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9 ways to rebuild your credit after bankruptcy

The hard part might be over but the journey is just beginning — it's time to rebuild your credit


Your credit score has more than likely taken a hit after filing for bankruptcy, and now it’s time to rebuild. Here are nine ways to build your credit back up, post-bankruptcy.

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If you’re like most people, you’ve realized Chapter 7 bankruptcy is not the end of the road but the start of a long and positive journey.

After discharging your debts in court, you have the unique opportunity to reestablish your credit without an overwhelming financial burden weighing you down.

But that doesn’t mean you won’t have to deal with negative repercussions. According to myFICO, you’ll see a substantial drop in your FICO scores if your credit was excellent before filing and a less severe reduction if you began with lower scores. In either case, your numbers will probably be at the bottom of the 300 to 850 scale.

Thankfully, you can overcome the credit damage by implementing smart strategies. Here are nine ways to build up your credit rating after a bankruptcy.

1. Make sure you’re zeroed out

Ashley Morgan, a bankruptcy and debt attorney from Herndon, Virginia, says the first thing to do is make sure all of the accounts you included in the Chapter 7 bankruptcy show as “zero balance due” on your credit reports.

“If there’s still an amount left on these accounts, your scores will be even lower than they should be,” says Morgan.

Pull copies of your credit reports from Experian, TransUnion and Equifax from AnnualCreditReport.com. If you spot an incorrect balance, dispute it with one of the credit reporting bureaus (it will alert the others) and include documents from the bankruptcy that indicate the discharge. When your credit reports are updated, your scores should adjust upward.

2. Carefully handle reaffirmed debts

If you left some debts out of the bankruptcy, you’re in a favorable position, says Morgan. You’re ready to use them to your scoring advantage.

Instead of having to apply for and obtain new loans and credit cards, you’ve got what you need to add excellent information to your credit reports. Payment history is the most important credit scoring factor, so respect those due dates. And if you still have a credit card, charge only what you can and repay it in full when the bill comes in.

A Chapter 7 bankruptcy will stay on your credit reports for a total of 10 years, but as you supply your credit reports with evidence of responsible credit usage, your scores will increase, especially as the bankruptcy ages.

3. Apply for a secured credit card

No active loan or credit card? No problem, says Adam Selita, CEO of The Debt Relief Company.

“The best and most beneficial way to build your credit after bankruptcy would be to apply for a secured credit card,” says Selita, who explains that you can get one regardless of the bankruptcy notation or the extremely low credit scores that go with it.

Secured credit cards are collateralized by a cash deposit that usually matches the credit line. So, if you put down $500, that same amount will be your limit. Many creditors will release the money back to you after you make a certain number of on-time payments, turning it into an unsecured card. Some even offer a rewards program so you can earn as you charge.

For example, the Discover it® Secured Credit Card offers 2 percent cash back at gas stations and restaurants (up to $1,000 in purchases per quarter) and 1 percent cash back on other purchases. Also, starting at seven months, your account is automatically reviewed and if you’ve used the card responsibly, you may be able to transition to an unsecured line of credit and have your deposit returned.

4. Consider a bankruptcy-friendly unsecured credit card

Another option is to obtain an unsecured starter credit card that’s specifically for people who have filed for bankruptcy, such as the Indigo Mastercard. However, the limits are usually low, many charge an annual fee and they are less apt to have rewards programs.

Michael Sullivan, a personal financial consultant at Phoenix-based Take Charge America, a nonprofit credit counseling agency, also recommends low-limit department store or gas company cards — since they can be even easier to qualify for than general purpose accounts.

Just don’t wait, he says: “A consumer with good habits can have a credit score of over 600 within a couple of years of filing bankruptcy and it can be a very good score before the 10-year period is up.”

Use low-limit cards carefully. Credit utilization is the second most important FICO scoring factor, so if the balance is near the limit and your scores are calculated before you pay the bill, you’ll be dinged.

A weekly grocery bill can make you hit the limit with these cards, so charge what you want but immediately delete the balance. It will guarantee a low credit utilization ratio as well as timely payments.

5. Use auto pay with fixed bills

Whichever credit card you have, simplify your credit score repair plan. Decide on a fixed monthly expense (such as a $49 gym membership), charge it to your card and then have that sum automatically satisfied via your bank’s bill pay system.

If you had trouble staying out of debt before, this is an ideal way to stay on track, says Selita. You won’t have to do anything other than make sure your checking account has enough funds to cover the charge and monitor your credit card account statements.

Aside from this strategy being easy, it will ensure that a steady stream of positive data is being added to your credit report. With consistent charging and repaying, you’re demonstrating that you’re a reliable borrower, so your scores will rise.

6. Take out a credit builder loan

To create a really high score, prove that you can handle a variety of credit products. This is where loans come in. Since you may not qualify for an unsecured loan, consider a credit builder loan instead.

Usually offered by credit unions and community banks, you put down a certain amount of money and then a loan in that amount is extended to you. Essentially, you’re just borrowing your own cash.

As with all loans, it comes with a payoff schedule and fixed monthly payments. Sunrise Bank, for instance, offers 12- to 18-month credit builder loans, and your money will be invested in a certificate of deposit, so you’ll earn a little interest.

The lender sends your account activity to the credit reporting bureaus, and your credit will improve with your history of steady payments. Once paid, your deposit will be returned to you, and you should see a positive jump in your credit scores.

7. Get a co-signer

Want to jump in with an even larger loan? That may make sense if you need to finance something expensive, like a car or new laptop. If you know someone with impressive credit scores and a high income who is willing to act as a co-signer, that’s another way in. Loans that last a couple of years will help lengthen your overall credit history.

The loan will appear on each of your credit reports and will be calculated into your credit scores, but both of you will be liable for the debt. If you don’t pay as you should, your co-signer will have to.

That arrangement should be fine with the lender because the co-signer is a low-risk borrower, but you will have to take pains to pay on time. If you don’t, not only will your credit rating go backward, but you could also jeopardize a valued relationship.

8. Become an authorized user

Less risky for the other person is to ask if you can be an authorized user on their credit card. If they agree, you’ll be added to a specific credit card account. It will then be listed on your credit report and factored into your credit scores.

“Piggybacking off someone else’s credit this way is a great idea for people who have just declared bankruptcy,” says Selita. “If the card owner pays on time and keeps the debt low, your credit scores will rise.”

All you have to do is check your credit report regularly to ensure the card is in good standing. When your credit scores increase enough to qualify for an account of your own, you can thank the owner for the ride and ask to be removed.

9. Add alternative data to your credit report

Yet another almost effortless way to perk up your credit scores is to add alternative data — like your utility and cellphone payments — to your credit profile.

You can add them to your Experian credit report with the credit bureau’s free Experian Boost program. There are no eligibility standards to meet, and after enrolling, all you have to do is pay those bills on time.

This program works especially well for people who have low credit scores or thin profiles. Experian reported that consumers with FICO scores of 579 and below had the highest scoring increase: 87 percent grew their scores, and the average increase was 22 points. Twenty-one percent jumped from a “poor credit” range to “fair.”

How to avoid accumulating debt again

Paying off your credit card balances in full every month is one of the best ways to avoid accumulating debt. If you can’t pay off your entire balance, try to pay as much as possible to minimize the amount of interest you will have to pay. You should also work on building up an emergency savings fund, so you have money set aside to cover unexpected expenses.

Finally, living below your means can help you avoid overspending and can make it easier to pay your bills in full every month.

Bottom line

There’s no need to fear a paltry post-bankruptcy credit rating. With time and effort, you can make enormous scoring strides.

“They don’t call bankruptcy a fresh start for nothing,” says Morgan. “Without many thousands of dollars weighing you down, you can use credit again — but, this time, by making your credit scores go up!”

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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