Tips to Repair Your Credit After Bankruptcy

Bankruptcy provides substantial debt relief, but it also can have a negative effect on your credit score. Although bankruptcy stays on your credit report for up to ten years, your credit won’t be bad for that long. You can take steps to start rebuilding your credit after bankruptcy. This is important since your credit score and credit report can play a big role in renting an apartment, financing a vehicle purchase, or even getting certain types of jobs.

Here's what you can do to speed your credit recovery after bankruptcy.

Use Credit Responsibly

It may seem counterintuitive, but using credit is how you build credit. When you make payments on debts, your creditors report your payments to the credit reporting agencies. The agencies then list your payment history on your credit report, which shows potential new creditors that you are a responsible debtor.

If you have debts that survived your bankruptcy, such as student loans, car loans, or mortgage loans, you can also use these to rebuild your credit. By making your payments in full and on time on these loans and on any credit you obtain post-bankruptcy, you can increase your credit score and build a positive picture of yourself as a borrower.

Getting New Credit After Bankruptcy

If you discharged all your debts in your bankruptcy, you can still obtain new credit. Many creditors will offer credit cards with low limits to those fresh out of bankruptcy. However, use caution; these are often subprime lenders that make these offers, and you will most likely have a very high interest rate and a lot of fees. Another approach is to get a secured credit card, which is a credit card backed by a money deposit. With a secured credit card, your credit limit is the amount of your deposit, although the interest rates and fees can still be very high. For information on how to get new credit, see Next Steps to Rebuilding Credit -- Getting New Credit.

How to Use Credit Wisely

When using credit post-bankruptcy, use it wisely. Do not spend more than you can afford; do not spend up to the limit. Make more than the minimum payment every month. Make your payments on time and pay it off when you can. Irresponsible credit use can have a negative impact on your credit. You want to show that you can pay back your debts as they come due.

You can do this by:

• Making a budget and sticking to it. Figure out what you can afford to pay every month on your debts after paying your necessary expenses. If your food budget is $200 for the month, do not spend more than $200 that month on food - you could end up without enough money to pay your debts.
• Only borrowing what you can afford to borrow. Once you know your budget, you know what you can afford. If you know that on your regular budget you could not afford a trip to Greece, don't use your credit card to fund a trip to Greece. Stay out of the credit card trap and use the card only for things you can afford to buy yourself. That way, you know you'll have the money to pay it back.
• Setting up automatic payments so you don't miss any. Many people opt to not receive paper bills, and it can be easy to simply forget to make your payments. By setting up automatic payments, you can have your payments deducted directly from your bank account every month on the due date.

Review Your Credit Report and Fix Errors

You are entitled by law to one free credit report from each of the reporting bureaus every year. You can request the reports online and review them to make sure they are accurate. Look for debts you no longer owe, balances due that are incorrect, or debts that are not yours. If you find any incorrect items, you can file a dispute with the credit reporting agency; the agency will investigate and make any corrections that are warranted. You may need to provide documentation to support your dispute. For information on what to look for in your credit report, how to request that the agencies fix mistakes, and more, see our articles on Cleaning Up Your Credit Report.