Your credit rating is an important part of your overall financial picture. And when you’re in the market to buy or refinance a home? Simply put, good credit gets you a better interest rate because the lender know there’s less risk that you will default on the loan.
A bankruptcy, though, has the potential to lower your credit score by as much as 240 points, according to FICO. That can be a tough pill to swallow when you’re trying to regain your financial footing and are hoping to qualify for a mortgage sooner rather than later.
Repairing your credit following a bankruptcy takes time, but getting back on track is possible — and in a shorter time than you might think.
How to Rebuild Your Credit After Bankruptcy
- Build a budget and stick to it. Seek help with your budget from a credit counseling agency, but avoid credit repair agencies, predatory lenders, payday loans, etc. There are also many helpful budgeting apps that can help you track your daily expenses on your phone.
- Build a rainy day fund. In case of an emergency, have as much money saved as possible so that you don’t have to depend on credit cards to cover surprise expenses
- Check your current credit report with each of the three main credit agencies. Be sure to dispute any errors, missing and/or inaccurate information such as current residence, employment history, and personal contact information. Track your score quarterly throughout the rebuilding process.
- Choose from one of the following to begin rebuilding your credit:
- Secured loan – A secured loan from a credit union or community bank backed by funds you have on deposit, or a loan deposited in a saving account that you are allowed to access provided you’ve made on-time payments
- Secured credit card – A secured credit card works much the same way by drawing on cash you’ve deposited. These cards often come with a high interest rate and an annual fee. Once you’ve proven your credit worthiness you may be able to obtain a card with a small credit limit but better terms.
- Cosigned credit card – A cosigned credit card or loan allows you to borrow, provided the card or loan is secured by someone with a good credit rating.
- Authorized user – In lieu of cosigning you can ask a friend or family member to make you an authorized user on their credit card. Be sure the credit card company will report your payment activity to the credit bureaus, or this method will not help rebuild your score.
- Control spending. As you slowly and methodically rebuild your credit, always pay bills on time, keep balances between 10% – 30% of your credit limit, and don’t open new accounts unless or until you have the income needed to make timely payments.
Getting Beyond Bankruptcy
A bankruptcy, while eliminating your debts, remains on your credit report for up to 10 years. Late payments and debts that have gone to collection will appear on your report for 7 years after the delinquencies have been reported.
Bankruptcy, however, no longer carries the stigma it once did.
This may be because of the recent Great Recession, or that lenders recognize an individual can’t declare bankruptcy again for 8 years after their first bankruptcy is discharged — usually 4 to 6 months after filing. Some lenders even offer loan programs designed to assist “unconventional” borrowers.
Beyond by Embrace Home Loans makes it easier for individuals who have filed for bankruptcy to get a mortgage. It’s possible to qualify for a mortgage if only 2 years have passed since you experienced a bankruptcy or foreclosure. This is a significantly shorter period than required by other lenders — Fannie Mae, for example, requires borrowers to wait 4 years after a foreclosure before they can be approved for a conventional loan.
The Bottom Line
There’s no denying that bankruptcy is a big setback to your financial health. But, it doesn’t need to be the end of the world. With patience, budgeting, and financial discipline it is possible to bounce back.