If you’re struggling with overwhelming debt, filing for personal bankruptcy is one of the best things you can do to stop falling behind and start rebuilding your life. However, once you’ve gone through the process, you won’t have an entirely clean slate to work with. The fact that you went through bankruptcy will remain on your credit report for up to 10 years, potentially making lenders more reluctant to extend credit to you.
It’s important to be aware of that problem, but your credit report shouldn’t necessarily be at the top of your list of concerns when you’re deciding whether to file for bankruptcy. As the saying goes, if you’re stuck in a hole, the first thing to do is stop digging. Bankruptcy gives you a chance to stop slipping further and further into debt, and that may be your top priority.
It’s also important to note that there are ways to rebuild your credit after bankruptcy.
FICO scores
The most common type of consumer credit rating in the United States is known as a FICO score, named after the Fair Isaac Corporation, the data analytics company that developed it. FICO scores are used in approximately 90% of all credit lending decisions.
To measure your FICO score, credit agencies and lenders look at the following factors:
- Your payment history
- The total amount you owe, compared to your credit limit
- The duration of your credit history
- The types of credit you have
Using rather complex formulas, analysts look at these factors and give you a score between 300 and 850. The higher your score, the more lenders are likely to extend credit to you.
Generally speaking, a score of 740 or higher is considered very good. A score of 800 or higher is exceptional. Scores below 580 are considered very poor.
Rebuilding your credit score
If you have a bankruptcy on your record, this will be a factor holding back your FICO score. However, if you’re unable to pay your bills, that will also drive down your FICO score. In other words, if you’re considering filing for bankruptcy, your credit rating is probably already relatively low.
The good news is that, after you go through the bankruptcy process, you can start rebuilding your credit rating quickly. A year later, your credit rating could be higher than it was when you filed for bankruptcy.
One way to get started is to start borrowing money and getting credit again. This may strike you as counterintuitive, especially if it was borrowing and credit cards that got you into financial trouble in the first place.
Here are some options to consider:
- Take out a secured credit card: Unlike ordinary credit cards, you must pay a deposit to get this type of card. This can be a risky maneuver in some cases, but if you are able to pay for the deposit and believe you will be able to keep up your payments, having a secured credit card for a couple years can go a long way in rebuilding your credit score. However, you should only pursue it if you’re confident your application will be approved because a rejected application will show up on your credit report.
- Get a co-signer: If you have a friend or family member with a good credit score, you can ask them to co-sign with you when you apply for a credit card or a loan. You’ll want to be very careful with this approach, because it means that your friend is agreeing to pay off the debt if you become unable to do so.
- Become an authorized user: Alternatively, you can ask about becoming an authorized user on your friend’s credit card. Just make sure that the credit card company records when you are making payments. This can help improve your credit score.
- Secured or credit-builder loan: Credit unions and community banks sometimes allow people to take out these loans with the specific goal of rebuilding their credit ratings.
Even if you decide against any of the above options, you can rebuild your credit by sticking to a budget and staying out of financial trouble as long as you can. Professionals with experience in debt relief and bankruptcy can help you understand your options.