Expert Advice on Rebuilding Credit Following a Bankruptcy

Tamsen Butler
Nabil Captan, Credit Expert

Many people wonder how to rebuild credit after bankruptcy. Should you immediately apply for a variety of credit products, or is a slow and steady approach better?

Nabil Captan, credit expert and educator, reveals the best way to rebuild credit after bankruptcy.

What does bankruptcy do to a person's credit score?

Bankruptcy has an extremely negative impact on a person's credit profile. For example, a person with a 680 FICO score might lose 130 to 150 points, however, a person with a higher score of around 780 might experience a credit score drop of around 220 to 240 points.

Is it difficult to learn how to rebuild credit after bankruptcy?

The good news is that a credit score is not fixed and changes over time according to how we make future payments. Rebuilding your credit after bankruptcy requires time and discipline, but most important, immediate actions.

Here are some of the steps you need to take to start rebuilding your credit:

  • Order and review your free credit report.You are entitled to one free credit report from each of the credit bureaus once a year. Make sure you request a report from a different bureau (Equifax, Experian & TransUnion) every four months, and don't be fooled by buying a credit score from this site because you'll be getting a FAKO score (Vantage, Score Plus, TransRisk) and not the real FICO score that 95 percent of all lenders use. To purchase your real FICO score, go to myFICO.com.
  • Get one or more secured credit cards. Secured credit cards require you to place your own money as collateral that matches your line of credit. Five credit cards with two or three hundred dollar limits will accelerate the process of rebuilding your credit. However, make sure the bank or company you sign with reports their accounts to all three bureaus. Finally and most importantly, do not max out these cards. Use less than 20 percent of your limits, and never pay minimum payments. Pay your full balance at the end of each month.
  • Obtain a short term loan from your bank for $500 or more. Again, use your own money as collateral. Make sure you pay it five days or more before due date.

Should people jump right into trying to obtain credit after bankruptcy?

There are certain companies that target people who filed, or are in the process of filing, bankruptcy by offering them a small limit, high fees and steep interest rates. You should build your own credit with minimum cost to you. By following the steps stated above, you should be in the 700 credit score range in 18 to 24 months.

What is the best advice for people trying figure out how to rebuild credit after bankruptcy?

Do not waste your hard earned money with credit repair companies. They claim that they are able to delete bankruptcy from your credit file for a fee; however, their tricks are short lived. One of the big myths is that once an item is deleted from your file it is gone forever. That is not the case and your file will update again with that piece of information back into your file. Use your money wisely by re-establishing your credit with secured credit cards and rest assured you'll get much faster and real results.

How long does it take before bankruptcy is no longer listed on a credit report?

There are several types of bankruptcy; however, as consumers our available options are Chapter 7 & Chapter 13 bankruptcies. A Chapter 7 bankruptcy remains on your credit file for 10 years from the filling date. A completed Chapter 13 bankruptcy will stay on your file for 7 years.

Can people obtain loans after bankruptcy?

Car loans are the easiest; however, they come with a hefty price to pay. Car dealers are willing to sell their cars at cost and make a lot more money by selling sub-prime loans. Credit cards are second in line; many sub-prime credit cards companies offer their credit cards with limited lines of credit of $200 to $500 with high fees and 29.99 percent interest rates.

As for mortgages, borrowers will be eligible for FHA financing after two years from the date of the bankruptcy was discharged and with re-established credit. Fannie Mae and Freddie Mac loans will require four years from the date of discharge with excellent re-established credit.

Is it easier to repair credit after one type of bankruptcy over another?

Chapter 13 bankruptcy -also called re-organization or payment plan bankruptcy- is less damaging to your credit profile because it's treated by a scoring model as "paid not as agreed." Moreover, Chapter 13 bankruptcy is a re-organization of your total debts, usually with a three to five year payment plan. Chapter 7 bankruptcy (also called liquidation bankruptcy) involves the court seizing and selling certain assets to pay back creditors, and has a more damaging impact on your credit scores.

About Nabil Captan

Nabil Captan is a nationally recognized credit scoring expert and educator. He created and produced The Credit DVD and Your Credit Score, and also created El DVD del Crédito and Su Calificación de Crédito the first ever DVD and CD credit scoring program in Spanish.

For more information, visit his website for The Credit DVD.

Expert Advice on Rebuilding Credit Following a Bankruptcy