How to Rebuild Your Credit After Bankruptcy

In this lesson, we will discuss some of the things you can do to rebuild your credit after a bankruptcy filing. In particular, we will talk about the credit-reporting laws that relate to bankruptcy, as well as some tips for improving your score.

The number of personal bankruptcy filings are up this year, and they’ll probably stay that while for a while. You don’t have to be an economist to see the reasons why. The economy is in recession, unemployment is soaring, and many people have seen their living savings and other assets wiped out entirely.

Bankruptcy and Credit Reporting

If you want to learn how to rebuild your credit after a bankruptcy filing, you must first understand what happens after you file it. So let’s talk about the reporting side of things. When you file for personal bankruptcy, it will eventually be reported to the three credit-reporting companies (Experian, TransUnion and Equifax).

The filing will show up under the “Public Records” section of your credit report. Why? Because you have to go through the courts to declare bankruptcy, and the court’s judgment is a matter of public record.

Most negative entries can stay on your report for up to seven years. But the rules are different for bankruptcies — they can stay on your report for up to ten years. All of this is regulated by federal law, in case you were wondering. In particular, the Fair Credit Reporting Act has established some specific rules for the reporting industry (Experian, TransUnion and Equifax). That’s where the ten-year rule for bankruptcy reporting comes from.

How It Affects Your Credit Score

Your credit score is derived from the information contained within your credit reports. The FICO score is supposedly the one lenders use most when reviewing credit and mortgage applications. This score ranges from 300 to 850, where higher is better.

If you have a lot positive information in your reports (a long history of timely payments with no blemishes), you’ll have a good credit score to show for it. If you have a lot of negative information on your reports (a history of missing payments, foreclosure, bankruptcy, maxing out credit cards, etc.), then you’ll have a low score.

We talked about the fact that your bankruptcy filing can stay on your credit report for up to ten years. During that time, it will have a negative effect on your FICO credit score. But — and here’s a key point to take away from this lesson — that negative effect will decrease with time. Your credit score will take the biggest “hit” shortly after the bankruptcy is reported. Over time, the effects of the bankruptcy filing will decrease, so your score may slowly rise again.

You will never be able to achieve your highest possible score as long as that bankruptcy filing stays on your reports. But there is plenty you can do to rebuild some of what you’ve lost. In other words, you can rebuild your credit after a bankruptcy filing, to a certain extent. And that is certainly worth pursuing. The more you can boost your score, the better your chances of getting approved for financing in the future (car loan, mortgage loan, etc.).

How to Rebuild Your Score After Filing

I had to give some background information so all of this would make sense. Now, with that out of the way, we can get to the stuff you really want to know. What can I do to rebuild my credit scorer after a bankruptcy filing? Where should I start? What’s going to have the biggest impact on my score?

First off, let’s talk about the primary factors that make up your credit score. There are actually several different scoring systems used, but we will talk about the most common one — the FICO scoring model. Here’s a chart that shows the primary factors that influence your score.

Let’s talk about each one of these categories in turn, starting with the one that makes the biggest impact:

• Payment History – This shows how you have repaid loans and credit over the years. If you’ve had to file for bankruptcy, I can safely assume that you’ve probably missed some payments in the past. It’s water under the bridge at this point. Time for a fresh start. Going forward, you need to make every effort to pay your bills on time (especially mortgage payments, credit cards, etc.). A pattern of timely payments can help you rebuild your credit faster than any other single factor.
• Amounts Owed — This shows your credit utilization ratio, or the amount of your available credit that you are currently using. If John has two credit cards with a combined limit of $10,000, and he’s using about $9,000 of that limit, then his utilization ratio is high. John is maxing out his credit, and this will hurt his credit score. So, if you want to rebuild your credit after bankruptcy, you need to pay down your credit card balances. Keep the accounts open for now (next topic), but pay down the amount owed.
• Length of History — How long have you been borrowing and repaying money? When did you open your first credit card account, or take out your first loan? This is your payment history. In a lender’s eyes, an ideal applicant is somebody with a long and stable credit history. So the length of your credit usage goes into the scoring mix. This is why you should be cautious when closing your old credit accounts. If you close the oldest ones, you could shorten your overall history and possibly lower your score. Pay down the balances on those old cards, but consider keeping them open for now.
• New Credit Accounts — I’ll keep this one short and sweet. Don’t open any new credit lines unless you absolutely need them. If you start opening credit cards, department store cards and the like, it sends a bad signal through the reporting system: “Uh oh, somebody is over-relying on credit again!”
• Types of Credit — I’m not going to waste your time with this one right now. If you’re trying to rebuild credit after bankruptcy, you’ve got bigger fish to fry. So let’s keep it simple and prioritize. Focus your energy on the blue, red and yellow sections of the scoring chart above. That’s where you’ll make the most gains.

Surely there’s more to it than this, right? Wrong. Credit scoring is not as complicated as some people make it out to be. Granted, the scoring systems themselves are trade secrets built around “fuzzy math.” But the steps needed to rebuild credit after a negative event like bankruptcy are pretty straightforward. Pay all of your bills on time. Reduce your credit card balances as much as possible, but keep your oldest accounts open for now.

And steer clear of those shady “credit repair” companies out there. The vast majority of them are scams!

Time and Good Behavior

I like to use the prison term “time and good behavior” to describe this approach to credit rebuilding. It’s an appropriate term. It takes both time and good behavior to rebuild a damaged credit score.

• We talked about the time factor in early stages of this lesson. A bankruptcy filing can stay on your credit report for up to ten years, but the impact of that negative entry will lessen with time.
• We also talked about the good behavior side of things. You have to make every effort to pay your bills on time, especially your credit card and mortgage payments. You should work hard to reduce the amount owed on your various credit accounts. This is the kind of behavior that will help you rebuild your score.

Time and good behavior. That’s what it takes. Be persistent, and use the strategies I’ve outlined above. There’s really nothing new with these strategies, either — you’ll read them over and over again on different websites. But there’s a good reason people keep reiterating these things. They work!