Although bankruptcy can give you a new start financially, it can also make it difficult to borrow affordably.
That’s why rebuilding credit after bankruptcy is such an important task for borrowers. Otherwise, applying for new credit can seem like an expensive undertaking.
As time goes by, the good credit behaviors you establish will outweigh the negative impact of your bankruptcy. This is because the FICO credit scoring model favors new information over old information. So while the negative item will remain on your credit report for 10 years, you can still build an excellent credit history.
Your bankruptcy does not need to determine your financial future. Here’s how to get your credit back on its feet.
Why bankruptcy matters to lenders
When you file for bankruptcy, it signals to lenders that you cannot manage your credit effectively. From their perspective, they’re afraid they may end up losing some or all the money they lend you.
It’s important to note that not all bankruptcies are due to financial mismanagement. Perhaps you ended up filing for bankruptcy because of medical bills, a divorce, or other reasons outside of your control.
Even if your bankruptcy wasn’t your fault, banks still view you as a risk and may not offer you credit. And if they do offer credit, it’ll likely come with unfavorable terms.
How to start rebuilding credit after bankruptcy
Regardless of how you got to this point, learning how to rebuild credit after bankruptcy can help you get back on the right track sooner than you think.
1. Assess where you stand
Depending on how you were managing your credit before the bankruptcy, it’s possible it didn’t completely destroy your credit.
Start by getting a free copy of your credit reports from AnnualCreditReport.com to see where you stand credit-wise. You should also make sure there aren’t any errors holding your credit down. Dispute any credit report errors you find ASAP.
Next, check your credit score. Depending on your bank, they may offer you a free credit score. If not, several companies offer free access to your credit score. Also, keep in mind that your credit score won’t be dinged if you check it.
As you continue to rebuild credit after bankruptcy, make sure you track your credit score and see that it’s improving.
2. Get on a budget
If you haven’t budgeted up to this point, now is a very good time to start.
At the end of the day, budgeting is all about managing your cash flow. Your budget can be as simple as dividing up your expenses into three categories using the 50/30/20 rule: needs, wants, and financial obligations (e.g. savings and debt payoff).
You can also choose to break down each spending category separately. For example, under the needs category, you can create subcategories for rent, groceries, and utilities. For the wants category, you can include things like cable TV, eating out, and entertainment. With this approach, you can choose as few or as many categories as you want.
Whatever you choose, tailor your budget in a way that prioritizes saving and paying down future debt. Managing your money each month with this in mind can help prevent another situation like the one that caused your bankruptcy.
3. Begin using credit again
Because your bankruptcy will be a red flag for lenders, your options for credit will be few. There are, however, a few different options that may be more accommodating.
Secured credit card: A secured credit card functions the same as a conventional credit card, with just one exception. With a secured credit card, you have to put up a deposit — usually equal to your desired credit limit — when you open the account.
In most cases, you can’t get the deposit back until you close the account. Secured credit cards sometimes carry high interest rates and annual fees, so be sure to keep those in mind while you’re searching.
Credit builder loan: These loans are unique in that they also sometimes require a security deposit upfront. Other lenders may put the amount you borrow in a savings account while you’re paying off the loan then give it to you at the end of the term.
In exchange, the lender reports your payment history to the credit bureaus. Self Lender is a good option for credit builder loans because their interest rate is much lower than what you’d get with a secured credit card. Other lenders include Digital Federal Credit Union, Republic Bank, and City National Bank.
You can also check with a community bank or credit union in your area to see if they offer a credit builder loan.
Co-signed loan or credit card: Lenders may not be willing to give you credit based on your credit history alone. They may reconsider, however, if you can get someone with good history to vouch for you as a co-signer. You can do this with either a loan or a credit card.
However, not all banks allow co-signers on their credit card applications. So make sure you check with the bank before you apply.
Keep in mind that a co-signer is putting their credit on the line by applying with you. A co-signer is equally liable for the debt, and it can harm their credit if you make late payments or default.
Authorized user: If you’re not able to get a co-signer, another option is to ask if you can become an authorized user on a family member’s credit card.
By doing this, you’ll benefit from the primary cardholder’s payment history without actually having to use the card. Unlike with a co-signed credit card, authorized users aren’t legally liable for the debt they incur on a card.
Although authorized user status also doesn’t boost your credit score as much as if you were the primary account holder, it does help.
Bankruptcy doesn’t mean death for your credit
Rebuilding credit after bankruptcy isn’t as hard as it seems. While it may take time and patience to get back into good graces with the credit gods, the path is simple.
The more you establish and practice good credit behaviors, the quicker your credit score will respond. Healthy financial habits will also help you avoid getting into trouble again in the future.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.81% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|