Boom, goes the dynamite. Yes, it sucks if you’ve been forced to file bankruptcy, and the mere thought of a lender or creditor extending credit to you again, may seem as likely as the Russians colluding with Trump, we guarantee things can and for most folks will improve.
You haven’t been branded with a big red B on your forehead. Moreover, while a bankruptcy on your credit report will naturally severely damage your credit score, you can repair credit and long before seven or 10 expensive, and embarrassing years slowly tick off.
Regardless of your personal reasons for filing bankruptcy, which the most common is medical debt. There are many understandable reasons to file bankruptcy from a failed business venture, to lack of financial wisdom, overspending, etc. The takeaway is there is hope, you’re not locked in bankruptcy prison, if you take wise action.
How Long Does a Bankruptcy Stay On Your Credit Report?
With a Chapter 7 bankruptcy, where your debt is liquidated and you’re not responsible for repayment, the bankruptcy item will remain on your credit report for a maximum of 10 years. That’s the maximum amount of time the item can legally remain.
With a Chapter 13 bankruptcy, where you are responsible for repaying at least part of the debt, you’ll have the bankruptcy mark on your credit report for seven years. We believe this shorter time window is because you’re repaying part of the debt.
For the items on your credit report that show a status of “included in bankruptcy” along with any other related negative items, they’ll remain on your credit report for a maximum of seven years. And it’s true, credit repair after bankruptcy won’t happen overnight, but it doesn’t have to take the maximum seven to 10 years.
Credit Score After Bankruptcy
Naturally, if you filed bankruptcy yesterday, your credit score will take a massive hit. However as this item ages, gets older, it will influence your credit score less, and less.
There are two big factors to improve your credit score after bankruptcy, and that is with building credit. In other words, displaying that today you’re a much more responsible user of credit.
And second, removing the negative items from your credit reports, as soon as possible. Because often, folks will have the consequences and negative items remain on their credit reports for much longer than the legal time window permits.
If you’re unfamiliar, we need to first share how your credit score is calculated. FICO, Fair Issac Corporation, is the primary credit score, the majority of lenders and creditors use.
There is also the VantageScore, this is a credit scoring model created in a joint venture by all three credit bureaus (Experian, Equifax, and TransUnion). For our purposes, we’re discussing your FICO score, and that’s the only score you should concern yourself with.
There’s five ingredients or areas the FICO score will look at. We’ve listed these five areas below, along with their respective approximate value or weight the FICO scoring model assigns them. And then we’ll discuss, the two important areas where you should focus your efforts to fix your credit score.
1. Payment History
Your payment history is worth 35% of your credit score. This is where the bankruptcy on credit report files will be taken into account. Along with all the other information on your credit report, both the positive and negative items.
2. Amounts Owed
This is also called your utilization ratio, and it’s worth 30% of your FICO score. This is where the amount of your debt will be weighed against your available and unused credit. In other words, how much debt you have versus how much available credit you have or money you could potentially borrow.
3. Length of Credit History
This is worth 15% of your FICO score and is looking at how long, big picture, you’ve been using credit. Along, with the age of each account on your credit reports. Generally, the longer the better, because it makes you appear more secure.
4. Credit Mix
This is 10% of your credit score and is looking at the types of credit you use. For example, do you have a credit card, mortgage, student loan, etc.? The idea here, is the more diverse the types of credit you use, the better credit risk you’ll be.
5. New Credit
This area is only 10% of your FICO score, and looks at how often you’re applying for new credit. You won’t be penalized for interest rate shopping or having your credit checked through the normal course of life, but we want to avoid appearing like we’re trying to get financing for new credit lines, every weekend.
Rebuilding Credit After Bankruptcy
Now, let’s talk about how to rebuild credit after bankruptcy and let’s start with your amounts owed area. Because this is a whopping 30% of your FICO score, and one of the areas you have a lot of direct control over.
The big picture idea is this, when you apply for a car loan for example, if you have a credit card with a limit of $1,000 with a balance of $988, then you’d only have $12 of available unused credit. You’d appear as a more risky applicant, than someone with the same credit card and only a balance of $250, and thus $750 of available unused credit.
The fella with $750 of available credit would appear as a much better credit risk to a lender and creditor. It makes sense. And before we share some tools to help with building credit after bankruptcy, we need to inform you, that having a lot of debt isn’t necessarily bad.
You can still improve your credit score, even if you have substantial student loans, mortgage, or other significant debts. The takeaway is to have and display significant available unused credit. You don’t want to appear like you’ve used every nickel of available credit.
Instead, it’ll help your credit score if you have low monthly balances, especially on revolving credit lines, like a credit card for example. Because you appear to be in a more secure financial position.
1. Secured Credit Cards
Many folks have trouble being approved for credit cards after bankruptcy, and due to new legislation a few years ago, there are very few banks offering credit cards to folks with a less-than-perfect credit history. As such, secured credit cards are a viable option.
Secured credit cards are issued as a major Visa or MasterCard. And the big difference is unlike with a traditional unsecured credit card where you’re given a credit line on your promise to repay, you must make a deposit first with the bank issuing your credit card to secure your account.
Frequently your deposit amount will equal your credit limit. For instance, if you deposit $500, you’ll be issued a credit card with a $500 limit. Your deposit is fully refundable, provided you don’t default on your credit card payments, and it’s much like collateral.
You may be charged slightly higher interest rates, along with a nominal annual fee, but both of these fees are reasonable. And while your credit card will be reported on your credit reports as a secured account, this can still be effective at displaying your current responsible credit use.
Likewise, if this credit card is not used responsibly, it can damage your credit score. We encourage you to try and keep your monthly balances at, around, or even below 30% of your limit. Capital One has a popular secured credit card offer, that may be worth your further investigation.
Please, before applying double check to make sure your credit card will be reported monthly to all three credit bureaus. Otherwise, it will have no impact on your credit score, because FICO and the credit bureaus won’t even know about it.
On a sidebar, prepaid debit cards can give you the purchasing power of a Visa or MasterCard, but they won’t build your credit. Due to more government legislation, they don’t lend you any money, nor are these accounts reported to the credit bureaus.
Beware, there are many predatory credit card issuers, often in the form of catalog, merchandise, or shopping credit cards. These should be avoided like the plague, they’re smoke and mirrors.
They’ll appear to be offering you a line of credit, and frequently claim “credit bureau reporting” but these are nightmare cards, and they aren’t credit cards. You’ll only be able to use these cards at a specific location, and unlike with a Sears card where at least when Sears was a booming business you could go to the mall and make purchases.
Catalog credit cards are typically for very low end, and overpriced online-only merchandise or years ago they’d mail you a catalog and you could use the card to make purchases exclusively from there. Please, don’t get this, they won’t help to fix your credit, and they’re not ethical or legitimate companies, in our opinion, especially if your goal is repairing credit.
2. Installment Loans
This would be a car loan, personal loan, home loan, etc. the idea and way this will help credit is because, with on-time monthly payments, you’ll be establishing your positive payment history. This is the most important piece of your credit score worth roughly 35%.
In all likelihood, you’ll be paying a much higher interest rate, and while we wouldn’t recommend doing this for a substantial amount of money, this can help your credit with a nominal amount of money. For example, financing a portion of a car purchase with a loan, even high interest, can help to display your new and improved relationship and use of credit.
Of course, with irresponsible use, this can also damage your credit score, and potentially cause you to have a very bad credit score. And while it’s not a wise long term investment of your resources, for the credit building opportunity it can be worth it.
Money makes the world go round, and money issues are the number one cause of divorce, and friendships to end. If you have a loved one with a good credit score, and a firm level of trust between the two of you, asking them to co-sign for you can be an effective way to get approval.
Please, be wise about this. Don’t lose the support of a quality friendship, family member, or spouse because the messiness of life interfered and left someone burned financially. It’s not worth it.
4. Authorized User
This strategy is also referred to as piggybacking credit. The idea is if you have a trusted loved one, such as a spouse with excellent credit, you can ask them to put you on their credit card as an authorized user.
For example, if your spouse has an American Express Black Card, or just an unsecured credit card with a large credit limit and a low monthly balance. If they add you as an authorized user, you’d have a credit card issued in your name too.
If the goal is to fix bad credit, we’d advise you not to even take possession of the physical credit card, so long as they continue to make on-time monthly payments, and keep a low monthly balance this account will also be positively reported on your credit file. In other words, you’ll get the benefit of their responsible use of this credit card.
And you need to know, you’ll also get the detriment of irresponsible use, should something happen and their monthly balance sky-rocket or they miss monthly payments, etc. There is a risk, on both sides, so please use discretion.
Credit Repair After Bankruptcy
Now let’s talk about the second area to focus your efforts rebuilding credit after bankruptcy, and your payment history, worth roughly 35% of your credit score. You likely have an array of negative items on your credit reports, from charge off debt, late payments, to debt in collections, and many of these items will show a status of “included in bankruptcy.”
These items are the real credit killers. You see, your credit score is very much like your Grade Point Average (GPA) in glory school days past. It doesn’t matter if you’re acing all your courses, if you’re failing The Art of Walking, because this one negative mark is going to ruin your overall GPA.
This is also true of your credit score. FICO very openly and clearly shares this. And this is why it’s so critical to clear credit report dings, blemishes, and remove any negative items, as soon as we can.
Just because an item is on your credit report, doesn’t mean it’s accurate, correct, or even legally supposed to be there. The way our credit system works, is you’re assumed guilty until proven innocent.
And when it comes to bankruptcies, you’re viewed in a very poor light, and for illustrative purposes, it’s like being a felon. You probably did it. This isn’t our opinion but that of lenders, banks, collection agencies, and the credit bureaus.
Moreover, your credit reports aren’t accurate, by any stretch of the imagination. The Federal Trade Commission (FTC) actually studied the accuracy of consumer credit reports in 2013 and found millions of Americans have errors, total mistakes on their credit reports.
The FTC press release says: “Overall, the congressionally mandated study on credit report accuracy found that one in five consumers had an error on at least one of their three credit reports.”
While Howard Shelanski, the Director of the FTC’s Bureau of Economics said: “These are eye-opening numbers for American consumers.” And he went on to say: “The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.”
Again these are errors. Mistakes. Items that shouldn’t be on consumers credit reports. Further, the credit bureaus have been fined time and again by our government for violating consumer rights, especially when it comes to the Fair Credit Reporting Act (FCRA).
This federal legislation originally passed way back in 1970, gives consumers a way to challenge and dispute credit report items, so long as they believe the item is made in error, misleading, or contains inaccurate information. This is your right as a consumer, after all your credit report and score affect so many factors of your life.
You can dispute credit report items online, over the phone, and by mail. Once the credit bureaus get your dispute, and deem it valid, they’re required to investigate the item. During which they’ll contact the company reporting the account information and ask them to verify your account, and the pertinent details.
If your account isn’t verified, then in accordance with the FCRA, the item must be removed. This is how to clean credit report dings, blemishes, and errors, and do so legally. By the way, due to amendments to the FCRA, today you can bypass the credit bureaus and dispute a data furnisher, company reporting your account information, directly.
Did you know in 2016 alone, over 400,000 bankruptcy items were removed from consumers credit reports? It’s true, and for further details check out our article about how to remove bankruptcy from credit report files.
This is done legally, and by exercising your consumer rights. And while it sounds easy, just dispute the credit bureaus, it’s rarely that simple. In recent years, 60 Minutes aired a segment sharing just how downright impossible the credit report dispute process is for the average consumer.
In 2013 Julie Miller was awarded $18.6 million by a jury, in a lawsuit with Equifax. Julie woke up one day to discover a random stranger’s 38 collection accounts on her credit reports. So she did what she was supposed to and went through the credit report dispute process.
Equifax, responded for over two years, claiming Julie had to send them more information and her dispute was frivolous. She complied, and sent endless additional information including DNA, hair samples, etc. and fruitlessly.
In full disclosure, this award was later reduced by a federal judge to $1.62 million in punitive damages, which is nine times the $180,000 she was awarded in compensatory damages. The total recovery is $1.8 million.
If you’re not a legal criminal aka attorney, compensatory damages are the actual real life damage, this is money that’s supposed to fix your life, and make you whole again. While punitive damages are the punishment, the example to other credit bureaus, not to screw consumers working on fixing credit errors legally.
This isn’t the first lawsuit, nor is it the only time the credit bureaus have been found responsible for violating consumer rights. Especially the FCRA. These guys aren’t your friend, nor are they government agencies. They’re private for-profit businesses, just like your local grocery store.
If you’ve been through a bankruptcy, it can feel like your financial life has ended. And temporarily it may have, but life isn’t about how far we fall, it’s about getting back up. As bad as it may be, I promise, it could be worse.
Iron Mike Tyson was able to get back up after losing $300 million, countless successful entrepreneurs have a bankruptcy in their past. As of writing this article, there’s a popular Gatorade commercial featuring Michael Jordan, among many other athletes, with the tagline of the secret to victory, being defeat, and using this as your fuel.
Don’t let this experience negatively impact your self-esteem, motivation, or drive in life. We encourage our members to consider professional, legal, and legitimate credit repair companies to help with credit repair after bankruptcy. Because in 2016 alone, not only were over 400,000 bankruptcy items removed from consumers credit reports.
Over 9 million negative items were removed from consumers credit reports, in just 2016 alone, one year! One of the best firms is The Credit Pros. Because they’ve helped client’s successfully remove bankruptcies, judgements, charge offs, late payments, collections, liens, medical bills, and so many more negative credit report items.
Get a free credit consultation with a certified FICO professional by calling toll-free 1-877-418-7596. And for more tips, techniques, and strategies about how to improve credit score with Dan Willis, sign up for our free newsletter and join our congregation.
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