnnualCreditReport.com.

After your bankruptcy is finalized, Plechner said, confirm the bankruptcy filing date is correct and accounts discharged during the process are reported as discharged.

Explore credit card alternatives

Secured credit cards can help you build credit when you don’t qualify for a regular credit card. While you can make purchases with it as you would with a traditional card, you “secure” – or back the account – with a cash deposit.

“This helps protect the lender in the event you cannot make payments,” Plechner said.

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Use the card reliably over time and you can re-establish your creditworthiness with the credit reporting agencies. A word of caution, however: fees and interest rates can be high on secured cards, Plechner said.

A credit-builder loan can help you both boost your credit score and build up cash as you make regular payments, including interest, to a locked savings account set up by the lender – often a credit union. The funds are yours once you’ve paid the loan over six to 24 months, according to the CFPB.

Retailer credit cards that you can use in your favorite stores offer another possible option if you don’t qualify for a regular unsecured credit card. The underwriting, or approval criteria, for store cards tend to be more liberal but the fees and interest rates can be high, Plechner said.

Get friend or family support

If you can’t get a loan or credit card on your own, a friend or family member with healthy credit might agree to co-sign for you, which can help your credit score. It can be a significant request, though.

“A co-signer is risking their credit to help you,” Plechner said.

“If it is problematic to ask someone to co-sign, you could instead ask to be an authorized user on a friend or family member’s personal credit card,” he added. “Be sure to verify that the credit card will report payment activity by authorized users to the credit bureaus.”

Practice good financial habits

Responsible financial behavior forms the building blocks for good credit.

“The secret to rebuilding your credit is basically the same as getting good credit in the first place. Pay your bills, on time, every time, all the time,” Cole said.
“That is the number one way. By doing this you are showing to creditors and potential lenders that you know that you have learned to handle the credit available to you.”

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That also means refraining from slipping into old bad habits and getting in over your head.

“Just stick with it. Don't over-extend and make sure you can handle current obligations,” Cole said. “The longer and more consistent one is in doing that, the less risky you become to potential lenders and the higher one's credit score will get.  Be consistent, don't over-utilize the available credit and pay the bills in a timely fashion.”

Plechner recommended paying more than the minimum on credit cards when you can and to be aware of two financial "dont's."

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He warned consumers to avoid credit repair agencies, as there's nothing a credit repair agency can do that you can't do yourself.

He also recommended against using payday loans. "The effective interest rate is almost always unconscionable," he said.

Experian, one of the credit reporting agencies, notes that student debt typically isn’t discharged in bankruptcies, and recommends making monthly payments on time to help rebuild your credit score.

Experian, like many financial experts, suggest making a budget to get a handle on your spending and keep debt in check.

“Bankruptcy can be an important, financial lifeline,” Cole said. “Don't waste it.”