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    How To Build Credit After Bankruptcy

    Bankruptcy is a last resort option for those whose financial situation has deteriorated to the point that they’re unable to meet their debt payment obligations. Those who declare bankruptcy do so to receive legal protection from collection efforts initiated by their creditors. 

    Although it offers a fresh start and a release from all debts, it comes at a cost. It stays on a borrower’s credit report for the better part of a decade. Those who’ve undergone the process know just how hard it can be to rebuild their credit.

    While challenging, it’s not impossible. 

    The following is a brief list of steps one can take to do just that; rebuild their credit after bankruptcy.

    Ensure Bankruptcy Is Accurately Reflected In Credit Report

    It’s well known that having a bankruptcy on one’s credit report doesn’t reflect positively. Although this is true, you should know that having outstanding or delinquent balances can appear worse. 

    It shows a lender that an individual has undergone some financial hardship but is in the process of repairing their credit. Outstanding or unpaid balances, especially when presented along with a recent bankruptcy filing, will lead a lender to believe that the individual hasn’t changed and is still practicing poor financial habits. 

    It’s common for creditors to continue reporting negative or unpaid balances even after an individual has filed for bankruptcy.

    Catching these errors and ensuring that one’s credit report accurately reflects their current situation is a good step towards credit score rehabilitation.

    Take Out Secured Loans

    This may be difficult for some as bankruptcy proceedings may leave an individual without much in the way of assets. This is especially true for those who have secured debts included in their Chapter 7 filing. Unfortunately, those who’ve recently filed for bankruptcy aren’t likely to receive unsecured credit any time soon. 

    Those who are able to obtain a secured loan or line of credit will find that this is one of the best ways to rebuild their credit, providing the individual makes at least the minimum payment on time every month.

    Secured Credit Cards

    A secured credit card is one that requires the user to put down a deposit upfront. The deposit functions as collateral and guarantees the issuer won’t lose money if the cardholder cannot make payments. This type of credit card is one of the easiest and most effective methods of rebuilding one’s credit score and history.

    Keep Debt-To-Income and Credit Utilization Ratios Low

    Many people erroneously assume that one’s credit score is largely determined by their payment history. The truth is, a credit score is based on a number of factors and two very important factors are the debt-to-income ratio (DTI) and credit utilization ratio. 

    DTI refers to how much of an individual's take-home earnings are used to service their debts. The higher the number the worse it looks in the eyes of creditors. The Credit Utilization Ratio refers to how much of one’s extended credit has been used. 

    For example, if an individual has a single credit card with a $1000 limit and has used $600 of that, they have a 60% credit utilization ratio. In general, creditors consider anything higher than 30% a negative impact on one’s credit score.

    Keeping these two factors low will have positive effects on your credit report and will make lenders more likely to extend them credit in the future.

    Pay All Accounts On Time

    Missed payments never look good on a credit report. While payment history doesn’t make up the entirety of your credit score, it’s still a major factor and should be treated as such.

    Secure New Credit

    Gaining access to new credit after bankruptcy is a major challenge for most. Without an asset to put down as collateral, or a close friend or relative to act as co-signer, it can seem near impossible for many years. 

    Many creditors issue credit cards or lines of credit to people who’ve recently undergone bankruptcy but borrowers must proceed with caution. Many of these lenders may be predatory, knowing that it’s illegal to declare it again for 7 years. 

    Those who manage to secure some type of credit need to ensure that they have the means and are sufficiently responsible to pay it off on time and without issue. 

    How Long A Bankruptcy Stays On A Credit Report

    This is one of the first questions people ask when it comes to bankruptcy. The answer depends on the type of filing. For a Chapter 7 bankruptcy, it’ll stay on the public record for a total of 10 years whereas a Chapter 13 filing will appear on the record for 7 years. 

    Bottom Line

    Bankruptcy can have a major impact on your credit report but it’s not permanent. Anyone who has undergone such a process can begin rebuilding their credit immediately. 

    Many who follow the above suggestions and exercise good financial decisions and habits find they can improve their credit score from around 500 to 600 in just over a year of hard work.