How to build credit after bankruptcy
Once you’ve completed your bankruptcy, here are the basic steps to building your credit:
- Review your credit report
- Sign up for free credit monitoring
- Open a credit card or loan
SEE CREDIT CARD OPTIONS: Best Credit Cards After Bankruptcy
Next, we’ll explain exactly how to accomplish each of these steps and why they’re all important to rebuilding credit.
Review your credit report
Visit AnnualCreditReport.com and request your credit report from the three credit reporting agencies: Equifax, Experian and TransUnion. You are legally entitled to a free annual credit report from each credit bureau.
Review your credit report and look for inaccurate information, such as debts that should have been removed after filing for bankruptcy. These can negatively affect your credit and you don’t want them to slow your rebuilding.
If you notice any errors, dispute them with the credit bureau that issued the report. All credit bureaus have an online dispute process, so filing a dispute is easy. We’ve also covered how to do this in our guide to credit bureaus.
READ THE GUIDE: What are the 3 credit bureaus?
Sign up for free credit monitoring
Choose a free credit monitoring service and create an account to track your credit score. There are many services that provide you with your credit score for free, updated monthly.
I always recommend going with a service that provides your FICO® score. Your FICO® score is the one most lenders use, so it gives you the most accurate idea of what they see when they check your credit. Here are two free options:
The only way to be sure you’re building credit is to keep an eye on your credit score. You’ll be able to see where you stand in relation to the lowest possible credit score and your target score. And truth be told, it’s good to make a habit of checking your credit, regardless of your score. I do this regularly to make sure there are no big changes.
LEARN MORE: How to know your credit score
Open a credit card or loan
Apply for a credit card or loan designed to restore your credit. The most popular options are secured credit cards and credit-building loans. A secured credit card is a card that requires a security deposit to open. A credit enhancement loan is a loan for which you only receive the money after paying it back.
LEARN MORE: What is a Credit Builder Loan?
This is extremely important – to build credit, you must demonstrate that you can borrow money and repay it. This means you need a credit account to make payments each month, and those payments must be reported to the credit bureaus.
I would go with a credit card because you can use it without paying interest. If you always pay off your card balance in full, there will be no interest charges on your purchases. With a loan, you will pay interest. That doesn’t make it a bad option, but it can be more expensive.
COMPARE TOP CHOICES: Best credit cards for bad credit
What is the fastest way to build credit after bankruptcy?
When it comes to building credit, people generally aren’t looking for the slow and steady option. They want their credit score back to normal as soon as possible. While there’s no way to speed this process up, you can at least do all the little things that will help boost your credit score and eventually qualify for the best credit cards.
Use your credit card every month and pay on time: The most important advice is also the simplest. Once you get a credit card, make at least one purchase a month and then pay the bill on time. It’s also a good idea to pay off the full balance so you don’t pay interest.
Your payment history is what matters most to your credit score, and it makes up 35% of your FICO® score. By regularly using your credit card, you will have a credit card bill to pay each month. These one-time payments you make will add up and begin to improve your credit.
Do not use more than 20% of your credit limit: Another important factor in your credit score is your amounts owed, which make up 30% of your FICO® score. It’s better for your credit score if you don’t overuse your credit.
The sweet spot is to keep your credit utilization ratio below about 20% to 30%. Credit usage is the amount of your credit limit that you use. If your card has a limit of $1,000, a balance of $200 would put you at 20% credit usage. Lower is better here, which is why I suggest not going over 20% while you’re building credit.
Consider taking out a loan: You can build up credit with a credit card or a loan, but it helps to have one of each. Part of your credit score is your credit mix, a factor that makes up 10% of your FICO® score. It’s better for your credit if you have a credit card and a loan, rather than just one or the other.
Limit new credit requests: Each time you apply for new credit, it has a small impact on your credit score. It’s always worth getting at least one credit card or loan, and you might want to get one of each. Other than that, keep inquiries to a minimum while building your credit. While it doesn’t have a huge impact, it does slow your progress.
LEARN MORE: Is applying for a credit card hurting your credit score?
Request to be an authorized user on another person’s credit card: When someone adds you to their credit card account as an authorized user, the card issuer may flag that card’s activity in your credit file. If that person pays their bill on time and doesn’t use too much credit, these are positive activities that could help your credit.
LEARN MORE: Does being an authorized user generate credit?