Why credit applications get denied after recent bankruptcy

Recent credit score damage is most egregious the first 24 months

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I filed for bankruptcy in March 2016 and got my discharge form in July 2016. I have currently applied for a few credit cards, for example, Capital One, that claims to help you rebuild credit, but I keep getting denied. I don't know what to do? – Elizabeth


Dear Elizabeth,
I’m afraid your credit rating is still reeling from the very recent bankruptcy filing, and it is having a major impact on your ability to qualify for certain credit cards. However, so is your approach.

This is what’s going on and what you can do about it.

Because lenders value payment history as a top priority, both FICO and VantageScores rank it as the most important scoring factor. The Chapter 7 bankruptcy notation indicates that you did not pay as agreed, so it is negatively affecting your scores. Any delinquencies and collection activity that may have preceded filing are hurting them, too.

The Chapter 7 bankruptcy will be reported on your credit reports for 10 years and most other derogatory information, such as late payments and charge-offs, remain for seven years. The damage these dings cause is most egregious in the first 24 months, though. After that, it begins to taper off.

Unfortunately, you’ve been exacerbating your scoring problems. Pursuing any kind of credit too often and in a short span of time will result in waning scores, especially when you don’t have any positive data being listed.

For this reason, you must stop applying, at least for the moment. Check your FICO or VantageScores to see where you stand so you can target the right credit cards for you, now and into the future. Both rating systems start at 300 and top out at 850, but don’t panic if your numbers are paltry. You can strengthen them.

First, if you have any debts that you couldn’t discharge in the bankruptcy (such as mortgage arrearage and student loans), get back on track with payments and payoffs. That will reflect positively on your reports and your scores will rise.

After that, edge your way in to the borrowing world.

Unsecured credit cards are great, but they’re not for everyone. The better cards require high credit scores and you may have been applying for them. Instead, focus on cards that will accept much lower scores (whatever is in your range). Typically, these are collateralized accounts called secured cards. As long as you have a stable income, you can probably qualify for one. Check out super basic unsecured credit cards, too. If the offer explicitly states that the type of credit needed is “bad,” you should be eligible.

You can also consider credit builder loans, which are secured loans you take out through a bank or credit union. By paying off the loan on time every month, you can help rebuild your credit. 

Another option is to have a trusting and financially reliable loved one add you as an authorized user to his or her existing credit card account. Most issuers will report account activity to all cardholders’ credit reports. With perfect payments and low or no debt being revolved on this shared card from one month to the next, your scores will rise. Just heed my warning: plenty of people ruin relationships when they disrespect the arrangement. Set and honor all terms. When your score is high enough to obtain an account of your own, thank the person graciously and remove yourself from his account. It will no longer be reported on your file, but you’ll have your personal card with which to build your rating, so that’s OK.

By adding as much data to your account that indicates excellent borrowing habits with as few inquiries for new credit as possible, your credit scores will recover from the bankruptcy at maximum speed. By the time they’re in the 700s, a far greater variety of attractive credit products will be available to you. 

See related: Get bankruptcy trustee approval prior to applying for creditHow soon after bankruptcy can you get new credit cards?Is secured card best for rebuilding credit post-bankruptcy?

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Updated: 02-18-2019